What’s the Hold-Up on Oil and Gas?

The Prospect of of Namibia becoming an oil-producing nation remains a well-covered topic from the country’s cafés to its boardrooms.

However, the nature of the conversations have evolved – from discussing details such as the size of the wells and who is drilling, to what the hold-up is and what must be done for Namibia to secure elusive final investment decisions (FIDs).

These are questions Namibia must answer now to have a chance of capitalising on what has been lauded (with good reason) as having the ability to change the magnitude of the country’s economic prospects.

HYPE AND REALITY

After Shell and TotalEnergies reported major successes in 2022, oil was thought to be Namibia’s ticket to the future.

Multiple other international oil companies (IOCs) entered the fray, with exploration and appraisal success rates well above global norms.

Namibia was on the front page of oil magazines worldwide, with huge reserve sizes being quoted.

Such was the hype, it was as if the oil was already in the barrels with all the hard work being done. As it turns out, this was never the case.

The geological conditions at the Orange Basin were always technically challenging: if TotalEnergies’ Venus discovery goes to production, it will be among the deepest offshore sites ever developed.

Venus is also located 300 kilometres from shore and lies within the Benguela Current, which is not known for calm seas.

The high gas ratio has also been a constant talking point, and is one of the main reasons for the Shell write-down; an announcement that drew public attention and was the first obvious hiccup.

SLIPPERY SLOPES

That aside, the geological conditions are not what is holding the industry back. That fault mainly lies with the above-ground environment.

One stumbling block for the most progressed IOCs is the fiscal stabilisation clause – essentially a contractual commitment to protect the IOCs’ investment.

The oil industry requires large upfront investments that will only generate returns for them years down the line.

This clause ensures that if the host country changes any laws, particularly around ownership and tax, IOCs have a seat at the table to ensure the projects’ economic viability remains intact.

While it is understandable that the administration does not want to get locked into an unfair deal for decades, such a clause is commonplace in developing nations, and IOCs are highly unlikely to move ahead without it.

Another contentious issue that always crops up between IOCs and host nations is local content policy.

This has been used as an attempt to avert the ‘oil curse’ but has had little to no effect, especially in Africa, where what can be well-intended policy breaks down to benefiting an elite few.

NORWEGIAN EQUATION

Norway is often looked at as a success when it comes to dealing with the oil industry, particularly on the transfer of skills to locals.
But one caveat needs to be made here – it didn’t happen overnight. It took decades.

Training and setting up local supply chains takes time, especially for an industry as complicated as offshore oil.

So one should be careful about setting out demanding local content goals before production has reached sufficient volumes.

While local content is undoubtedly important, it should only be the focus when both sides are able to have a real impact, and it should not be what brings negotiations to its knees.

SNAGS, WEALTH AND OVERSIGHT

Other issues include Namibia’s Petroleum Act, which is outdated and requires revisions.

Namibia’s sovereign wealth fund, which one would imagine is needed to sterilise the revenue inflow from oil, is barely being debated.

The matter of which ministerial vote ultimately directs the oil sector is also far from simple.

The shift of oversight for oil and gas to the Office of the President clashes with the Petroleum Act, which vests authority in the mines and energy minister.

Populist talk of increasing the state’s carried interest further destabilises any relationship between IOCs and the state.

A stable relationship is the bare minimum for each party if they are to enter a decades-long contract with sizeable financial implications.
Practical bottlenecks also remain, such as the need to upgrade port infrastructure.

All these issues can be addressed, with the first step being clear and open communication between all parties.

Communication has not been a strong point of the new administration.

One can only hope that recent cracks of falling growth and widening deficits in the fiscus bring the administration to the table with serious intent to reach a fair but realistic agreement.

• Oliver Diggle is an economist at Cirrus Capital.

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