Call for world’s top new oil nation to update law ‘now’ to prevent mega-project delays

Namibia, the world’s top new oil and gas destination, must update its petroleum legislation to ensure the smooth progress of multibillion-dollar offshore projects being lined up by TotalEnergies and Shell, according to a key executive in Africa’s energy sector.

Namibia’s petroleum law has not been updated since 1998 and the are concerns in some quarters that it may not be fit-for-purpose in a world where the energy transition is forcing companies to accelerate oil and gas projects, including a plethora of developments proposed in the country’s red hot Orange bason.

Namibian petroleum contracts should include what is known as a fiscal stability clause, argued NJ Ayuk, executive chairman of the African Energy Chamber, an oil and gas advocacy group.

This clause, he said, “would clearly state that if Namibia were to make legislative or regulatory changes, such as new tax requirements, the energy companies signing the contract would be protected from negative economic impacts.”

Depending on the wording used — such as ‘economic rebalancing’ or ‘equalisation clause’ — contracting companies might be exempt from new tax codes or compensated to make up for legislation that adds to their expenses such as new labour or environmental laws.

“What matters is, in the end, the companies’ return on investment would not be impacted by changes that occurred after their deal was finalised,” argued Ayuk, who is also chief executive of Johannesburg-based Centurion Law Group .

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For Namibia, a newcomer to oil and gas deals, adding a fiscal stability clause to petroleum contracts “will be key” to retaining the energy industry’s intense interest in the country, said Ayuk, highlighting their usage in Guyana, Mozambique, Mexico and Angola.

“While I cannot produce a study that proves these countries have attracted more investment as a result of their clauses, I do know (that) when a developing country fails to offer the clauses, they’re giving oil and gas companies reason to limit investments there.”

He cited a recent paper from international consultancy Deloitte as saying: “Stabilisation clauses enhance certainty and predictability which are key ingredients for the success of long- term investment projects.

“Petroleum exploitation is capital intensive and recouping the investment takes much longer than most sectors. Any subsequent changes in the laws of the host state may significantly alter the economics of the economics of a project.”

Ayuk said for international oil companies to invest in a country without a fiscal stability clause “is quite a gamble” in an already risky industry.

While applauding Namibia for its investor-friendly oil and gas regime, he said “guaranteeing companies’ investments is critical and must be done “now… otherwise there is a possibility that the issue of financial risk will come up during contract negotiations with Shell, TotalEnergies and their partners.

This, Ayuk argued, could lead to costly project delays and see exploration interest “dry up”.

He also highlighted that the fiscal stability issue was brought up in 2020 — two years before the huge Orange basin finds — by the chairperson of the Namibia Petroleum Operators Association in a letter to Namibia’s Minister of Mines & Energy Tom Alweendo to describe the role that fiscal guarantee clauses could play in supporting ongoing investment in Namibian’s fledgling oil and gas sector.

“There is a fundamental need for a stable and sustainable business environment, so the country and the investors are able to plan ahead and rely on terms agreed upon,” the letter stated.

“An economic rebalancing provision provides appropriate security around economic terms, which are critical for large-scale multi-billion dollars project investment/bankability, while not infringing the host country’s sovereignty and are a common feature in many petroleum contracts globally.”