Gabon hopes to increase hydrocarbons production through new discoveries

Oil remains the lifeblood of Gabon’s economy, representing half of state revenues and around 80% of its export earnings in 2014. The country benefits from relatively light, sweet crude from accessible onshore deposits, and has potential in deep offshore blocks. However, the absence of any major new oil discoveries, declining production at mature fields and, above all, the halving of international oil prices over the past year have dampened the short-term outlook, leading to a push to aggressively increase enhanced oil recovery techniques and new exploration.

The government is seeking for its oil industry to stabilise production at around 250,000 barrels per day (bpd) in the short term – 20,000 bpd more than current levels – and to double it by 2025. This is ambitious, relying on increased output from offshore and a start in production from deep offshore blocks. However, Total, Shell and Eni have all announced gas discoveries in the offshore pre-salt formations believed to be analogous to those off the coast of Brazil, though the finds still need to be appraised. Should these discoveries prove as rich as believed, natural gas, rather than oil, could be Gabon’s saviour, allowing the country to monetise more of its reserves through liquified natural gas export facilities, to supply gas to planned export-oriented fertiliser complexes and to fuel much-needed domestic power generation.

In the interim, the government is keen to increase its take of domestic hydrocarbons output through greater shares of revenues and equity in all new producing fields, as prescribed under the new Hydrocarbons Law, as well as through the state-owned Gabon Oil Company (GOC), created by decree in 2011.

Output

The drop in oil prices from late 2014 to early 2015 – with Brent falling from $95 per barrel in October 2014 to $56 on April 1, 2015 – had an impact on the sector’s role in the economy. Hydrocarbons’ share of GDP fell to 35.7% in 2014 from 43.7% in 2013, while its share of total state revenues in terms of GDP is estimated at 12.8% in 2014 and is expected to fall below 10% in 2015, according to the “African Economic Outlook 2015”, prepared by the OECD Development Centre, the African Development Bank and the UN Development Programme.

Total oil production rose to 220,000 bpd in 2014, from 220,300 bpd in 2013, but still represents a fall of 38% from its peak of 370,000 bpd in 1997. Production has been shored up through well workovers and redevelopment work at mature fields, such as the Anguille field by Total Gabon, but this is not expected to result in anything more than stabilising output at 240,000-250,000 bpd in the coming years. The lion’s share of production is exported, with production for the domestic market standing at just 15,840 bpd in 2012, in part a result of limited refining capacity – although a new facility is being constructed. According to BP’s “Statistical Review of World Energy 2015”, Gabon’s proven oil reserves stood at 2bn barrels at the end of 2014, down from 2.2bn in 2004.

Producers

The country’s three main hydrocarbons producers are Total Gabon, Shell Gabon and Perenco Gabon. Total has been operating in the country since 1928, and has the largest portfolio of producing fields and exploration blocks in the trio. The company recorded a 1% increase in crude oil output in 2014 to 57,300 bpd. Shell entered Gabon in 1960, began producing in 1967, is the owner-operator of four onshore fields in the south (Gamba/Ivinga, Rabi, Toucan and Koula) and has exploration licences for two offshore blocks. In 2014 it produced 33,000 bpd of crude oil and natural gas liquids, against 30,000 bpd in 2013.

However, the elder statesmen have been overtaken by Perenco, which holds interests in 29 onshore and offshore licences, and produced 60,000 bpd in 2013, with the expectation of 70,000 bpd and 50m cu feet of gas in 2014. In addition to producing around 30% of total domestic oil output, as the only major gas producer Perenco plays a big role in Gabon’s nascent gas market. It supplies gas for key thermal power stations in Libreville and Port-Gentil.

Numerous other foreign operators also hold interests in producing fields in Gabon, including UK-based Tullow Oil, France’s Maurel & Prom, China’s Addax Petroleum and VAALCO of the US. A subsidiary of Sinopec, Addax produces 20,000 bpd from its interests in the six producing fields that it holds through four production-sharing contracts (PSCs) covering both onshore and offshore licence areas. Its largest offshore producing licence is Etame Marin, operated by VAALCO, in which Addax holds a 31% interest. Maurel & Prom registered average production in 2014 of 25,000 bpd, up 6% on 2013, at its 100%-owned Ezanga permit in western Gabon.

