Low Oil Prices Prompt Change
AOP talks to Adaku Ufere, Energy Practice Leader for Centurion Law Group, about what governments can be doing to make exploration more attractive in Africa, as well as the impact of low oil prices on indigenous oil companies.
What are the primary regulatory challenges companies face when conducting exploration in frontier markets in Africa?
Unstable governments, fluctuating regulations and lack of proper enforcement of established statutes constitute a serious issue in Africa. Investors want to be sure that provisions agreed to will remain stable for ten, twenty years — not change on every whim and caprice, or change of leadership. African governments need to promote the use of stability clauses and draft regulations in such a way as to give investors’ confidence. Also regulations need to be drafted to take local particularities into cognizance, for example in East Africa, where the position of onshore oil is very different from that of offshore gas.
What actions can governments take to make exploration more attractive, especially in this price environment?
Governments can reduce the costs associated with exploration. Signature bonuses and minimum financial obligations in the initial exploration periods can be made more affordable so as to attract wary investors. Taxes can be reduced or eliminated during exploration and enforced during production. Governments can also be willing to invest in their assets and explore the possibility of paid interests, as opposed to the current phenomenon of carried interests, so as to lessen the burden on the potential investor.
How do you anticipate a period of sustained low oil prices will impact the strategies of independent and indigenous oil companies operating in Africa?
It will lead these companies to become more creative and take less risks. Independent and indigenous companies will begin to take on safe bets, such as farm-in opportunities, and mergers with other smaller companies. This skills sharing and knowledge acquisition can only benefit them when the industry picks up again, as they would have had a sustained period of capacity building, to utilize once they are once again able to take on solo opportunities.