Since it was announced that an independent, Africa focused, Australian Securities Exchange listed, Oil and gas exploration and development Company, FAR Limited is to start drilling the first well in many years, there has been lots of questions on the minds of many Gambians.
The Fatu Network in trying to find answers, spoke to authoritative sources who brought clarity and provided answers to many lingering questions. Here we summarize some useful information we believe will provide an insight into the sector.
We learnt that petroleum exploration has been ongoing in The Gambia since the 50s, but it intensified in the early 2000s when 3D seismic volume was acquired in 2003. That is said to have reignited interest in Gambia leading to the grant of an exploration licence to Buried Hill in 2006 and ERIN energy Corporation in 2012 who was then called CAMAC. Erin Energy Corporation is an independent oil and gas exploration and production company focused on energy resources in sub-Saharan Africa.
Driven to a large extent by the availability of data, in 2004, a petroleum bill was enacted and it provided the legal framework for the administration and regulation of Petroleum exploration activities
Do We have Oil In The Gambia?
We learnt that as of today, there is no oil discovered in Gambia. The well that is expected to be drilled will determine whether there is oil or not in that particular area. The Drilling operations is expected to last for about 45 days and will cost FAR Limited about $40 million US dollars.
Once oil is discovered after this drilling, the next stage would be the appraisal stage where amongst others, quality and quantity of the oil will be determined as well as economic viability of extracting the oil. The appraisal stage can costs hundreds of millions of dollars and takes 3-5 years to complete.
The next stage after appraisal is development, this is the process where infrastructures needed will be put up to start extracting the oil. This process takes 3-4 years and can cost billions of US dollars in an offshore (in the sea) environment. Once the infrastructure is in place, the next stage is normally production during which the oil is taken out of the ground and transported to the market to be sold.
On the other hand if oil is not discovered, the oil company that has invested millions of dollars will lose their investment.
From the figures quoted above it is clear that exploration is highly capital intensive and high risk, hence the main reason why Governments do not like funding the process. The level of risk and capital requirements also explains why the reward is high which goes to confirm the truism that ‘no pain no gain’. Oil companies take the risk and invest their capital in anticipation of reward when the efforts are successful.
Who Has Petroleum Exploration License in the Gambia?
The Gambia Government gave a petroleum exploration license to ERIN Energy Corporation and ERIN ended up selling 80% to FAR Limited. FAR farmed-out(sold)40% to PETRONAS Global, the custodians of Malaysia’s national oil and gas resources. Farm outs are transfers of shares in a licence through which one party transfers interest in a license to another party and often in-return for performance of certain work commitments or paying part of a certain cost in relations to the said license. Such transactions are said to be common practice in oil and gas industry during exploration, appraisal, development or production stages. It shares risk!
ERIN Energy’s license covers two blocks A2 and A5 (these are areas in the Atlantic ocean not in Kiang). Right now another six blocks are in the process of being licensed with ten companies already shortlisted including FAR Limited and Tullow Oil. I understand that the Gambia Government has also established a national petroleum negotiation committee comprising of key government institutions working on legislation and structures and also to manage the process of blocks licensing.
What is Government’s share?
A lot has been said about Government’s shares in these licenses, but this is what I learnt and I believe will be of interest to many Gambians. I said earlier that due to the risk and capital intensity of exploration, governments do not want to put any hard earned tax payers monies that could be otherwise spent on deserved social needs of the population into a risky business.What government instead did is to agree with the exploration companies that once oil is found and development starts, then Gambia has the option to take 15% of the interest. This is done by each of the interest holders giving up percentages proportional to the shares to add up to give government its 15%.
In addition, to this I learnt that government will also be entitled to a certain percentage as royalty as well as different taxes such as corporate tax, income tax, withholding tax etc. These revenue streams all put together will result in government getting over 50% of positive cash flow.
I hope these findings will shed some light on the workings of the petroleum activities. We will update you as we dig more into this issue.