Tullow reported a drop in net production from its onshore and offshore assets to 12,600 bpd, from 13,300 bpd in 2013, with a misunderstanding over the granting of new production licences for the Onal fields in 2014 leading to a small downward revision in the calculations of the firm’s net production. The company said that it expected to resolve the issue with the government by the end of 2015.

Tullow holds interests in 14 exploration, development and exploitation licences, including stakes of between 5% and 40% in fields operated by Perenco and 7.5% in four operated by VAALCO. Net average production of 3880 bpd was registered by VAALCO in 2014 from its 28% working interest in the offshore Etame Marin block, comprising four fields of which three are producing – Etame, Avouma/South Tchibala and Ebouri. During 2014, these fields produced 15,890 bpd, or 5.8m barrels.

Exploration

Gabon expects to launch a new offshore licensing round in September 2015 once 3D seismic surveys conducted by France’s CGG Veritas have been completed, with bids expected in early 2016 (see analysis). In its last licensing round in 2013, 45 offshore blocks were offered, with several operators pre-cleared for negotiations. Bilateral negotiations were initiated for 13 blocks, and in August 2014 PSCs were signed with seven firms for nine blocks: Malaysia’s Petronas, a consortium of Noble Energy and Woodside Petroleum, Marathon Oil and Spain’s Repsol for one each; Ophir Energy for two; and Impact Oil and Gas for three. Negotiations are understood to be continuing with Exxon Mobil for another block.

The government is hoping that exploration of its deep offshore blocks will result in major discoveries – as seen in recent years in the waters of neighbours Angola and Equatorial Guinea – and compensate for declining production at now-mature fields. Similar offshore finds – such as Ghana’s Jubilee field, which following its discovery in 2007 is now producing around 100,000 bpd – have further stoked optimism. Hopes have been boosted by a series of gas discoveries since 2013 in its pre-salt formations, which suggest that Gabon’s deep offshore may have similar geology to Brazil’s offshore (see analysis).

“There is still a lot of unexplored geography in Gabon and it would benefit from a focus on how to make the country more attractive for exploration companies. The business environment has to be improved with reforms geared towards the fiscal framework for foreign companies,” Jean-Médard Madama, general manager of Tullow Oil Gabon, told OBG.

Natural Gas

The discoveries by Total, Shell and Eni of gas and gas condensate at three offshore blocks since 2013 could see Gabon become a major producer. The country has proven reserves of 28.3bn cu metres – largely in associated deposits – but makes little use of it, with over 90% of its production reinjected for oil production or flared.

While the current global oversupply, combined with the take-off in shale gas production in the US, seems to be dampening export opportunities at present, eventual production could in time help drive the country’s industrialisation. Gas is required to supply two planned fertiliser complexes in Port-Gentil, which would allow the country to start monetising its gas reserves, as well as fuel new power generation capacity needed to meet future domestic electricity demand.

The government is keen to push development of domestic gas resources, and this is reflected in the new Hydrocarbons Law, which has introductory provisions referring to a specific – though as yet undefined – tax regime for gas-related activities. A development plan must also now be submitted if commercially viable gas is discovered within a petroleum title, and failure to develop the gas resource would see the operator lose its exploitation rights.

Short-Term Supply

The government’s desire for gas is driven by short-term supply needs. Two fertiliser projects – one being developed by a public-private partnership (PPP) between Olam International and the government, the other a joint venture between Morocco’s OCP and state-owned Société Equatoriale des Mines (SEM) – will need up to 2bn cu metres of gas per year as feedstock and a source of power generation. Production from Perenco’s fields is currently sufficient only to meet the supply needs of the Alenakiri and Owendo thermal power plants near Libreville.

