By: John Baker*
New entrants to Africa’s oil and gas industry have tough times ahead. Oil and gas prices have been in free fall for the past year. The effects are widespread and recovery is uncertain. This has had a marked effect on frontier countries struggling to begin monetizing recent oil and gas discoveries. “Frontier country” is a term, often used in the oil and gas industry, to describe a country with a developing petroleum market. Frontier countries are typically labeled high-risk investments due to some combination of unproven resources, regulatory uncertainty, political risk, and poor infrastructure. The market decline has dramatically increased this risk, so future success hinges on their ability to adapt to new economic realities by strategically minimizing investor risk. Chief among investor concerns are market and regulatory uncertainties. Frontier countries lack the capacity to turn the tides on market decline, but they are well positioned to increase investor confidence with consistent, transparent, value-driven legislation.
Over the past few years, major discoveries have prompted increased investment in exploration projects in Africa. As new entrants to the markets, these frontier countries saw the opportunities as a godsend in a time when prices peaked over $120 a barrel and production companies were seeing record-setting profit years. Then, the bubble popped: as projects hit the ground running, prices plummeted. Many factors contributed, but experts attribute the fall mainly to oversupply, the rise in US shale production that forced increased competition in Asian markets, and weakened global demand.
Since October 2014, the market has crashed to its current level near $50 a barrel. As a result, many oil and gas projects, particularly those involving costly unconventional extraction methods and offshore drilling, have become economically unviable to pursue. Foreign investment is becoming increasingly difficult to obtain and many companies have been forced to stall or abandon many of these once promising opportunities. Widespread overdependence on oil threatens economic and social stability as countries cut their budgets to deal with the harsh reality that prices may not recover in time to be their saving grace.
PricewaterhouseCoopers (PwC), one of the biggest professional services networks in the world with contacts in every major industry affected by the recent market decline, analyzed the effect of low prices on development and industry strategies for the future by conducting extensive interviews with major players in Africa’s oil and gas upstream, downstream, and mid-stream industries. Respondents expressed concern about how the market will affect development, but over 90% projected a gradual increase in prices over the next few years, reaching $80-90 in 2017. Only the future can tell if that estimate is overly optimistic, but it raises a key point: oil and gas is a long-term business that history has shown to be cyclical in nature. Therefore, both companies and governments need to think long term to avoid detrimental knee jerk reactions. Of course, this is easier said than done especially in countries like Angola where oil revenues make up 70% of total public revenues. They will have to find ways to optimize costs, revise their budget, and possibly consider austerity measures.
It is not all bad news. In 2014, eleven of the largest twenty global discoveries of oil and gas were in Africa. As a result, many countries previously unknown for oil and gas have seen increased seismic activity. The Kenyan Petroleum Bill of 2015 proposes a relatively large bidding round to take place next year and is expected to see an increase in onshore drilling exploration. Liberia recently received confirmation from Canadian Overseas Petroleum Ltd. that their partner, ExxonMobil, will drill an exploration well by late 2016 or early 2017. With recent major gas discoveries, Mozambique and Tanzania are poised to become global players in the liquefied natural gas industry. Some countries have continued to grow, but the market decline has been a powerful wake up call for most. Frontier countries need to use the time for cost optimization and strategic planning to increase attractiveness to investors.
If frontier countries want to survive in this volatile industry, they must create a strong regulatory framework adapted to the new market realities. Regulatory uncertainty refers to the myriad of issues present in many frontier countries’ petroleum regulations. Agency roles may be undefined, overlap, or serve conflicted interests. As new market entrants, they lack experience so regulations are often inadequate, unrealistic, and lack transparency.
The PwC respondents voiced concerns with infrastructure, the supply chain, and skills shortages; however, they were optimistic about their ability to tackle these issues. The bigger problem is the regulatory framework they cannot change. 82% of respondents listed regulatory uncertainty as one of the biggest threats to development. Six of the world’s major oil and gas companies wrote an open letter to the UN, addressing the need for consistent policies to achieve long-term economic resiliency. “We need governments across the world to provide us with clear, stable, long-term, ambitious policy frameworks. This would reduce uncertainty and help stimulate investments in the right low carbon technologies and the right resources at the right pace.” Without regulatory certainty, companies will just walk away.
Companies need to know their rights will be protected. This is the most glaring defect inhibiting growth. South Africa, for instance, has one of the ten largest technically recoverable reserves of shale gas in the world, but unclear legislation and unrealistic participation agreement provisions have deterred investors. Significant changes to the law have been discussed, but investors will likely continue to stay away until the government passes favorable legislation. In Liberia, the National Oil Company of Liberia (NOCAL) is both player and referee. NOCAL acts both as direct participant in oil and gas projects and regulator of the production sharing contracts governing them. This is clearly a conflict of interests. Liberia has publically promised remedy the issue, so hopefully we will see that change soon.
