By Keith Myers, RWI advisor and co-founder of Richmond Energy PartnersÂ
Since the country's first oil discovery was made last year, Sierra Leonians have been caught between their hopes and fears. There are optimistic expectations that offshore oil exploration will result in discoveries that change the fortunes of their post-conflict society. But there are also fears of a replay of the country's unhappy experiences in the mining sector, when Sierra Leone's immense mineral riches didn't translate into development but instead, through greed and bad governance, fueled civil war.
Whilst it is not known whether the newfound oil can be developed commercially, there is the potential for a 100,000 barrel per day deep water oil field, comparable to those shortly to come on-stream in Ghana. If successful, such a field could deliver nearly US$1bn per year in government revenue. Additionally, in mid-November, Anadarko Petroleum Corporation announced a second significant oil find that might contain commercial quantities. Comparing this potential to the current annual government budget of $300 million for a population of 4.5 million, it's clear that much is at stake.
First things first: A commercially-viable oil field needs to be discovered. The Venus-1 deep water well drilled last year by the Anadarko consortium was tantalising. The oil companies have been parsimonious with information but the well appears to include hydrocarbons, which are assumed not to be in commercial quantities, but nonetheless encouraging enough to have another go. Wells are expensive and the geophysics is proving tricky--not yet allowing reliable detection of hydrocarbons before drilling and so making slight the chances of single prospect success. The two wells planned in the next few months, Mercury and Jupiter, will give a better idea of whether or not Sierra Leone is destined to become Africa's next oil producer.
In the meantime, much needs to be done to get oil sector governance in shape. A National Oil and Gas Policy is in draft form; existing laws need to be revised and new laws enacted; and current licenses must be reviewed in light of the new oil policy. The licensing system needs strengthening, as evidenced by the legal disputes arising from certain oil companies not meeting their contractual obligations and the redrawing of certain license boundaries by the government.
This was the context for the Revenue Watch Oil and Gas capacity building workshop in October, which brought Parliament's Mining and Energy Committee together with media and civil society members to learn about the oil and gas industry and its governance. The aim was to provide MPs with enough knowledge to better carry out their oversight and legislative roles and to enable civil society and media to hold government accountable and help educate the public.
The workshop kicked off with the news that the Mercury-1 well had commenced drilling that day. This was news indeed to the MPs as no government announcement had been made. The exploration well is likely to cost between $40-$60 million and there is a one in four chance of discovering a field that could contain reserves of up to 450 million barrels, according to Tullow Oil estimates.
The workshop explored the dynamics of the global oil and gas industry: why oil prices are volatile and what the implications are for government revenues and budgets. The attendees heard about different types of oil companies and how they make business decisions. Industry figures consider Sierra Leone a "frontier area" for oil. While companies are hoping to find discoveries similar to the Jubilee field in Ghana, success is far from assured.
Concerning licensing, the key government objective should be to maximise the value of the nation's oil and gas resources by licensing exploration areas to companies with appropriate technical work programmes which are both technically competent and financially able to deliver. Parliamentarians' role in this relationship is to ratify agreements negotiated by the executive. However, they have limited capacity to carry out this role effectively and in practice it is difficult to make material changes to agreements put before them.
The attendees worked through an exercise to calculate the Sierra Leone government take from licenses already agreed and compare them to other countries. It's ironic that the fiscal terms for some of their licenses are freely available on company websites, but not yet from the government in Sierra Leone. They were able to see that the government take in Sierra Leone, at 37-39%, is very low by international standards and is not progressive. For example, there is no cap on company returns at high commodity prices.
Principles for good governance of the national oil and gas sector were also used in an analysis of the draft Sierra Leone National Oil and Gas Policy. The broad aims of the document are hard to fault, although some may be a challenge to implement. A number of suggestions for improvement were noted. One priority would be to ensure the independence of the regulator from political influence given that, in the draft, the President appoints the board, and the regulator is accountable only to the President. There was strong support among the attendees for the need to depoliticise the role of regulator as much as possible and for the requirement that the regulator publish a comprehensive annual report. The policy goal for the creation of a national oil company to participate in licences was noted. However, given the few qualified national petroleum professionals currently in Sierra Leone, this is likely only realistic in the medium term. The draft's stated commitment to managing expectations of the people through the provision of open and timely information was laudable, but, judging by the MPs' surprise to hear that the critical Mercury exploration well had started, acting on the policy of open information seems to have a ways to go.
Though Sierra Leone is a functioning democracy, political parties are determined largely on ethnic rather than ideological grounds. This makes achieving a national consensus on exploiting oil and gas resources essential. The workshop seemed to offer steps in this direction and it was heartening to hear MPs from both sides committing to build their knowledge further and to work for consensus.
Sierra Leone is a country of great beauty and potential, but one with crumbling infrastructure and a people still recovering from a brutal civil war that set development back decades. Capacity remains weak at all levels, leaving the country's resources vulnerable to exploitation by unscrupulous investors attracted to frontier plays. The National Oil Policy is aiming in the right direction, but the real challenge will be in its implementation. Sierra Leone will soon know whether it is on route to being an oil producer. Whatever the outcome, Sierra Leone is going to need a good deal of support for good governance along the way.
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