Test time for Namibia after offshore discoveries

Discoveries by Shell and TotalEnergies have raised hopes of an economic windfall, but Nambia’s history of mismanaging its gas reserves offers a cautionary tale.


Image : Oil and Gas Photographer/Shutterstock.com

Oil majors have recently discovered a new petroleum province in Namibia’s Orange Basin that has the potential to transform the country into an oil producer, but only if the government can implement a successful regulatory regime to encourage investment.

On 4 February, Shell announced that it has hit oil in Namibia’s Graff 1 offshore well, marking the first time that oil has been found in the country after a decades-long hunt.

Maggy Shino, petroleum commissioner at the Ministry of Mines and Energy, said it was too early to provide exact volumes of oil encountered at the deep offshore well, which has been drilled to a depth of 5000 metres. Shell holds a 45% stake in Petroleum Exploration Licence 39 where the well is located. Qatar Energy holds a 45% interest and the National Petroleum Corporation of Namibia (NAMCOR) holds the remaining 10%.

On 24 February, French major TotalEnergies also announced the discovery of light oil and associated gas in Orange Basin, this time in its Venus prospect. Block 2913B covers approximately 8,215 sq km in deep offshore Namibia. TotalEnergies is the operator with a 40% working interest, alongside QatarEnergy (30%), Impact Oil and Gas (20%) and NAMCOR (10%).

Together the discoveries have the potential to recast the economic and energy destiny of the middle-income coastal country, experts say, but only if policymakers avoid repeating the mistakes that dogged exploitation of the Kudu gas fields.

“If you have two massive wells, Graff and Venus, that really could make Namibia an oil and gas producer and that’s a significant income coming in for the population and the country,” says Nicolas Bonnefoy, a partner in oil, gas and mining at London-based international law firm ASAFO and Co.

The country and oil companies now face the high-stakes challenge of managing exploration, extraction and first production, which is scheduled for 2026.

“This is a difficult moment as the bargaining power changes hands from the oil company to the state and their respective interest may not always be completely aligned,” cautions Bonnefoy.

“This is also where the lack of technical skills, political interference, short term financial interest and personal political agenda often come in the way.”

The strength of the country’s petroleum regime – the set of laws, regulations and agreements which governs the economic benefits derived from petroleum exploration and production – is now about to be put to the test for the first time, he says.

Delivery time

The success of commercialising the petroleum depends on how the government has laid the groundwork of its petroleum regime, says Bonnefoy.

The discovery has the potential to trigger a wave of new investment across the entire energy value chain in infrastructure, power generation and distribution and production. The birth of a domestic petroleum market in the country could also deliver thousands of jobs to the local population while creating demand for services and new domestic companies in transport, logistics and education.

“It acts as a magnet to attract all the other companies. This is a key, critical time for Namibia because the momentum and excitement for investors gathers and is rising. They need to build on it,” Bonnefoy says.

If the oil is too expensive to extract, or if the development is held back by the regulatory environment, infrastructure or low demand, the oil may well stay in the seabed.

“A great discovery, a large discovery does not necessarily mean that oil is coming out of the well any time soon,” Bonnefoy explains.

If the discovery can be commercialised, the country will start collecting its share of the spoils as production commences, subject to the terms of the petroleum regime. The country must then design an efficient local content regime to ensure its businesses and people are involved in and benefit from operations.

In the longer term, the discoveries could also bring energy security to the sparsely populated nation that relies heavily on petrol imports and intermittent hydropower. The development of a consistent domestic energy supply will be critical for powering the economy, while reducing imports from neighbouring countries.

Getting legislation right

Meanwhile, as Namibia pursues exploration and production, policymakers will need to hammer out a sound oil and gas bill that provides regulation, certainty, and environmental protection.

The bill should aim to improve certainty and transparency across the industry, providing international oil companies and domestic companies with clarity about industry procedures and policies, ensuring productivity and trimming the time taken to get projects off the ground.

It should also govern the regulation of the industry, providing clarity on tax, risk, ownership and safety.

African countries have a track record of mismanaging their transition into energy producers once reserves are discovered, Bonnefoy laments.

The promise of economic prosperity in Nigeria’s Niger Delta region has been shattered by mismanagement as local communities grapple with environmental degradation, deteriorating health, and the erosion of livelihoods that has spurred spiralling insurgent violence.

Nigeria’s comprehensive Petroleum Industry Act, which was signed into law last August, aims to remedy this by creating an environment more conducive for growth of the sector. It also addresses the legitimate grievances of communities most impacted by extractive industries.

On the continent, Angola is an outlier, with a flexible legislative process that can quickly push through legislation so prospectors can plough ahead with development.

”What is good about Angola is that a lot of their terms are fed by decrees, which are far easier to pass than laws. They can therefore react very quickly to changes in circumstances compared to other states, who by the time they think of it and pass the law have wasted five to 10 years,” says Bonnefoy.

Cautionary tales

As recent Orange Basin discoveries kickstart a new era of exploration, the historical failure to exploit Namibia’s Kudu gas fields offers a cautionary tale.

Namibia discovered a giant gas field containing an estimated 1.3 trillion cubic feet of gas in 1974. Twenty-nine years later, despite a number of companies holding licences, the reserves have failed to be monetised due to concerns over the project’s viability along with wrangling between oil companies and the government on export agreements.

Political interference from the state, debates over tax, interest and refineries all dogged the project, Bonnefoy says.

Initially discovered by Texaco, the well’s operations were passed to Shell, Energy Africa, and later Tullow Oil.  In 2017 a subsidiary of BW Group took over, supported by Namibian state oil company NAMCOR.

“All the small players are gone. Tullow just threw the towel at it and said it will never work. That’s what you want to avoid in Namibia.”

In this chequered past lies opportunity for the country to cherry-pick industry practices from around the world in designing their oil regime, says Frank Fannon, a former US assistant secretary of state for energy resources and current managing director of Fannon Global Advisors.

“Namibia’s lack of discovery success in the past has meant that it could watch the rest of the world test different models. I would encourage the country to integrate the best elements and reject the bits that compromise the country’s values… The country would also like to ensure a long-term industry. The regulatory context and fiscal regime should incentivise those goals rather than short-term returns,” says Fannon.

A discovery of this magnitude has the potential to be high-jacked by political ambitions, with politicians overspending on infrastructure, accelerating timelines and cutting corners to meet political timelines rather than business cycles, Fannon warns.

“I would encourage the country to stay on a disciplined path. To focus on the technical elements, safety, and environmental performance, among others. The world, investors, and the broader industries are watching how Namibia manages this discovery. It will be important that the country and the private sector execute the plan.”

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