In order to remedy regulatory uncertainty, local governments need to act. They need to establish clear agency roles to avoid conflicting legislation. Industry consciousness must be raised through education and increased dialogue with oil and gas companies. Agencies and other policymakers need to understand the market and their role in it so they can adapt to new challenges and adopt economically attractive legislation.
Liberia’s Restated and Amended Production Sharing Contract (PSC) is markedly different than the 2002 law and reflects the appropriate mentality with a step in the right direction. NOCAL explains their reasoning:
“Some provisions of the Law… were not realistic to expect from the companies given the risk at the time. Liberia was classified a ‘frontier’ region, which means maximum risk, which means to get the companies to come at all you have to offer them more. Liberia got the best deal it could under the circumstances. As Liberia develops, that risk reduces and Liberia can demand more from new contracts it signs.”
This mentality is necessary. Policymakers need to recognize the risk level associated with exploration operations in frontier countries during this economic climate. Liberia’s new PSC shows a sensitivity to these issues and may prove to be a model for similarly situated countries in the future. Oil and gas is a cyclical market, so adaptability is key. The ability of frontier countries to respond to the inherent challenges of this volatile market will be determinative in their long-term success.
 Clifford Krauss, Oil Prices: What’s Behind the Drop? Simple Economics, N.Y. Times (Oct. 5, 2015), http://www.nytimes.com/interactive/2015/business/energy-environment/oil-prices.html?_r=0environment/oil-prices.html?_r=0.
 Richard Devine & Ana Severova, Bargain Hunting in the Low Oil Price Environment: Key Issues for Investors when Bidding for Hydrocarbons in New Frontiers, 8(5) J World Energy Law Bus. 425, 426 (2015).
 This list is not meant to be exhaustive, but rather to give the reader an overview of the most common and significant risk related issues that define frontier countries. As explained in the cited article, a uniform definition does not exist, but a country labeled “frontier” typically presents some combination of these issues. See id.
 See From Fragile to Agile: Africa Oil and Gas Review, PricewaterhouseCoopers 13-14, 35 (Aug. 2015), https://www.pwc.co.za/en/assets/pdf/oil-and-gas-review-2015.pdf.
 See id. at 6, 12, 30-31.
 Weekly Europe Brent Spot Price FOB, U.S Energy Information Administration Independent Statistics & Analysis (Oct 15, 2015), http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=rbrte&f=w.
 Supra note 1.
 Supra note 1.
 Supra note 4, at 17, 24, 28.
 See supra note 4, at 21-24.
 Supra note 4, at 4.
 Supra note 4, at 13.
 Supra note 4, at 14.
 Supra note 4, at 6.
 Supra note 4, at 19.
 Supra note 4, at 18.
 Press Release, MarketWatch, Canadian Overseas Petroleum Ltd.: Liberia Update (Sep. 23, 2015), http://www.marketwatch.com/story/canadian-overseas-petroleum-ltd-liberia-update-2015-09-23.
 Supra note 4, at 12, 30-31.
 Supra note 4, at 9.
 Supra note 4, at 35.
 Six Oil Majors Say: We Will Act Faster with Stronger Carbon Pricing, UN Climate Change Newsroom, June 1, 2015, http://newsroom.unfccc.int/unfccc-newsroom/major-oil-companies-letter-to-un/.
 Supra note 4, at 20, 36, 40-41.
 Supra note 4, at 41.
 Frequently Asked Questions, National Oil Company of Liberia http://www.nocal.com.lr/pdf/Resource_Library/Frequently_Asked_Questions.pdf (last visited Oct. 12, 2015).
 See Republic of Liberia National Petroleum Policy, p. 5-6, 8 (Nov. 2012).
 Many Articles of the Restated PSC conflict with the 2002 law, but perhaps the most important change is evident in the royalty provisions. See An Act Adopting the New Petroleum Law of the Republic of Liberia, Section 3.7 (2002); Restated and Amended Production Sharing Contract, Article 17.5 (2014). Keep in mind: the Restated PSC is a contract between Liberia, Exxonmobil, and Canadian Overseas Petroleum, but in Liberia and some other African countries, PSCs must be ratified by both houses of the legislature and signed by the president into law so the Restated PSC effectively replaces any conflicting sections in the 2002 law. See also Richard Temple & Isabelle Desgranges, Liberian Production Sharing Contracts: A New Model for West Africa?, 7(2) J World Energy Law Bus. 112, 113 (2014).
 Supra note 4, at 41.
 Temple, supra note 27, at 119.
*Edited by Christine Sanders