New measures to reduce the flaring of associated gas could also bring additional supply to market. Around 90% of the gas produced in Gabon is currently either flared and vented, or re-injected into wells to aid oil recovery. A provision in the new law will see the introduction of thresholds for gas flaring on all operating fields from September 2015, with penalties to be applied for failure to comply with the limits. This is in line with similar moves by other countries around the Gulf of Guinea, and follows Gabon’s commitments under the “Zero Routine Flaring by 2030” initiative launched in April 2015 by the UN and World Bank.

Hydrocarbons Law

Gabon introduced a new Hydrocarbons Law in September 2014. Under discussion since 2010, the law codifies current contractual practice in the industry, with a move from royalty-based concessions to PSCs, and should provide greater transparency. “The new law provides a more structured framework for oil operators. It was welcome. However, we believe that setting a minimum threshold for fiscal terms will prove to be detrimental by making the oil and gas industry less attractive. Promoting competition among financially and technologically capable operators is the best way to ensure balanced economic terms,” Henri Max Ndong Nzué, managing director of Total Gabon, told OBG.

“Compared to the 1962 and 1980s versions, the new law gives a far clearer legal framework for the oil and gas industry,” said Nicolas Chevrinais, a partner at EY. The law also takes into account new environmental protection standards, such as stricter limits on the flaring of gas. The law most notably defines five different types of contracts – exploration agreements, contracts for production and sharing of production, those for exploration and sharing of production, service contracts and technical evaluation agreements – setting out the rights and obligations for each.

However, an implementing regulation is still required to provide a model for each type of contract, including the mandatory clauses and those open to negotiation. “We hope this will be issued in the coming months, as this may hamper the smooth running of current PSC negotiations,” said Chevrinais.

Many new PSCs were signed prior to the promulgation of the law for blocks awarded in the last licensing round, held in 2013, as well as for existing producers. Seven firms were awarded PSCs for nine blocks in autumn 2014, while numerous others were able to secure renewals of their agreements and licences.

According to UK law firm Linklaters, the law does not drastically impact the terms of the most recent PSCs as the last negotiation rounds took place on the basis of model PSCs consistent with and with reference to the old law. More mature investments could, however, be more affected in time.

Local Input

The new law also underlined Gabon’s intent for the state to play a more direct role, expanding the scope of activity for GOC. The state can now take up to 55% in any new production field, and has the right to a free carry of 20% in every new PSC. GOC also has the right to purchase up to an additional 15% in a PSC at market rates, and the ability to acquire at market rates a maximum participating interest of 20% in the equity of any firm applying for or holding an exploitation title. The state already holds 25% stakes in Total Gabon and Shell Gabon.

In addition to carving out a larger share of operations, the state will see increased benefits from a new fiscal and revenue-sharing regime applicable to PSCs laid out in the new law. Corporate tax remains at 35%, in line with the general tax rate, though it is no longer included in the state’s share of profit oil, affecting project profitability. However, the law also incorporates a measure of flexibility: four of the seven fiscal rules are open to negotiation and are determined at the time of PSC signing, including signature and renewal bonuses, cost recovery and profit oil, and calculation of proportional royalties. Profit oil is on a sliding scale, with a minimum share for the state in the first tranche of not less than 55% in conventional oil and 50% in deep offshore, on par with other regional oil producers. Cost recovery is now limited to 65% for conventional fields and 75% for deep offshore.

Downstream

Gabon’s downstream market, totalling around 700,000 tonnes per annum, is showing annual growth in consumption of around 10%, according to figures from Total. Petroleum storage and domestic fuel wholesale, as well as refining for the domestic market, are controlled by the state-owned Société Gabonaise d’Entreposage de Produits Pé troliers, which has storage facilities in Owendo and Moanda, and the country’s sole refinery, Société Gabonaise de Raffinage (SOGARA), respectively. The refinery is in Port-Gentil, and operates below its design crude oil distillation capacity of 24,000 bpd. Output fluctuates because of maintenance challenges at the facility, which was built in 1967. However, average annual output of 20,000 bpd is sufficient to meet current domestic demand of 16,000 bpd of petroleum products. A new 50,000-bpd refinery is planned in Port-Gentil to replace SOGARA. South Korea’s Samsung signed a memorandum of understanding in July 2012, but at time of press construction had yet to begin due to cutbacks in the state budget. Competition is, however, intense in the distribution and retail market, with four operators – Total Marketing Gabon, PetroGabon, OiLibya and Engen – although prices are regulated by the state. In early 2015, the Council of Ministers appeared to decide to break up SOGARA’s monopoly and liberalise the refined oil market, but as of August 2015 no official details had been announced.

