As production drops at older oil fields, exploration efforts are increasing

Gabon is the fifth-largest oil producer in sub-Saharan Africa and oil dominates the economy, accounting for roughly half of state revenues and more than 80% of export revenues. Over the last decade, however, output has declined as the country’s larger oil fields mature, prompting Gabon to encourage activity in smaller blocks expand offshore exploration in new blocks, and continue redeveloping existing oil fields. The government is also taking a more active role in the sector through its still relatively young state-owned oil company, while also tightening oversight.

Output & Reserves

Oil production reached its peak at 370,000 barrels per day (bpd) in 1997, after which it declined steadily for most of the next decade before stabilising in recent years around 240,000 bpd. In 2013, total production was 237,00 bpd according to BP’s “Statistical Review of World Energy”, or 242,830 bpd according to the US Energy Information Administration (EIA). This is similar to 2012 figures of 245,000 bpd (BP) and 241,960 bpd (EIA).

Most of this is exported; domestic consumption in 2012 was just 15,840 bpd. According to BP, Gabon’s proven oil reserves stood at 2bn barrels (300m tonnes) at the end of 2013, down from an estimated 2.3bn barrels in 2003. The government has set a target of doubling oil output to 500,000 bpd, with the intention of re-joining the Organisation of the Petroleum Exporting Countries (OPEC), which it left in 1997.

Offshore Licenses Awarded

Gabon first began producing in 1957 and, on the back of large onshore discoveries, became the continent’s third-largest producer in the 1980s. As output began to plateau at those larger oil fields – including at Rabi and the Grondin/Mandaros projects – attention shifted to smaller blocks, which in recent years have made up a larger share of production. The government’s biggest recent push for more upstream activity, however, has come in the offshore segment: encouraged by recent successes in Ghana, Côte d’Ivoire and Nigeria, Gabon is looking to tap into new deep and ultra-deep blocks.

In October 2013, the state awarded 13 new offshore licences to a broad range of companies, including both established players seeking to expand their holdings, such as French operator Perenco and British firm Ophir Energy, and a number of new players. Ophir Energy, ExxonMobil, Repsol, Impact, Marathon Petroleum, Perenco, Petronas and Eni all acquired shares of the 13 licences originally awarded. In May 2014, two concessions were withdrawn when the government removed Noble Energy (US), Cobalt (US) and Elenilto (Israel) from the list of awardees, citing insufficient financial capacity as the reason they were ineligible, even though all three had partnered with larger companies in their bids.

In August 2014, production sharing contracts (PSCs) were signed for the following blocks: F14 (Petronas); F15 (Noble/Woodside); G13 (Marathon); D13, D14, and B7 (Impact Oil and Gas); and E13 (Repsol). The following blocks are under negotiations: C11 (Exxon Mobil), A3/A4 (Ophir) and E14 (Perenco).

Interest in the offshore licences was spurred by the discovery in August 2013 of a gas condensate reserve in the deep offshore Diaba licence held by Total (42.5%) in partnership with Marathon (21.25%), Cobalt (21.25%) and the Gabonese government (15%). Similarities between the pre-salt layers of offshore Brazil and the Gulf of Guinea have raised hopes that Gabon might have major viable hydrocarbons systems comparable to those of Brazil – a thesis encouraged by successful discoveries in the north of the Gulf of Guinea. The Diaba find suggests a working petroleum system with potential for further discoveries, and has helped to raise the profile of Gabon’s offshore plays. In July 2014, Italian operator Eni announced a new discovery of gas and condensates in the pre-salt layer of its offshore Nyonie licence. While the operator is conducting analysis, initial estimates indicate that the reserve contains up to 500m barrels of oil equivalent (boe) in place.

Recovery Rate Enhancement

longside their offshore explorations, in an effort to raise production levels operators are redeveloping mature oil fields to enhance the recovery rate of existing wells, which at less than 30% is low by global standards. Some advances have recently resulted from oil companies’ efforts to modernise platforms, upgrade equipment and drill new wells in existing fields.

