The Gambia on Tuesday finalized two agreements, including the Deeds of Agreement and Joint Operation Agreement with British Petroleum (BP) for the exploration of Block A1 offshore. The latest development gave BP the green light to start the oil exploration of the Block.
This followed the initial signing of a formal exploration agreement between the two parties three months ago.
So now that BP is all set to start the exploration, what happens next? The Chronicle engaged an expert to break down the components of the deal.
How the deal is structured
The Petroleum Act that regulates the exploration, development and production of hydrocarbons in The Gambia provides that the government should own the oil. As a result, the government has surrendered its right by contracting the Gambia National Petroleum Corporation to work with BP in executing the project. Hence the government cannot be a regulator at the same time a party to the deal. In effecting this agreement, a Joint Operation Agreement (JOA) was signed and if oil is discovered, The Gambia has 15 percent stake in the Block.
“The issue there is that the government is the regulator of oil and gas industry. And the government cannot be a regulator and a licensee at the same time. That is what informs the idea that the government should give its 15 percent to Gambia National Petroleum Corporation,” said Abdourahman Bah, a lawyer and oil and gas expert.
Because of this situation, according to him, GNPC and BP have a relationship in the operation of Block A1. “It’s a huge legal document that defines rights and liabilities of GNPC as a partner and also BP to ensure that the two parties that have opposing interests work in harmony without dispute.”
Meanwhile the government had already signed an agreement with GNPC regarding its 15 percent stake. As part of the agreement, GNPC will pay tax to the government.
Gambia’s oil prospect
Although there is hope of oil availability in the country, it’s not certain that there’ll be discovery. The hope that there’s oil in The Gambia is premised on the geological research of seismic data which helps to determine the location of the oil and gas reservoirs.
“It was based on the discoveries in Senegal. Our block is adjacent to the discoveries that were made in Senegal. From a geological point of view there is likelihood that there is oil in the other side – which is in The Gambia as well,” Bah told The Chronicle.
Why government settles for just 15 percent
The estimates have shown that Block A1 has the potential of having more than 1 billion barrels of oil. According to Bah, the government does not have the money to invest in exploration, adding that this amounts to tens or even hundreds of billions of dollars.
“Secondly, because it’s offshore the technology needed is very expensive and also difficult to come by. Only the oil companies have that kind of technology and that’s why anywhere you go with the exception of Saudi Arabia, you have oil companies partnering with host countries,” he told The Chronicle.
Bah said with the seismic study, a country can estimate how much barrels of oil it can gain from each Block and it can enter this information into its financial modeling. A country can also estimate the amount each barrel is worth after it’s extracted within a period of 20 to 30 years as in the Gambia-BP agreement.
“From there now you would be able to tell how much the government would make during all those years from taxes, royalties, surface rents, and windfall taxes, and from other payments as well as that of the payment the oil company makes to the government. Aside from the 15 percent that is basically for us to participate, the benefit it has is that it exposes our local staff to the operation in the next 20 to 30 years. It’s possible that the GNPC, if they have the resources and capital – we would just assign them the Block without foreign companies.”
According to Bah, if the oil is discovered and it’s of commercial quantity, the first payment that comes to the government is usually by means of royalty payment which is based on the number of barrels that is being lifted. Generally, he said, countries use the benchmark of other countries to know how much is payable for every barrel and it is payable whether profit is made or not.
“The company also pays Corporate Income Tax that is incorporated in The Gambia which runs into billions if not hundreds of billions as well. They also pay developmental levy and environmental fee as well. With all these bits together, basically the government gets more than the oil company because in the financial modeling, the government takes around 65 percent of the projected proceeds of the project.”
According to the Ministry of Petroleum, BP will take the risk to pre-finance the whole process until oil is found and it then becomes repayable with interest. “The government does not have the resources to pay for upfront investments. This may run into hundred billion dollars. The good thing is that at the exploration stage, it’s carried out for free. The government does not pay anything during the exploration,” Bah told The Chronicle.
“By the structure the 85/15 percent, every 100 barrels lifted a day for example, 15 percent will go to GNPC and 85 percent to BP.”