OIL SEARCH SAGA

Government is set to cancel, then, renegotiate production sharing agreements (PSAs) with companies licensed to explore oil and gas in Malawi, Nation on Sunday has learnt.
This could end nine months of uncertainty as Capital Hill dithered on a decision that halted oil and gas exploration activities at a time the country is desperate to diversify the economy currently dominated by the climate change-ravaged agriculture sector.

Minister of Justice and Constitutional Affairs Samuel Tembenu, in an interview on Friday, confirmed that government has completed reviewing the matter and that a final announcement will be made soon, after a meeting with oil companies planned for next week.
Tembenu declined to state the specific outcomes of the review, especially on the matter of PSAs’ cancellations and the decision to renegotiate the same.
But sources close to the oil exploration review process have told Nation on Sunday that government wanted to first communicate the decision to the companies at the scheduled meeting that failed to take place last month.
Said one of the sources: “They [PSAs] are set to be cancelled. The decision has been made. We were meant to communicate the decision at the meeting we scheduled to meet the companies.”
According to another mining official who opted for anonymity, government has taken a conciliatory position on the matter, preferring a diplomatic approach and mediation with the companies rather than just a unilateral announcement.
“We will communicate the cancellation to the public once the formalities of the meeting are done,” said the other official.
Over the past decades, PSAs have emerged as a popular form for structuring oil and gas contracts between resource-endowed countries and international oil companies (IOCs).
Under the PSA, a licensed company extracts and develops the resource in return for a share of the production.
Normally, the company meets exploration and development costs, as is the case in Malawi at the moment.
PSAs usually specify a portion of total production that can be retained by the contractor to cover costs; hence, it is called ‘cost oil’.
The remaining oil is called ‘profit oil’ and is divided between government and the contractor based on the agreed PSA formula.
Malawi’s current PSAs have nearly all the elements of royalties, equity, income taxes and even the R-factor, according to Capital Hill officials with knowledge of oil and gas licences.
A source at the Ministry of Natural Resources, Energy and Mining confided in Nation on Sunday last week that on average, the country’s PSAs entail that government would get 70 percent while the companies would receive 30 percent of the production.
But Capital Hill is apparently unhappy.
“Overall, government now concedes the tax agreements and the profit sharing agreements were not only illegal, but also unfavourable to the country,” said the source.
Tembenu, however, said although government has made a position on the matter, the announcement of its decision awaits a meeting with the companies next week.
“We have completed our process of review. The final decision will be announced soon. As I speak, I have been writing a Cabinet member on the matter,” said Tembenu, who sits on a Cabinet Task Force appointed by President Peter Mutharika to review the process.
Ministers of Foreign Affairs; Energy and Mining; Finance, Economic Planning and Development also sit on the task force.
But Tembenu refused to disclose contents of the review, saying government’s meeting with oil companies next week could also change the position government would take on several areas on the matter.

He, however, conceded that government has interim positions on both the oil exploration licences and production and profit sharing agreements.
“The oil profits and production sharing agreements and the oil exploration licences have been reviewed together and the announcement on both matters will be made together. At the moment, we have a position, but we cannot review it until we meet the companies and come up with a final position,” said Tembenu.
In a separate interview, Secretary for Natural Resources, Energy and Mining Ben Botolo could also neither confirm nor deny the developments, saying government will soon make appropriate announcements.
“Based on the AG [Attorney General] report, we need indeed to cancel the [PSAs], but such a decision has not been made yet. We have to consider issues of litigation. So, we cannot jump to conclusions at the moment,” said Botolo.
Efforts to speak to some of the companies involved in the exercise proved futile as e-mails to Surestream Petroleum Limited general manager Keith Robinson and Rak Gas country manager Chimwemwe Chikuse were unanswered as we went to press.
Attempts to speak to Chikuse on phone also failed as he insisted on the e-mailed correspondence.
Currently, government has suspended the whole process of oil exploration on the lake, pending conclusion of talks on the matter.
Lake Malawi is divided into six segments for oil and gas exploration with Block One awarded to Sac Oil Holdings Limited of South Africa in 2012.
Whereas Block Two and Three were awarded to a British firm Surestream Petroleum in 2011, but in 2013 Hamra Oil Holdings acquired 51 percent stake in the Surestream licences. Blocks Four and Five were awarded to Rak Gas in July 2013 whereas the sixth block went to Pacific Oil.
Rak Gas—owned by the Government of Ras Al Khaimah, one of the emirates of the United Arab Emirates (UAE)—has since carried out Full Tensor Gravity Gradiometry (FTG).
On its part, Hamra—a Cayman Island private company that bought 51 percent into Blocks Two and Three from Surestream with the approval of the Malawi Government—also carried out an FTG last year.
Pacific Oil, which is part of Vega Petroleum Limited—the privately owned oil and gas entity that has oil producing and exploration concessions in Egypt—and Sacoil are yet to launch exploration activities.n