Total, for example, is redeveloping its Anguille field by building a new platform, Anguille Marine Nord (AGMN). This includes drilling 21 new wells, installing new high-efficiency equipment, constructing a new power grid and taking measures to reduce flaring by 90%. As part of a $2bn, five-year spending campaign, the French company put the AGMN platform into service in March 2013, announcing the first oil extraction a month later. Once it is fully complete in 2015, Total expects the platform to boost production at the Anguille field to almost 20,000 boe per day.

Smaller operators, too, have been investing in redevelopment upstream. Perenco is currently doing so in northern Gabon, having invested $400m in 2012 and around $500m in 2013. VAALCO is planning to build and install two new production platforms in Etame Marin, an investment that, together with its associated new wells, will total some $500m. Maurel & Prom, for its part, invested €153m for development work in 2012 – almost double that in 2011 – largely to raise production to its goal of 35,000 bpd in 2014.

Oil Companies 

Shell Gabon and Total in Gabon have traditionally been the largest producers among the country’s 22 registered operators (of which eight are currently producing). Shell, active in Gabon since 1960, currently operates a number of onshore fields in the country and holds two exploration and PSCs in offshore blocks, producing 44,000 bpd in 2011, the latest year for which figures are available. Total Gabon, whose presence in the country stretches back to 1949, is active in all stages of the value chain, from exploration to marketing. Its assets in Gabon include the three fields it operates – one onshore and two offshore – and shares in two it does not operate. According to its annual report, crude oil production at its fields reached 56,900 bpd for 2013, up 2% on 2012 and comprising about 21.4% of the upstream market.

The dominance of these giants, however, has recently softened as output from other players has risen. In 2013 French firm Perenco, which holds six licences (five offshore and one onshore), invested $500m in its Gabonese holdings. Its production output, at 60,000 bpd, is similar to Total’s. It plans to drill 30 new wells and have five rigs in operation by the end of 2014.

Four other operators producing in Gabon are Addax (China), Maurel & Prom (France), VAALCO (US) and Tullow Oil (UK). Addax has interests in six of Gabon’s producing fields, holds four PSCs (both onshore and offshore), and operates the Dinonga and Irondou fields. Maurel & Prom, which holds five licences at 100% and a controlling 85% share in another four, increased its Gabonese production in fiscal year 2013, reaching 29,000 bpd by December and achieving average sales of 19,580 bpd, up 26% on 2012. VAALCO operates the offshore Etame Marin concession, its chief producing asset at 18,000 bpd as of February 2014, and holds the licence for the onshore Mutumba Iroru block. Tullow Oil holds minority shares in 21 licences, of which the 14 that are producing yielded 10,600 boe per day in the first half of 2014.

National Company

One of the sector’s most telling reforms in recent years has been the re-establishment of a national oil company. Seeking to acquire a greater share of the oil sector and thus retain a larger chunk of its revenues, the government created the Gabon Oil Company (GOC) in 2011. Its predecessor, the Gabonese National Petroleum Company, had shut down in 1987, leaving the country without a national oil company for more than 20 years.

The GOC’s functions are many and varied. According to the state decree that established it, its key tasks are: holding, managing and executing a wide range of petroleum activities (both upstream and downstream) on behalf of the state; managing state participation in oil and gas fields; overseeing companies that hold conventions of establishment and PSCs; monitoring and operating (alone or in association, partnership or joint venture) hydrocarbons deposits and any related or associated substances; and, in general, performing all financial transactions related directly or indirectly to the hydrocarbons industry under Gabonese or foreign law. Under a long-delayed new hydrocarbons code, which was adopted in July 2014, the GOC will have the right to a 15% share in all new operations.

For the moment, the GOC’s focus is on managing the state’s existing shares in oil contracts. Though it does not yet operate any producing assets, the national oil company holds an operating licence for the onshore Remboué field, which it intends to return to production by the end of 2014. In March 2014, the GOC launched a partnership with Perenco to provide technical training for its employees.

Regulatory Actions

The establishment of the GOC is part of a broader set of reforms aimed at overhauling the legal and regulatory environment for the upstream sector. In recent years, the state has tightened its oversight of the oil and gas sector, conducting rigorous audits of oil companies, enforcing the tax code more strictly and hinting at incorporating tougher contract terms into the new hydrocarbons code.

