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Promoting petroleum exploration in Namibia
Rcwxwce.s Policy.
Vo1.20, No.4, pp. 265-27
Copyright
0
1995 Elsevier
Printed in Great Britain.
I. I994
Science Ltd
All rights reserved
0301.4207/94
$10.00
+ 0.00
Promoting petroleum exploration in Namibia S K Date-Bah Economic and Legal Advisory Services Division, Commonwealth Secretariat, Marlborough House, Pall Mall, London SW1 Y 5HX. UK
This article examines the Namihian experience in the formulation of policy for the promotion of exploration in a frontier petroleum province by international petroleum companies, to determine whether the Namihian model is suitable for borrowing by other frontier petroleum territories in developing countries. After considering the policy and law in place in Namibia at its independence and reviewing the various new policy and institutional measures instituted by the government which came into power at independence, the article concludes that the Namibian model is worthy of consideration by other frontier provinces in the developing world because of the simplicity of the regime, the fact that it does not require excessive negotiation and responds to environmental concerns.
Many developing countries actively seek to attract risk capital for investment in petroleum exploration and development. The extent of their success in this endeavour differs from country to country. Where a particular country achieves relative success, it may be instructive to study its policy measures, laws, administrative practices etc for lessons of wider applicability. Namibia offers a very interesting example of the devising and putting in place of a fresh policy and legal framework for petroleum exploration and development in a frontier developing country jurisdiction. It also provides an opportunity to observe the impact of a new regime on petroleum company behaviour. Because of the international isolation of Namibia during the years when United Nations economic sanctions were in force against it before its independence in March 1990, there had been hardly any significant investment there by international petroleum companies. Given its prospective geology (Light and Shimutwikeni, 1991; Miller et al, 1994) the country therefore had a unique opportunity to attract international exploration capital after its attainment of independence. The issue for its government therefore was how to achieve the right mix of policies and measures to ensure that private capital was attracted to explore for oil in Namibia on terms that gave the govemment an adequate ‘take’ and regulatory control, but Resources Policy Volume 20 Number 4 December 1994
assured the investors security for their capital and a fair return on their investment. It is the intention of this paper to examine the experience of the Namibian government in developing a new petroleum regime and to analyse the particular model of a petroleum regime which Namibia adopted in response to the challenge of finding the right mix of policies and measures to deal with its particular circumstances. There will be a consideration of whether the Namibian model is worth adopting by policy makers in other frontier petroleum territories in the developing countries who are considering the formulation of a new petroleum regime for their jurisdiction or revamping an existing one. This evaluation will come at the end of the paper but, prior to that, the paper begins by outlining the law and policy relating to petroleum exploration and production which existed in Namibia at independence. It then proceeds to discuss the various petroleum promotion measures adopted by the government after independence.
Policy and law at independence At independence on 21 March 1990, Namibia had no statute exclusively dedicated to regulating the exploration for, and production of, petroleum. Petroleum was 265
Petroleum exploration in Namibia: SK Date-Bah
regarded as a mineral under the general mining legislation, namely, the Mines, Works and Minerals Ordinance 1968. The fiscal regime applicable to petroleum was accordingly the same as that which applied to minerals (other than diamonds and gold, which under the Income Tax Act had a special regime). Some prospecting grants had been made in respect of petroleum under this fiscal and legislative regime. The Kudu gasfield (Namibia’s only hydrocarbon discovery) had been discovered under these arrangements. The Mines, Works and Minerals Ordinance was not regarded as modem by the SWAP0 government which came to power at independence. For instance, it had no provisions for compulsory relinquishment of acreage by holders of prospecting grants and no obligation was laid on the government to secure a work programme from prospective holders of prospecting licences before granting them such licences. These among many other defects in the old legislation led the new government to decide to replace it with more modern legislation. It decided to prepare and enact petroleum legislation (as well as new minerals legislation).
