Lessons Learned from Senegal’s 2020 Licensing Round

In January 2019, Senegal made reasonable adjustments to its Petroleum Code to reflect the renewed optimism surrounding the country’s oil industry prospects. The previous iteration of the Senegalese Petroleum Code had been in place, untouched, since 1998. But beginning in 2014, a series of explorations along the coast revealed an untapped supply of petroleum resources likely vast enough to attract the attention of international energy companies. In time, the reserves in the Senegal Basin—  more than 1 billion barrels of oil and more than 40,000 billion cubic feet of gas — would prove to rank as some of the largest new discoveries in the world.

In anticipation of robust bidding during the upcoming 2020 Licensing Round – when the region would be offered up to international contractors for only the second time ever – Senegal moved to revise its Petroleum Code into a version more befitting its newfound and highly promising status. The administration reset the parameters of the code to strike a healthy balance of favorability between the government and potential operators in terms of royalty requirements and local content policies. The proposal, which detailed plans to develop 12 offshore blocks in collaboration with Senegal’s national oil company, Petrosen, was crafted to attract substantial international attention while securing as much profit for the government and people of Senegal as possible.

The Senegalese Ministry of Petroleum launched the revised 2020 Licensing Round on Jan. 31. While the submission deadline wasn’t until the end of July, every individual impacted by the COVID-19 pandemic to any degree should recall the widespread volatility experienced by practically every industry during the first few months of 2020.

An Unprecedented Global Disruption

As detailed in the African Energy Chamber’s soon-to-be-released Petroleum Laws – Benchmarking Report for Senegal and Mauritania, COVID-19 and the global lockdowns initiated by its spread forced a sudden and massive decline in all types of travel and a subsequent plunge in the price of crude oil. The entire energy industry suddenly faced daunting challenges not seen in generations. Around the globe, budgets tightened fiercely as the sweeping project cancellation notices came rolling in.

In a move mirrored almost everywhere in the modern world by governments and businesses of every size, Senegal extended its licensing round submission deadline to Sept. 30, only to extend it again to Dec.15 and once more to May 31, 2021.

Despite these extensions, the seemingly generous terms of the new Petroleum Code, and the availability of detailed technical data concerning the wealth of resources held beneath its coastal waters, Senegal and Petrosen failed to secure any partnerships during the 2020 Licensing Round.

While COVID undoubtedly played a role in this disappointing tale, there was more to the story.

A Licensing Round Postmortem

Aside from the stormy economic climate that followed the pandemic everywhere it spread, the updated terms of Senegal’s own Petroleum Code may have been one of the reasons international oil companies didn’t jump at the opportunity to be part of the country’s fledgling sector in 2020.

Every country on the African continent deserves to ethically benefit from its natural resources and fossil fuel reserves. No African nation should stand by and bear witness to the exploitation of its energy stores while only outsiders and key insiders profit. Oil and natural gas development campaigns in every corner of Africa should focus on maximizing prosperity for every government, corporate entity, and individual involved in the endeavor. The African Energy Chamber exists to see this goal realized.

However, when international energy companies fail to engage with the licensing process in any meaningful way, we have to investigate the reasons why. Is there something in the physical or commercial environment that is restraining interest or does the problem lie with the contractual framework itself?

While it is definitely in a country’s best interest to mandate that the guest company distribute a certain percentage of these benefits to the host government and population, government leaders must determine if their demands have found the most lucrative balancing point between creating a welcoming environment for international companies and achieving their own national goals.

Considering Senegal as a case study in this regard, we can determine where changes are needed to improve the outcomes of future licensing rounds.

Senegal’s 2019 Petroleum Code update saw changes in fiscal terms and local content regulation that may be the key to understanding why the 2020 Licensing Round was unsuccessful.

Senegal’s fiscal terms, generally, continue to make the country one of the most contractor-friendly in all of Africa. However, Senegal’s choice to impose royalties, absent in earlier offshore production sharing contracts, and to essentially double the government’s take of project revenue during the first years of production, likely dissuaded potential investors from launching new projects in Senegal. While the government take over the lifetime of the project would only be minimal at roughly 7% higher than existing terms, Senegal’s new policies still would reduce operators’ share of revenue. Combined with challenging market conditions, international oil companies (IOCs) may have found it difficult to justify investments in Senegal at the time. A profit-sharing structure framed around daily production levels and a slightly lower government share percentage may have been perceived as more operator friendly. Had Senegal opted for a model such as Mauritania’s Block C-8 Production Sharing Contract (PSC) or the royalty-free Sangomar Offshore Profond PSC, the Senegalese offer would have likely appealed to more operators.

Senegal’s stricter local content regulation may have also contributed to the failure of the 2020 Licensing Round. Local content percentage requirements bolster a region’s economy with new employment and education opportunities for its citizens and contracts for local businesses. Substantial local content provisions also strengthen the transparency between governments and contractors. Senegal’s new local requirements included:

  • Submitting annual plans for working with local contractors, suppliers, and service providers.
  • For oil and gas service providers and sub-contractors to open a local subsidiary.
  • Submitting tender bids through a centralized government platform.

While the benefits of government-friendly local content agreements are obvious, overly strict local content requirements can be perceived as burdensome by IOCs. Going forward, an adjustment to Senegal’s local content mandates, while lessening the overall positive impact locally, should prove more attractive to contractors and help to secure partnerships in the next licensing round.