As Petroleum Commissioner for Namibia, Dr Leon Moller had first-hand experience of negotiating with international oil companies in Africa. Now a solicitor in Aberdeen, with leading UK law firm Shepherd and Wedderburn, he outlines the challenges and potential pitfalls facing firms hoping to exploit the continent's vast resources.
The West African region is endowed with a rich abundance of natural resources and attracts many international companies and governments that increasingly view the region as a major source of oil supplies for their ever-increasing domestic markets.
There is also a notable trend developing of International Oil Companies (IOC's) leaving established, mature regions and competing for the rich oil and gas resources of the region.
West African oil producing countries such as Nigeria, Angola, Gabon, Equatorial Guinea, Chad, Cameroon, Congo and Ghana, with the recent discoveries, have become the main focus of the international oil industry, including direct government interest from China, India, Japan, etc through their state oil companies.
But companies looking to invest in West African countries like Nigeria must do their homework before committing themselves to the region's vibrant and growing oil and gas sector.
A number of global leaders recently called for oil production increases to stave off debilitating, oil-inspired inflation. However, this goodwill gesture was then almost overshadowed by attacks in Nigeria on Shell's deepwater Bonga platform and Chevron's pipeline, which resulted in a loss of about 300,000 bpd in production.
These ongoing events, which also include unrest and kidnappings, are mainly targeted against the activities of the oil companies and are major contributing factors in low production levels and also the rise of the current oil price.
So companies should therefore be familiarising themselves with the current situation and ensuring they have adequate advice and are well prepared for the challenges and potential conflicts that are present in the region.
The West African governments are increasingly under pressure to address the many socio-economic problems affecting their local communities and at the same time reverse the petroleum resource curse that is so prevalent in their oil producing regions. There is an alarmingly extensive range of problems affecting the region's oil and gas sector, including corruption, civil unrest, sabotage, labour disputes, expropriations, nationalisations, ownership claims by indigenous communities, lack of basic services and infrastructure, etc. It is therefore important that companies establish workable relationships with their host governments, local partners and communities and adhere to their contractual obligations.
Typical questions companies need to ask themselves about their investments include:
- is it safe to invest?
- what are the local requirements (partners, indigenisation)?
- are they guaranteed a desirable return?
- should they invest in oil producing countries with troubled reputations?
Additionally, how these companies reach their decisions and what mechanisms are available to deal with any type of risks when things go wrong depend mainly on the adoption of an effective internal management system. At the same time, companies should take note that there is now a strong drive towards greater transparency and accountability in the industry with the adoption of more anti-corruption treaties, laws and initiatives and the increase number of investigations and prosecutions concerning the oil industry.
It is now mandatory for companies to avoid hidden and costly pitfalls and protect the company's project profitability through proven negotiable strategies to achieve equitable allocation of risks. Finally, companies could also strengthen their bargaining position by a clear understanding of the key commercial and legal aspects and should always be prepared to mitigate their contractual disputes in all different jurisdictions, including the West African countries.