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Central bank holds key to Gabon’s oil future

If oil companies are forced to hold revenues in the local currency—combined with mandated Opec cuts—the Central African country will struggle to attract the new investment it desires

A revised hydrocarbons code has cut taxes on Gabon’s oil industry, but foreign firms warn these reforms will count for little unless the regional central bank waters down plans to impose harsh new currency rules.

Six countries including Opec members Gabon and Equatorial Guinea are part of the Central African Economic and Monetary Community (Cemac) and use the Central African franc, which is governed by the Bank of Central African States (BEAC).

The central bank’s new regulations would require companies to retain their revenues, which must be denominated in francs, at banks within the Cemac region. This would force firms to exchange dollar-denominated revenues into francs, incurring exchange fees and exposing them to currency fluctuations. Also, financing to oil companies is usually in dollars, so the new rules could put them in breach of loan agreements.

Majors exit

In 2017, London-based E&P firm Assala Energy, backed by private equity house Carlyle Group, bought Shell’s entire Gabon onshore oil and gas interests for $628mn, plus $285mn in debts assumed from the seller. Assala subsequently refinanced this debt, which is now a loan backed by Assala’s oil reserves and financed by a consortium of 11 banks. Such agreements require the borrower to hold bank accounts abroad. “The new regulations put this type of financing in jeopardy,” says Assala Energy CEO David Roux.

The regulations were slated to come into force in March 2019, with a phased implementation period until September that year. But the region’s oil industry remains in talks with the central bank, which agreed moratoriums until the end of 2020.

“If the Cemac region wants to attract investors it needs to make sure cash can be repatriated” Bounds, Vaalco Energy

“There are some exceptions we think are applicable to the oil and gas industry… if the Cemac region wants to attract investors it needs to make sure cash can be repatriated,” says Cary Bounds, chief executive of Vaalco Energy, which has been producing crude from Gabon’s Etame Marin field since 2002.

“To attract new investments, cash needs to be able to move freely. Yet the new regulations restrict currency flows and would be costly and inefficient.”

Gabon, which rejoined Opec in 2016 and has 2bn bl of proven reserves, produced 189,000bl/d in May, down from 2019’s average production of 208,000bl/d. Output has fallen steadily as decades-old fields decline, prompting majors such as Shell to quit the country or reduce their activities.

Total sold much of its Gabon assets in 2017, including interests in 15 fields to European independent Perenco for $350mn. As of 2019, Perenco produced 95,000bl/d oe in Gabon.

“[Apart from] a few exceptions, Gabon is now more about small companies maximising production from existing fields,” says Stephane Foucaud, founding partner at energy-focused capital markets firm Auctus Advisors. “I do not see that as a negative. Sometimes—particularly in an industry where assets are more mature or smaller—smaller companies often operate at lower costs. They are able to do more with marginal assets while the majors have no interest.”

Hydrocarbon code

Since the start of the oil price slump in mid-2014, IOCs have paid scant attention to Gabon and only a few new production-sharing contracts (PSCs) have been agreed in the past half-decade.

Gabon nevertheless hopes to woo more foreign firms, although it has extended a shallow and deepwater licensing round for around 35 offshore blocks several times and has now indefinitely postponed the licensing deadline. The country also adopted a new hydrocarbon code in July 2019.

“The new code was long overdue. The previous version was introduced when oil was over $100 and was very onerous to foreign investors,” says Vaalco’s Bounds. “Those terms might have made sense if oil had stayed at those price levels, but do not at today’s prices. The new code is a big improvement and gives foreign investors more confidence to come in and invest.”

Under the new code, minimum government stakes in PSCs and exploration companies are now 10pc, down from 20pc previously, notes law firm Norton Rose Fulbright.

Oil firms will also pay corporation tax solely in oil, while more initial costs can be offset—the new code scrapped the 35pc income tax on ‘profit oil’, which was previously paid on top of the government’s share of production. Instead, this is now included in kind as part of that share, according to Fitch Solutions. The tax rates on PSCs are subject to individual negotiation but are lower than before.

Opec cuts

Less positively for oil firms, Gabon’s government has delivered instructions to cut production by 23pc to meet Opec-led output reductions, although this has yet to come into force.

“Imposing production cuts will force us to halt investment,” says Assala’s Roux. “There is no point in investing to increase production when we are forced to shut down wells. It makes no sense.”

“Gabon is now more about small companies maximising production from existing fields” Foucaud, Auctus Advisors

His firm has invested $370mn of a planned $600mn to redevelop the assets it bought from Shell. Ahead of the sale, Shell’s production from these fields was declining by c.20pc annually. Since assuming control, Assala has upped production to 53,000bl/d from a reported 40,000bl/d under Shell, also cutting operating costs to $12/bl from over $20/bl.

“Our model is to unlock reserves that are beyond the scope of bigger companies. Redeveloping assets requires significant investment. When you have mature assets of limited size and returns competing for capital in a very broad international portfolio, majors do not tend to allocate capital to these brown fields and therefore production naturally declines,” says Roux.

In October 2019, Assala renewed four of its onshore licences for 25 years and bought three onshore exploration licences. The firm has drilled over 20 new wells in its five operated fields and performed over 50 workovers of existing wells.

“To make such mature assets economically viable, you have got to reinvest in drilling new wells—in-fill and step-out wells—to unlock reserves that are present but are undeveloped,” says Roux. “It takes several years to get your returns back and therefore with the maturity, not only of the assets but the contracts we inherited from Shell, we needed to give ourselves a longer time horizon to make the new investments meaningful.”

Production outlook

Despite imminent obligatory production cuts, Vaalco expects to increase its production in Gabon by 35pc in 2020 versus a year earlier. Gross reserves and resources for the company’s Gabon assets are around 115mn bl; Vaalco’s share, net of royalties, is 31mn bl, while it produces around 18,000bl/d gross in Gabon. 

“We are committed to Gabon,” says Vaalco’s Bounds. “We have focused on reducing operating costs and, fortunately, have no capex required in the near term—we can defer this for now. All this has put the company on the right footing in the current uncertain environment.”

He plans to resume multiple drilling programmes in Gabon within 18-24 months, depending on rig availability and the industry climate.

South Africa’s Sasol, which owns a 27.75pc stake in the Vaalco Energy-operated Etame Marin offshore licence in Gabon, in June stated would end its West African oil operations. “We are very happy with Etame and would consider buying Sasol’s stake at the right price,” adds Bounds.

Plunging oil prices and subdued demand led Norway’s BW Offshore to halt its planned expansion of its Gabonese Ruche Phase 1 field as the company cut its 2020 capex by 50pc. BW last October said it would double Phase 1’s output to 30,000bl/d. The company did not respond to requests for comment.

“That development is delayed, but it is a very good asset. It is a young asset with lots of running room, so the problem is more that BW bit off more than it could chew,” adds Auctus Advisors’ Foucaud. “There is a capital requirement. At $40/bl, BW generates cash from Ruche, so as the oil price recovers that project expansion will resume—if not next year, then the year after.”

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