One example of this was the repossession of the Obangué field over a tax dispute in 2013 that ultimately resulted in Addax paying a substantial sum – about €298.5m according to local media – to recover the field. Another came in early 2014 when Total received a €600.8m tax reassessment notice, which it has contested. Charles Tchen, CEO of Independent Petroleum Consultants, a firm that advises on oil and gas with a focus on West Africa, said, “The government’s revoking of the Obangué licence, the withdrawal of already-awarded offshore licences from three companies and the levying of tax fines have negatively impacted the industry, causing concerns over the operating environment and the credibility of the government in awarding contracts and upholding contract terms. However, there hasn’t yet been a noticeable withdrawal of investment interest. Hopes are high for the country’s long-term exploration potential, and Gabon has big advantages relative to the region in terms of political stability, security and infrastructure.”

The GOC became an operator in January 2013 as the recipient of the onshore Obangué licence after it was transferred from Addax following the tax dispute. A legal battle over licensing rights ensued. At last, after a settlement was reached in January 2014, the asset was returned to Addax. According to Tchen, “The terms of the negotiations for Addax to reclaim the field were notable in that the GOC retained no non-operating share of the asset, no joint venture was established, and no provisions were made for the GOC to be trained in oil field management and operations.”

New Hydrocarbons Code

The need to revise Gabon’s regulatory framework has long been recognised. Many existing oil contracts are the result of ad hoc negotiations rather than a sector-wide regulatory regime. Few local actors participate in the sector.

Motivated by the need for greater transparency in negotiating PSCs, by the projected increase in oil production and by the desire to capture a greater share of oil revenues, the government has undertaken an overhaul of the legal framework governing the hydrocarbons sector. After initial delays, the hydrocarbons bill was sent to parliament for ratification in early 2014. On July 23, Minister of Petroleum and Hydrocarbons Etienne Dieudonné Ngoubou announced its adoption.

As under existing PSCs, the new hydrocarbons code limits the financial risk assumed by the government by requiring that the full cost of exploration and development activities be borne by the oil company, while the state’s equity financing participation applies only once production begins. This arrangement has been regarded as relatively favourable for oil companies under existing PSCs, but may pose problems for the sector’s future expansion as it moves into exploration of higher-risk deep and ultra-deep offshore zones.

Under the new code, the GOC will have the right to purchase a 15% share in all new oil contracts. This measure, aimed at expanding local equity, may also benefit international oil and gas operators. “The 15% share is to be purchased at market prices, rather than allotted to the GOC for free, so it is contingent on the GOC having the funds available to purchase its share,” said Tchen. “This is not likely to have a major immediate impact on international oil companies operating in Gabon.” Rather, the 15% clause is primarily a forward-looking one, clearing the way for the GOC to take on a greater role. In the long term, it is likely to strengthen the sector since it encourages shared-equity partnerships between local and foreign players.

The new code has evoked concern within the industry. The Gabonese Oil Union, for one, has said that its provisions do not provide sufficient incentives for oil companies to assume the heightened financial risks of exploration in deep and ultra-deep offshore zones. Another complaint is that the code has been rolled out so soon after the awarding of new blocks. “The amendments introduced in the new hydrocarbon code and the role and responsibilities of the GOC are major aspects to consider for any international oil company interested in doing business in Gabon,” Rodney J MacAlister, the general manager of VAALCO Gabon, told OBG.

Refining Upgrade

As with many of Africa’s large upstream producers, Gabon’s oil and gas sector has a limited downstream component. The country’s only refining company, Société Gabonaise de Raffinage (SOGARA), produces just 21,000 bpd, operating below capacity due to frequent maintenance needs and cash availability. Built in 1967, the ageing facility is scheduled to be shut down and replaced in 2016 by a new greenfield refinery. In April 2012, the government signed a memorandum of understanding with Samsung C&T to construct the new refinery and conduct maintenance under a public-private partnership. This new facility, the firm’s first major engineering project in sub-Saharan Africa, is scheduled for completion by end-2016 at a cost of about CFA700bn (€1bn), and with a capacity of 50,000 bpd. It will be located in the Mandji Island special economic zone (SEZ) and will process liquid petroleum gas, diesel and aviation fuel, and refined oil, with roughly half destined for export.

