Christopher Z. Neyor, International Energy Expert, former CEO NOCAL
I was preparing public comments on the scheduled April 2020 bid round for offshore oil blocks announced by the Government of Liberia and then came raging the coronavirus and with it a depression of oil and commodity prices. These comments were partially in response to inquiries by many Liberians seeking my take on the bid round as an energy specialist and past executive leadership having served as presidential energy adviser and CEO of our national oil company (NOCAL). My comments have taken on an unexpected added perspective, the drop in oil price on world trading markets. It is therefore natural that I first address the fall in oil price relative to the Liberian bid round.
Oil Price Versus Exploration Investment
The price of crude has fallen precipitously over the past few days thanks to the coronavirus that is wreaking havoc globally, impacting economic production and thereby a lower demand for oil. Liberia, as a frontier country (a country that has no confirmed commercial discovery of oil or gas), has bid round scheduled date unluckily coinciding with a growing infection rate of this novel virus and, with it, steep drop in oil price. The question then, is what should Liberia do in view of these unwholesome and unexpected realities?
First, just some simple oil economic facts: investment in exploration activities (that is looking for new oil resources) is directly proportional to the price of oil. That means a rise in oil price leads to higher investment in exploration and vice versa. Even though producing a drop of oil from any future discovery of these scheduled bids round and the resulting exploration may be a decade away, investment decision to participate in a bid or allocate monies into the drilling of very expensive deepwater oil well is contingent on the price of oil today. This is the psychology of the market. Each of these deep-water exploration wells cost around $100 million to drill. If you do not find oil in commercial quantity, you get a dry hole and too many of those dry holes make your basin less attractive.
This exploration investment decision based on the current oil price is even more disadvantageous to a frontier country like Liberia, especially when you have a recent record of dry holes though not in the Harper Basin that has more favorable geology. That is why if the Liberian government were to ask for my opinion, I would advise the bid round scheduled for April be postponed. It is in our long-term interest to do so. If we bury our heads in the sand and continue with the bid round, our already ill-equipped negotiators will be at the mercy of those oil companies that will bid knowing that they will cleverly use the coronavirus, the low price of oil or the frontier status of Liberia to get a great deal. Even if the coronavirus is contained to some level, the low oil prices will linger for some time with volatility. Liberia, unfortunately, would have no one to counter the sophisticated charts and graphs and projections from those savvy oil economists and lawyers on the other side. High-end oil contract negotiation is not a place for the amateur to practice. They will eat us for lunch.
With Liberia’s past history as a dry-holes frontier country, it is very strategic to have a critical mass of exploration activities and with reputable companies having a track record of discoveries in West Africa in order to rebuild value in the basin. The next bid round has to be managed in such a way that PSC’s (Petroleum Sharing Contracts) be negotiated and signed to allow at least three oil companies to drill at about the same time in a maximum of 6-months time frame apart. However, let me make it clear that the first exploration well out of these planned bid rounds will not spud until about three years from any new PSC effective date depending on the acquisition and interpretation of 3-D seismic data by contractors.
Negotiating and managing this process of creating critical mass in exploration drilling is quite complex and I believe investment must continue in building the human capacity of the oil sector to take on this task. First, the marketing, even in a high oil price environment, has to be targeted to small to mid-sized oil companies with a desirable history of deep-water discovery and financial reach to enhance the prospect of commercial discovery in Liberia. One such entity with an enviable history of West Africa discoveries is Cosmos Energy, a Texas-based company that has the best understanding of the Gulf of Guinea geology or what is referred to as the West Africa Transform Margin. Cosmos did huge oil discoveries in Equatorial Guinea, Ghana (discovered the Jubilee oil field) and Senegal. As CEO of NOCAL, I targeted Cosmos and had encouraged them to participate in Liberia offshore but they were given the runaway after my departure (I do not work for them but just mentioning them here as an example of the kind of companies we should target).
Targeting of quality companies is more doable with an attractive oil price and competent and respected leadership in the oil and gas sector and that is another reason the bid round be postponed.
Absence of Logistics Base
There is an adage that “when the iron is hot, you strike it”. When it becomes cold, you can no longer shape it into a form you desire. Besides exploration drilling, when the oil price is high other investments in downstream infrastructure are more attractive. One of such is an onshore logistics base constructed at a nearby port that serves oil rigs that arte drilling in the middle of the ocean. It is a logistics base that accounts for what is referred to local content of that huge investment into an exploration oil well. From the base, specialized boats deliver pipes and lubricants and cleansers and catered meals to the oil rigs and bring wastes and other items to the base for disposal or onshore repairs. This provides the opportunity for local businesses to emerge, build partnership and capacity to benefit from the oil sector. The government through the oil sector leadership has an obligation to promote the development of such Liberian owned support businesses in keeping with constitutional provision for citizens’ participation in the extraction of their own natural resources. We will discuss this further shortly.
For the over half a billion dollars that were invested in exploration wells in Liberia during the Sirleaf administration, the local content which averages around 25% of the total mostly went to Ghanaian companies because the operating oil companies used Takraodi for their logistics even though the port was 48 hours away from the oil rigs in Liberian waters. That added to the cost. The oil companies didn’t like that because of the higher cost but they had no other choice. The Ghanaians were obviously very thrilled.
When the price of oil was high in 2012 long before Ebola-hit Liberia, a group of well-established Liberian entrepreneurs seized the opportunity and mobilized partnerships and capital to build a logistics base at the port of Buchanan and made their presentation to the GOL. However, due to the shortsightedness government bureaucracy killed the project. Then the oil price dropped and the logistics base investment became unattractive. Today, we still do not have one and with oil price now going low again, exploration drilling in Liberia will be further discouraging because of the higher cost using Ghana or other outside points as a logistics base for their operation in offshore Liberia.
Hopefully, by the time the next round of drilling comes up a few years from now and oil price appreciated, we can refocus on the construction of the Buchanan oil and gas logistics base. A future commercial discovers of oil would accelerate investment in this logistics infrastructure so critical to local Liberian owned businesses benefitting from drilling and prepare for the busier oil field development and production operations.
It is highly recommended that in view of the continuing fall of oil price amid a global coronavirus pandemic that the Liberia oil bid round scheduled for April 2020 be postponed. I will address other issues of concern to Liberians regarding the oil and gas sector that holds much promise for our collective future.
About the Author:
Chris Neyor has extensive background and experience in energy policy & planning, business strategy, and project finance. He is a master Strategist and is a pragmatic interpreter of Sun Tzu’s Act of War for execution in business and public policy. Prof Neyor was Advisor on Energy, Environment and Climate Change to former Liberia President Ellen Johnson Sirleaf and later served as President & CEO of the National Oil Company of Liberia. He was Managing Director of the Liberia Electricity Corporation in the 1980s and was a Visiting Scholar at the Center for Energy and the Environment at the University of Pennsylvania in the 1990’s. He is a product of Stanford University Graduate School of Business and is currently a private consultant.