Local Content

As is the case in many of Africa’s hydrocarbons producers, the government is also seeking to support the development of local small and medium-sized enterprises (SMEs) that provide services to multinationals in the oil and gas industry as well as increase the employment and training of nationals. The new Hydrocarbons Law reasserts principles of extant national labour legislation in terms of priority employment for nationals with equivalent skills and qualifications, as well as the prioritisation of local subcontractors. As a result, the government and foreign oil operators, to meet local hiring quotas, have a common interest in ensuring that there is a qualified local workforce. Oil firms’ workforces should be at least 90% made up of locals, but this quota sometimes cannot be met due to a lack of qualified or specialised workers.

As part of this, there has been a push to increase training and education capacity. Foreign oil producers such as Total, Shell and Perenco joined forces with the government in 2011 to create the Petroleum and Gas Institute, located in Port-Gentil, which received formal recognition in June 2014. A course in petroleum engineering by France’s IFP Training, including five-month internships, was launched in March 2014. In addition, Total also provided funding to the Ecole Polytechnique de Masuku in Franceville in 2013 to offer a master’s degree in petroleum engineering, while Addax sponsored engineering students and provided funding for equipment at the same school under a partnership formed in May 2014.

In addition to in-house training, numerous operators such as Shell have set up scholarship systems to send select students to universities to continue their education. All seven signatories of nine PSCs in the last licensing round in 2013 were also required to pay to send three students per PSC to foreign universities as part of their contractual obligations.

The Ministry of Petroleum and Hydrocarbons has been tasked with determining strategies and policies to assist SMEs, which in 2014 made up around 20% of subcontracting work in the industry. The push has met with some notable results, as international oil companies take up the mantle. Shell Gabon, for example, announced in February 2015 the launch of a new local content policy to build on the CFA458m (€687,000) worth of local subcontracting it tendered during the course of 2014, and unveiled a new three-year contract with GM Energy, a Gabonese company specialising in fluid filtration.

Electricity

Gabon’s supply-demand margins remain extremely tight despite the commissioning in 2013 of the 160-MW Grand Poubara hydropower plant near Franceville and the 70-MW Alénakiri gas-fired thermal power plant near Libreville. Although it has eased somewhat over the past year as a consequence of a broader economic slowdown, national electricity demand has been rising at around 6% per annum over the last 10 years – exceeding previous forecasts – with the state and the partially privatised national water and electricity supplier, Société d’ Energie et d’Eau du Gabon (SEEG), struggling to add new generation capacity to keep pace.

“The country suffers from an overall lack of power generation capacity, which is exacerbated in big cities that must also grapple with urban sprawl and high population growth,” Jean Belassel, the managing director of JB Engineering, told OBG.

In 2014 electricity sales totalled 1749 GWh, up 6.3% year-on-year (y-o-y), while net production rose 4.7% to 2172 GWh, according to SEEG. Libreville’s grid, one of five isolated electricity networks, registered peak demand of 352 MW in 2014, up 6% compared to 2013, equivalent to the total installed capacity connected to its grid. This includes Alénakiri, which is not part of SEEG, having been built with state financing as a dedicated source of power for the Nkok special economic zone (SEZ), but which supplies Libreville until Nkok SEZ is fully operational.

The supply-demand situation in Libreville, which accounted for 67% of national demand in 2014, mirrors that in its two other main urban areas – Port-Gentil, which houses the bulk of Gabon’s oil operations, and the mining centre, Franceville. Together the three constitute 80% of the total population.

