East Africa is riding a wave of change in the management of exploration and production rights of its newly struck oil and gas resources amid growing pressure for transparency and accountability.
In a latest development, Uganda’s Cabinet has approved plans to open up six exploration blocks in the oil rich Albertine Basin for licensing in the country’s first competitive bidding, bolstering the region’s shift away from one-on-one negotiations with firms.
Energy minister Simon D’ujanga, said that preparations have begun to issue the blocks in line with the Petroleum (Exploration, Development and Production) Act, 2013 which provides for licensing through open, transparent and competitive bidding.
“The government plans to invite companies to participate in this licensing round during the first quarter of 2015” he said in a statement to the nation’s Parliament seen by AFKInsider.
Uganda plans to invite bids for Semiliki and Kanywataba blocks in Ntoroko District, Ngassa in Hoima district, Taitai and Karuka in Buliisa district, Mvule in Yumbe and Moyo districts and Ngaji in Kanungu and Rukungiri districts.
Uganda’s petroleum resource is now estimated to be more than 6.5 billion barrels of oil, an upward revision from 3.5billion barrels that was estimated in August 2012. The country also estimates that is it has 500 billion cubic feet of non-associated gas (independent gas), translating to about 90 million barrels of oil equivalent.
Neighbouring Tanzania, a hotspot for natural gas exploration, has already received bids for some of the eight oil and gas blocks it offered in its latest competitive bidding round.
China’s top offshore oil producer, CNOOC Ltd, and Russia’s state-run Gazprom were among companies that submitted bids for the blocks on offer in the fourth round. Statoil and ExxonMobil, which have made big gas discoveries off Tanzania, submitted a joint bid for one of the offshore blocks.
CNOOC will battle with Statoil and ExxonMobil for offshore block 4/3A, which covers 2,620.3 square kilometres. Gazprom applied for block 4/3B offshore Tanzania, covering an area of 3,045 square kilometres.
Abu Dhabi state-owned investment fund Mubadala applied for offshore block 4/2A, which covers an area of 3,630 square kilometres, while another UAE firm, Ras Al Khaimah Gas LLC, has submitted a bid for the Lake Tanganyika North block, with a size of 9,670.2 square kilometres.
Four offshore blocks, 4/3B, 4/4A, 4/4B and 4/5B, did not attract any bids.
Winners of the latest bidding round will be subjected to new production sharing agreements (PSA) terms that toughen some of the conditions for energy firms seeking to explore and develop the east African nation’s big gas prospects.
Tanzania has so far signed 25 PSAs with some 17 international energy companies, including BG Group, Statoil, Brazil’s Petrobras, Royal Dutch Shell, Exxon Mobil and Mubadala Petroleum.
Another East Africa country, Kenya also plans to switch to bidding rounds to license its oil exploration blocks, moving away from one-on-one negotiations with firms, as interest in its economy increases following a recent oil discovery.
“Once we have the new law in place we shall put up several blocks that we have mapped out for bidding,” Martin Heya, head of Petroleum at Kenya’s Energy and Petroleum ministry told AFKInsider.
The competitive bidding will be carried out through a proposed law known as the Petroleum (Exploration, Development and Production) Bill, 2015 that is awaiting Parliamentary approval.
Exploration interest in Kenya has surged since the country announced a three year ago its first oil strike discovery by British explorer Tullow Oil in the country’s north. The country has since recorded multiple discoveries.
The discoveries triggered a rush by international oil and gas companies to snap up what remained of Kenya’s 46 exploration licenses.
Kenya has mapped out at least eight additional exploration blocks that will be put up for bidding under the proposed laws. Uganda and Kenya are on track to become oil exporters by late 2018 or early 2019.
The system used to allocate petroleum exploration rights varies from country to country although auctions and discretionary methods are the most popular worldwide.
In discretionary methods, licenses are directly allocated according to administratively or politically created criteria while in auctions, exploration and production rights are allocated to the highest bidder.
The two most commonly used discretionary methods are the open door policy and administrative procedures analysts said.
In open door policies, exploration and production rights are allocated as a result of direct negotiation between the government and one or more interested investors through solicited or unsolicited expressions of interest.
This method is based on criteria that are often not predefined or known to market participants. In administrative procedures, rights are allocated through an administrative adjudication process based on a set of criteria defined by the government but not always publicly stated, or about which participants may be only vaguely informed.
Administrative procedures are also allocated via licensing rounds. Under both modalities, the government retains considerable discretion in awarding exploration and production rights.
In the auction method, rights are allocated to those applicants prepared to pay the largest sum of money. Although bonus bidding is the parameter commonly used, there may be single or multiple bidding parameters, including royalties.
“Auctions are generally more transparent than administrative procedures. Auctions can be designed in such a way as to make them robust to political and lobbying pressure as well as corruption. In some contexts, this could be an important consideration,” analysts Silvana Tordo, David Johnston and Daniel Johnston said in a working paper by the World Bank titled Petroleum Exploration and Production Rights.
In the bonus system, companies eyeing exploration and product rights pay an outright sum of money in exchange for license while in the royalties option, companies targeting such rights commit to pay a gross or net revenues earned from the use of the licensed blocks.