Storage & Distribution

All petroleum storage and domestic fuel sale activities are handled by Société Gabonaise d’Entreposage de Produits Pétroliers (SGEPP), which maintains storage facilities in Owendo and in Moanda. In 2013 SGEPP reported revenues of €11.3m. The distribution market, which is required to buy from SGEPP – oil lubricants, which can be imported, are the exception – is split between four operators: Total Marketing Gabon, Petro Gabon, Engen and OiLibya. Supply shortages prompted temporary petrol station closures in 2013 and 2014, largely due to cash flow issues at the refinery, SOGARA. “Oil firms are required to sell a portion of their output to SOGARA at a 15% discount for domestic refining and consumption. However, SOGARA has been delinquent in paying the oil companies, which leads to domestic shortages,” said Tchen. Distribution infrastructure, including a sizable network of overland pipelines, is largely sufficient to meet domestic consumption needs.

That may change with time. Growth in petroleum product distribution is likely to follow overall economic growth, with operators in extractive industries and the construction sector continuing to play a key role as clients in the foreseeable future. Government diversification plans, including greater use of cleaner fuels such as gas in the medium to long run, could affect the market if major consumers start shifting to gas.

Africa’s fast-growing consumer fuel market has recently sparked competition among commodities traders to acquire assets such as refineries and storage facilities, and Gabon is no exception. In June 2013, Gabon signed an accord with Swiss-based commodities trader Gunvor creating a Port-Gentil-based joint venture to sell refined petroleum products along the Atlantic coast. The government will retain a 55% share and make a contribution equivalent to the initial capital investment of €746,300. In addition to its 45% equity stake, Gunvor will also provide a loan of €373.2m for start-up operations. Another Swiss-based energy and commodities trader, Vitol, signed a long-term oil-exporting contract with Gabon in early 2013.

Workforce

Lack of relevant skills and experience in the workforce is a major challenge to developing Gabonese participation in upstream oil and gas activities, and expanding the downstream industry. Foreign oil firms have an interest in training locals, both to meet local hiring quotas and to avoid the expense of importing large numbers of expatriate workers. Many companies do, in fact, carry out significant internal training for employees. Yet there remains a significant disparity between the skills of the workforce and the needs of the sector.

To address this, the government has partnered with Total Gabon to establish the Petrol and Gas Institute (Institut du Petrol et Gaz, IPG) in Port-Gentil, the centre of the national oil and gas industry. Construction of the IPG and start-up costs were financed by Total Gabon through a public-private partnership, while Shell and Perenco plan to contribute to later-stage operating costs. The institute has offered continuing education courses and a certificate in production operations since 2011. As of January 2014, a new programme was officially inaugurated offering a master’s in petroleum engineering in conformity with the international licence-master’s-doctorate system.

Natural Gas

Despite proven reserves of natural gas amounting to 28.3bn cu metres (largely in associated deposits) according to EIA figures for 2014, Gabon’s gas sector remains relatively undeveloped, with no export trade. Of the 2.2bn cu metres of natural gas produced in 2012, the EIA reports, more than 90% was reinjected for oil extraction purposes, or else lost to flaring and venting. Flaring has been reduced (the government allows occasional exceptions but must first authorise them; infractions of this attract penalties).

Only a limited amount is marketed. Gas is used to generate electricity, producing 584 GWh in 2011. Perenco is a major producer, supplying 680,000 cu metres of natural gas a day to power plants in Libreville and Port-Gentil. Perenco also maintains the network of gas pipelines connecting the two cities to the gas production field and processing facility.

The government has plans to develop the local gas processing industry, as outlined in the industrial section of the Emerging Gabon strategic development plan (Plan Stratégique Gabon Émergent, PSGE). The newly adopted hydrocarbons code currently has no specific provisions relating to gas production or processing. However, many recent developments bode well for the sector, including the 2010 reduction of gas flaring and the construction of two new gas-fuelled power plants in Alénakiri and Port-Gentil.