Under the Emerging Gabon plan, the government set a target in 2011 of increasing power generation capacity to 1200 MW by 2025 and providing universal electricity access by 2020. At present both objectives appear ambitious, given that rural electrification in particular is quite low – in 2014, only 15% of rural areas had reliable power.

As a result, in September 2014 the Council of Ministers approved the Policy Letter for Universal Access for Basic Services in Rural Areas, which fixed targets of providing electricity for 85% of rural areas by 2025 and achieving universal access to electricity by 2035.

Generation

There is a sizeable amount of new generation capacity proposed or planned, but development is expected to slow over the short term due to government budgetary constraints (see Economy chapter). Fortunately, demand growth has dropped to around 2% over the last year, a function of lower levels of public and capital spending in the wake of the decline in oil prices, but the supply-demand balance is proving tricky to manage.

Total capacity stands at 673 MW, comprising 443 MW owned and operated by SEEG, which is majority-owned by France’s Veolia Environnement, as well as the Grand Poubara and Alénakiri stations belonging to the state-owned Société de Patrimoine du Service Public, de l’Eau Potable, de l’Énergie Électrique et de l’Assainissement, and operated under concession by China’s Sinohydro and Israel-based Telemenia. A 52-MW gas-fired plant at Port-Gentil has also been completed by Telemenia, but has not yet been connected to the local grid or to a gas supply pipeline. It is expected to come on-line in 2015.

Home to half the country’s population, 15-20 MW of new capacity is required to be added to Libreville’s grid each year to keep pace with demand. SEEG is planning to rent 15-20 MW of new gas-fired gensets from the UK’s Aggreko to cover demand in the capital until 2016, when it expects to start receiving power from the Telemenia gas-fired plant at Port-Gentil via a planned new connecting line. This should carry the city through to 2020, when the 115-MW Ngoulmendjim hydropower plant is expected to come on-line. Ngoulmendjim, on the Komo River, east of Libreville, is the country’s priority project in an investment estimated at CFA250bn (€375m).

Hydropower

The government’s plans to diversify the economy will dramatically increase power consumption, particularly as manufacturing and mining activity grows in the interior. To address this, it is turning to hydro facilities. Gabon has significant hydropower potential, estimated at up to 8000 MW. According to the Ministry of Energy and Water Resources, 60 potential sites have been identified for new hydropower capacity, of which 52 have been documented with an estimated maximum capacity of 7002 MW, a guaranteed capacity of 5793 MW and average annual production of 42,000 GWh.

The low cost point for production is also a major advantage. Electricity from hydropower plants costs CFA20-25 (€0.03-0.04) per KWh, compared to CFA40-45 (€0.06-0.07) for gas-fired output and CFA130 (€0.20) for diesel-fuelled production, while SEEG sells at an average price of CFA95 (€0.14).

In addition to Ngoulmendjim, the projects nearest completion are the 36-MW Fé 2 on the Okano River, in the north-eastern province of Woleu-Ntem, and the 84-MW Chutes de l’Impératrice Eugénie on the Ngounié River, in the southern province of Ngounié. Fé 2 is designed to supply the province of Woleu Ntem as well as strengthen the grid in Libreville with lines connecting to Moanda and Franceville. Impératrice Eugénie will supply the wood processing industry in the province of Moyen-Ogooué, and the cities of Mouila, Mandji and Libreville.

The projects were originally awarded to Gabon’s Compagnie de Développement des Energies Renouvables as part of a 30-year build-operate-transfer contract in 2010, although a dispute resulted in the re-allocation of the projects in 2014 to the China Gezhouba Group. Germany’s Gauff Engineering was awarded six-month contracts in November 2014 to provide technical assistance on the design and planning of both projects as well as on the engineering, procurement and construction contracts.

A number of other major hydropower projects have been mooted, such as the 594-MW Tsengue-Lélédi, 410-MW Booué – intended to supply the future Belinga iron ore project in the north-east (see Mining chapter) – and 180-MW Mouila schemes, but they are still in the planning stages.

