Erik Watremez, partner at EY’s Gabon office, talks to TOGY about Gabonese oil and gas regulations on corporate tax and local content as well as their impact on the industry. He also addresses the impact of low oil prices on upstream strategies and the industry’s reaction to the possibility of persistent low prices.
How are upstream companies changing in the face of low oil prices?
Companies do not stop working or investing because of low oil prices. A cyclic low oil price won’t affect their plans. When a company decides to invest, it does so for decades, investing sometimes USD 1 billion before getting a barrel from a field. If companies stop investing because the price was going down, nothing would get done. In periods like that, you have to invest wisely and re-allocate your resources.
Exploration and production companies are concentrating on key projects and preparing to achieve maximum production once oil prices rise. They concentrate on the licences renewals for permits about to expire or getting approval for new developments to start production in two to three years.
Costs have to be controlled to be more profitable, but companies have to invest to produce when the prices go up again. It’s contradictory to the state’s expectations. The Gabonese government expects to maintain production levels to continue collecting money from the sale of resources in times of low oil prices.
A decrease in prices can be compensated by producing more. At this time, companies are not interested in increasing production. Production can be increased if the companies have huge fields such as in Nigeria, Ghana or other countries. In Gabon’s marginal mature fields, the big major companies want to target the huge investments, letting the little companies in.
Do you agree with International Monetary Fund managing director Christine Lagarde’s analysis that prices could remain under USD 50 for a couple of years?
Global events and tension are affecting oil production in Iran, Libya, among other countries. Things may change once the conflicts stop.
Demand is also a factor. If China is not doing well, it damages everything. No one in the industry plans on oil prices recovering to USD 100 per barrel or more in the next two years. They plan to save more and keep a low profile.
How effective is the 35-percent corporate tax for oil and gas companies in Gabon?
This tax brings stability. Companies know the rate and take it into account when deciding to invest by including it in their business model. If they realise it’s unprofitable, they might try to negotiate, but without disturbing the competition, otherwise the state would lose credibility.
The big issue is not the 35% in itself, but all the constraints in the Hydrocarbons Code make it difficult for some people. However, as everything is stated in the code, from local content to site rehabilitation and pollution, there are no surprises.
Do you think a local content regulation of 80% is reasonable for companies in Gabon?
Companies cannot immediately reach 80%. It is a good goal to have in mind, as it encourages international companies to invest in the development of the Gabonese people.
Likewise, oil and gas companies in Gabon sign a profit-sharing contract with the government. The Gabonese government can either agree or disagree with an operator’s budget, development and investment plan. The ultimate sanction is for the government to take control of the permit. It’s really a partnership. Companies investing in Gabon do so for the long term.