Written By: Paul Morton, Of Counsel and Bertrand Montembault, Partner Herbert Smith Freehills LLP
Herbert Smith Freehills is pleased to participate once again in the annual MSGBC Summit. Now in its fourth year, the event and the region are now firmly established on the African oil and gas agenda. Ahead of the gathering in Dakar this year, we wanted to share some observations from across the continent and the oil and gas sector globally.
As the industry continues its gradual recovery from the post-2014 period of low oil prices, the prospects for Africa's upstream sector are also looking more positive. Following a period of significant decline in investment, 2019 and 2020 should see an overall increase in licensing rounds, discoveries and investment decisions across the region. West Africa, particularly Senegal and Mauritania, continues to be at the forefront of the sector as a prospective rival to the more traditional producers in the region.
With the discoveries that opened up the sub-region now a few years behind us, and significant projects underway in the development and pre-development stages, the MSGBC Basin is gradually transitioning into a more established oil and gas province.
Meanwhile, despite the improved outlook for the oil and gas industry, the sector faces a rapidly changing global energy market that will significantly affect the energy mix and long-term demand. In response to these uncertainties, investors are shifting their investment strategies and considering carefully where to deploy their capital. The MSGBC Basin will therefore be competing with other regions for capital as investment levels continue to recover.
Now is therefore an opportune time to look at what is required in order for the sub-region to realise the full potential of its natural resources and how investors and policy makers can achieve this.
Importance of the regulatory environment
The regulatory environment is becoming a key factor for oil and gas companies in evaluating investment opportunities. By way of example, a recent report by the International Energy Agency has highlighted the growing importance of ‘time-to-market' considerations in assessing a project. According to the IEA, companies are focusing on shorter cycle projects with a quicker return on investment. From this perspective, ‘above ground' factors that may delay project execution become critically important, with regulatory uncertainty high on the list of risk factors. Indeed, despite improvements in a number of jurisdictions, an uncertain regulatory environment, coupled with weak institutions and corruption, continues to act as a drag on the resources sector in Africa.
A number of governments in the region have taken (or are planning) steps to reform their legislative frameworks governing oil and gas (and mining) development. Often these reforms are attempting to achieve multiple objectives, seeking to balance maximisation of value for the state with a fair and transparent licensing and fiscal regime. Where these efforts have been well managed, legislative reform has been successful in unlocking investments. However, new legislation on its own is no promise of results. In many cases, delays in implementing new legislation have had the opposite effect, delaying licensing rounds and preventing investment decisions. Similarly, an overly assertive emphasis on increasing state revenue in the short-term has also led to lower investment levels in some jurisdictions (see our earlier commentary on the resurgence of resource nationalism in Africa here.
Within the MSGBC sub-region, all eyes will be on the impact of the new petroleum code in Senegal [see also HSF briefing note here], which will hopefully produce interesting discussions at the MSGBC Summit this year.
Ensuring broad-based development
Maximising the impact of the natural resources industry on the wider economy is increasingly seen as a key policy objective for host governments. This can be achieved by leveraging demand from the natural resources industry for goods, services and infrastructure and creating linkages with other sectors in the economy. Strong local industries supplying the oil and gas industry will be positive for both host states and investors, who will benefit from simplified logistics and reduced costs.
Local content policies can play a key role in achieving this and legislative reforms across the continent over the past few years have consistently had a strong emphasis on this area. Senegal is a key example of this, where the new 2019 Petroleum Code was accompanied by a stand-alone local content law specifically tailored to the petroleum industry.
A successful local content regime must be tailored to the capacity of local industries and carefully designed to ensure the desired transfer of skills and technology. All too often policies are limited to simple restrictions on foreign procurement, without taking into account the capacity of local industry to meet demand. Where compliance is not feasible within the local context, such restrictive policies will contribute to regulatory uncertainty and, rather than supporting local businesses, will deter further investment.
There is a growing body of research on such policies in the extractive industry and host states and investors have a common interest in getting them right. Senegal is taking the lead on this front with its proactive approach on local content and the MSGBC Local Content Forum promises to be a fruitful forum for exchanging ideas.
 See, for instance, the OECD's 2019 “Guiding Principle for Durable Extractive Contracts”, the outcome of the OECD Policy Dialogue on Natural Resource-based Development.
 Africa Energy Outlook 2019.
Bertrand Montembault, Partner at Herbert Smith Freehills will be joining the panel discussion on Day 2 of the MSGBC Basin Summit “The Rule Book: The Regulatory Need-to-Know, From the Impact of the Petroleum Code to Adhering to Environmental Standards” Panelists include:
Partner, Herbert Smith Freehills LLP
Associate Director, Critical Resource
Dr Aissatou SY
Head of Legal, PETROSEN
Senegal General Manager, CNOOC International