Gas-to-Power

New generation capacity will also be required to supply industrial developments near Port-Gentil, notably at Mandji Island, as well as planned fertiliser plants by a joint venture between Morocco’s OCP and SEM, and a PPP between Olam International and the government. In light of the country’s large associated gas reserves, gas-fired capacity provides an accessible option, particularly given the proximity to onshore and offshore fields.

Perenco is currently the country’s main gas producer, supplying 680,000 cu metres per day to the Owendo and Alénakiri power plants in Libreville, as well as a plant in Port-Gentil, but the ability to boost supply is limited. Recent offshore discoveries by Total, Eni and Shell could meet future domestic demand but reserves have still to be confirmed.

Renewables

Providing electricity to rural communities in remote areas could be achieved by making use of local natural resources. The development of micro-hydropower schemes and biomass-fired plants at plantations would be cleaner and cheaper than the current widespread use of diesel-fired generators. The first biomass power plant firing on the residue of palm oil is set to be commissioned by Belgium’s Société d’Investissement pour l’Agriculture Tropicale in Lambaréné, with further projects planned by Singapore’s Olam International, among others.

IPPs

In light of Gabon’s tighter fiscal constraints, shifting capital and infrastructure projects to private investors will be crucial to continue boosting capacity. Independent power producers (IPPs) are the solution, according to Jean-Paul Camus, director-general of SEEG, pointing to existing offtake agreements signed for Alénakiri and Grand Poubara.

“It is a model which could attract a number of investors. Offering them guaranteed offtake at the right price will provide security to investors. Technical rules would need to be defined as well as financial aspects of such contracts, but this IPP model would unblock the investment problem and is the key to development of the sector,” he said.

Restructuring

IPP models are catching on elsewhere in Africa, and in Gabon they have a particularly long history, though not without challenges. In 1997 Veolia Environnement was awarded a 20-year concession to operate SEEG’s portion of the power and water supply grid. However, limited investment due to inaccurate growth forecasts during project preparation has put the operator under pressure, particularly as it has sought to maintain low tariffs. “When we signed the concession, we had in mind growth of 2-3%. Instead we have experienced far higher growth, which has necessitated much higher investments than we could have imagined and has led to difficulties in financing all the investments,” Camus said.

The need to meet demand without raising tariffs has put the network under strain, leading to load-shedding in Libreville and Port-Gentil. In a speech in 2014, the minister of energy and water resources, Désiré Guedon, said SEEG’s services had been deteriorating steadily over the past decade. “As major cities such as Libreville and Port-Gentil grow, so too does the urgency of developing the water and power distribution infrastructure to avoid power or water cuts and ensure full access,” Françoise Ngomo, the managing director of Société d’Electricité, de Téléphone et d’Eau du Gabon, told OBG.

Numerous options are under study for post-2017, according to Alain Herth, the director of the Regulatory Agency for the Potable Water and Electricity Sector, including separation of the water and electricity supply businesses, and unbundling of the electricity sector into separate entities for generation, transmission and distribution.

“The current concession is not working, with delays in investment in generation, transmission and distribution because to make these investments tariffs would need to at least double, if not triple, which is impossible. The state cannot finance the investments, so other solutions are needed, such as bringing in IPPs for generation,” Herth said.

An industry seminar was organised in February 2015, with the Ministry of Energy and SEEG to discuss the options post-2017, with a strategic study now being carried out by Paris-based Nodalis Conseil.

Outlook

Gabon is counting on ongoing exploration and a planned new licensing round to revive falling oil production. If confirmed, the offshore gas discoveries by Total, Eni and Shell will contribute to meeting Gabon’s target of doubling its hydrocarbon production by 2025. Large-scale production of gas will moreover allow the state to monetise these reserves through the supply to planned export-oriented fertiliser complexes, and could fuel much-needed domestic power generation. Investment in new generation capacity is vital to meet growing domestic demand and power planned economic and industrial growth. Given the state’s current financial difficulties, IPPs look the best option but an attractive regulatory framework will need to be created to secure foreign investors.