Another development is the building of a Moroccan-Gabonese fertiliser factory. Cemented in a joint venture with Morocco signed in March 2014, this deal will see investments of €1.66bn to construct two factories in Gabon (one already designated for Port-Gentil) and two in Morocco, all using Gabonese gas. The project aims to produce 2m tonnes of fertiliser for export within sub-Saharan Africa, thereby both supporting and profiting from growing agricultural activity in the region. An earlier fertiliser-production project, signed in 2010 with Olam International and India’s Tata Chemicals, was scrapped after Tata pulled out.

Electricity

Total electrification has much improved in recent years, reaching 81.6% of the population in 2013, according to the World Energy Council. The government estimates that electrification reaches 85% in urban areas and 50% in rural ones – a major advance on the continental average. Yet despite Gabon’s oil wealth and sizable hydroelectric resources, generation capacity has not kept pace with rising demand, resulting in load shedding in Libreville and Port-Gentil. Population growth, which has remained steady at 2.4% for the last five years according to the World Bank, and urbanisation – the urban population grew 2.7% in 2013 – are driving factors behind increasing energy demand.

A more recent source of demand stems from Gabon’s push for economic diversification through domestic processing of raw materials, especially by establishing SEZs. Meeting the demand for electricity will be critical to the country’s ability to industrialise. “Energy demand in Libreville, even without the demands of industry, is increasing by close to 8% each year,” said Erik Watremez, a partner at Ernst & Young in Gabon. Distribution inefficiencies also need addressing.

Linkages

The EIA reports that while electricity generation in 2011 reached 1.7bn KWh, only 1.38bn KWh were consumed, and another 0.32bn KWh – nearly 19% – were lost. Gabon is served by three regional grids instead of one national grid, which complicates distribution. Watremez said, “Managing the electricity stock in Gabon is difficult. In developed countries, electricity grids are connected and when one area has a surplus, it circulates to another area until it’s consumed. In Gabon, it’s difficult to manage the energy supply because the grids are not connected.”

Generation

Gabon has an installed capacity of about 420 MW of electricity, according to EIA statistics for 2011. Three new power plants that came online in 2013 will greatly boost the energy supply to industrial processing activities in the timber, petroleum and mining sectors. Two of these, at Alénakiri and Port-Gentil, are gas-fuelled thermal generators constructed by Israeli firm Telemenia and have capacities of 70 MW and 105 MW, respectively. The Alénakiri plant has begun supplying timber processing and other industrial activities in the Nkok SEZ, while the PortGentil plant supplies that city’s oil and gas activities as well as the Mandji Island SEZ.

The third plant is hydroelectric and forms part of the Grand Poubara dam project on the Ogooué River, near the interior city of Franceville. With a capacity of 160 MW, this plant supplies a ferromanganese processing facility in Moanda as well as Franceville.

Two additional power plants in the pipeline are rural hydroelectric projects: Chutes de l’Impératrice Eugénie in the southern province of Moyen-Ogooué and Fé II in the northern province of Woleu-Ntem. These will primarily serve rural areas, expanding electricity access to new parts of the country. Several micro power plants to supply rural populations are also to be constructed, for example in Iboundji and Malinga.

Hydroelectricity accounted for 45.7% of electricity production in 2011, generating 809 GWh of the total 1769 GWh, according to the EIA. Although thermal power is now the dominant energy source in Gabon, hydroelectric generation is set to grow as the country increasingly taps its estimated 5000-6000 MW of undeveloped potential. “While gas has potential as an alternative energy source, the really big potential is in hydroelectricity,” noted Rick Emery Tsouck Ibounde, the World Bank’s resident economist for Gabon. “Hydroelectricity is the logical source given Gabon’s many inland streams and abundance of water sources.”

The Ministry of Energy and Water Resources has prioritised the development of hydroelectricity over gas as a generation source, but developing the necessary generation capacity will require sustained investment over the medium term. According to Watremez, “Developing hydroelectric capacity can be challenging because of the extensive environmental impact studies that have to be performed, and also because the sector has a heavy infrastructure requirement.”

Wind and solar power remain largely undeveloped, though pilot projects for solar-powered public lighting have been launched in some rural communities and the government has commissioned a study on the potential for renewable energies with a focus on rural areas. Results of the study, conducted by Canadian company Hatch, are expected in 2014.

Transmission & Distribution

The majority of electricity is consumed by households, which accounted for 691 GWh of energy usage in 2011, according to the EIA. The remainder was consumed by industrial activities (358 GWh), commercial and public services (200 GWh), and the transport sector (5 GWh). “A large proportion of electricity consumption at the household level comes from air conditioning, as in many African markets – though this is more extreme in Gabon due to the high level of purchasing power,” André Berre, director-general at BE TECH, told OBG.

Regional links, however, are much needed. “The lack of interconnection is a major constraint on access to electricity,” said Watremez. “For example, the hydroelectric dam of Inga in the Democratic Republic of Congo could furnish all the electricity needs of Gabon if there were better regional interconnection.”

The government is working to connect more of Gabon’s rural areas to its three regional electricity grids by building rural substations and line extensions, a series of which were completed in 2013. These include an extension of the Ambowé substation, construction of the 90/20-KV Angondjé substation, and a series of high-voltage/low-voltage line extensions: to Bel-Air, Montalier, Bikélé 1 and 2 (all in Libreville), and to Kessi (near Fougamou).

Projects currently under way include a high-voltage/low-voltage line extension to Cap Estérias; pre-electrification of the area of Batouala in Ogooué-Ivindo; and construction of a 90-KV transmission line from Ambowé to Angondjé.

The agency responsible for managing the production and distribution of electricity and water in the country is Société d’Énergie et d’Eau du Gabon (SEEG). Privatised in 1997, SEEG is 51% owned by France’s Veolia, which operates the utility under a 20-year concession set to expire in 2017. SEEG has struggled in recent years to meet the country’s electricity needs.

Distribution in Gabon has also been hindered by inaccurate forecasting, which has led to problems with the concessions for power and water utilities. As Tsouck Ibounde explained, “One challenge in electricity provision is that the demand growth was underestimated. At the time that SEEG was privatised in 1997, annual demand growth was estimated at 3%, but current demand growth is closer to 7% or 8% per year.”

To help broaden its hiring pool and expand sector employment, SEEG has partnered with the International Institute for Water and Environmental Engineering, also known as 2iE, to establish a Central African campus of the Water and Electricity School in Owendo. The school opened in January 2013, offering two-year training for cohorts of up to 60 students interested in technical positions in the water and electricity sectors.

Since 2011, the government has created two new state companies to help manage the expansion of the country’s electricity infrastructure: Société de Patrimoine du Service Public, de l’Eau Potable, de l’Énergie Électrique et de l’Assainissement, and Société de Production et de Transport d’Électricité. Both of these agencies have a particular focus on the development of hydroelectric and gas potential. A third state entity, the Water and Electricity Regulation Agency, was established in 2010 to improve the oversight and regulation of the utilities sector.

Water

Gabon’s population has one of the highest rates of access to piped and well water in sub-Saharan Africa. World Bank statistics indicate that, as of 2012, 92% of the population had such access, though in rural areas the rate was much lower, at 63%.

In May 2013, the government contracted Spanish firm Acciona to design and build the country’s largest drinking water treatment plant to date, in Ntoum. The €50m project will expand the existing water treatment facilities in Ntoum, raising total capacity there to some 315,000 cu metres a day. The new plant alone will have a daily processing capacity of 140,000 cu metres, which the authorities calculate will be sufficient to meet the drinking water needs of Libreville and its suburbs for the next 15 years. Construction is set to finish by the end of 2014.

Outlook

In the oil and gas sector, the redevelopment of existing fields is yielding results, and recent discoveries in both shallow and deepwater offshore fields hold promise for medium- to long-term increases in production. Oil companies’ interest in exploring Gabon’s deep and ultra-deepwater offshore blocks remains robust, and the recent adoption of the new hydrocarbons code will pave the way for the state to launch new tenders to license the roughly 30 blocks that have yet to be assigned. New power plants in Alé- nakiri, Port-Gentil and Grand Poubara will boost the energy supply significantly and enable economic diversification, particularly the development of local processing industries in the SEZs. Further sustained efforts from the government and private players are needed, however, to achieve necessary interconnection between the three regional power grids, in order to manage the country’s power stock more efficiently.