Petroleum promotion measures by the postindependence government of Namibia Measures relating
CO the
institutional,fbamework
The Ministry of Mines and Energy at independence inherited the responsibility for administering the Mines, Works and Minerals Ordinance. Furthermore, under the pre-independence arrangements, the state oil company, SWAKOR (which was subsequently renamed NAMCOR in 1990), had played a leading role in organizing offshore seismic surveys and had discovered gas in the Kudu field. These two state agencies were thus the two principal government organs, which existed at independence, for promoting Namibia’s petroleum prospects. The issue of policy which the new government faced was whether to centralize its petroleum promotion efforts in the Ministry alone, to devolve even more responsibility to NAMCOR, or to keep the two agencies working in concert. In the end, the decision taken by government, which is enshrined in the Petroleum (Exploration and Production) Act 1991 (which will subsequently be referred to as the Petroleum Act), was to make the Ministry the decision maker on licences and allied matters relating to petroleum exploration and production, but to give NAMCOR a statutorily recognized advisory role in relation to the Ministry. This policy has, in retrospect, served the government very well since it has enabled NAMCOR to play a coordinating and technical role in support of the Ministry’s 266
licensing and regulatory functions under the Petroleum Act. The Ministry has led the country’s petroleum promotion drive. But, obviously, it has also had other responsibilities beyond petroleum. NAMCOR, on the other hand, because of its exclusive dedication to the promotion of petroleum exploration and production in Namibia, has had no distractions from this purpose and has thus been able to play a highly concentrated and effective role in organizing promotion efforts. It has, for instance, negotiated offshore seismic survey contracts with overseas speculative seismic survey companies, arranged for promotion meetings overseas and presented information on Namibia’s geological potential and investment conditions at international fora. It assisted the government in devising the terms for Namibia’s First Licensing Round which concluded in 1992 and for the Second Licensing Round opened on 1 October 1994. It has provided logistical and technical support for the government negotiating team during the various phases of the First and Second Licensing Rounds, including organizing the announcement of the invitations to bid under the Rounds, coordinating the assessment of the bids received, making its senior officials available to serve on the government negotiating team alongside other members from the Ministry of Mines and Energy and other Ministries and assisting the Ministry with the administrative responsibilities following from the petroleum agreements signed with the oil companies under the First Licensing Round. Formulation
qf the new regime
The new government set a high priority on preparing new legislation that would promote Namibia’s acreage by providing a modern legislative framework for orderly licensing and fair regulation of the upstream petroleum industry in Namibia, establishing internationally competitive terms for prospective investors and clarifying the role of NAMCOR in relation to the industry. To facilitate the attainment of these objectives, the government requested and obtained technical assistance from the Commonwealth Secretariat, which made legal and economic expertise available to support the Ministry’s petroleum promotion efforts. With the help of this technical assistance, the government succeeded in putting in place a new petroleum regime embodied in three legal instruments: the Petroleum Act, the Petroleum (Taxation) Act 199 1 and a Model Petroleum Agreement 199 1. This new petroleum regime provided an attractive framework within which to promote Namibia’s petroleum prospects. As the Honourable Toivo Ya Toivo, the Minister of Mines and Energy, said in his speech at the Second Reading of the Petroleum (Exploration and Production) Bill 199 I on 27 February I99 1, ‘A necessary part of any Government’s strategy for attracting
Resources Policy
Volume 20 Number 4 December
1994
Petroleum exploration in Namibia: SK Date-Bah
international private petroleum exploration capital to its territory is to devise a suitable legislative framework within which both the Government’s objectives and the investment goals of foreign oil companies can be reconciled’ (Toivo, 1991). The petroleum regime fashioned by the government of Namibia was intended, among other objectives, to promote and facilitate the rapid, thorough and systematic exploration of Namibia’s petroleum potential; to enable expeditious and effective development of any discovery of commercial interest; and to achieve an adequate and fair share for government of any revenues generated from future development and production of a discovery of petroleum. These objectives were intended to be achieved while at the same time giving private capital sufficient incentives and the opportunity to achieve its investment goals. The main specific elements of this regime are discussed below. The Petroleum Act vests all rights to reconnaissance or exploration for, or the production and disposal of, petroleum in the Namibian state. The state in turn, through the Minister of Mines and Energy, is authorized to license private entities to engage in these activities. This combination of state control over petroleum rights, even in relation to private lands, and a licensing regime which enables the invitation of private capital to engage in exploration for petroleum is commonplace and familiar to the international petroleum industry. The Petroleum Act makes provision for three licences: reconnaissance, exploration and production licences. It also requires the Minister to enter into a petroleum agreement with any person to whom he wishes to grant an exploration licence. Such petroleum agreements therefore occupy a central role in the promotion strategy of the government. Accordingly, in 199 1 also, the government prepared and published a Model Petroleum Agreement to serve as a basis for negotiation with prospective investors in petroleum exploration in Namibia. Namibia’s Model Petroleum Agreement is a modern concession conferring on the oil company concerned exclusive exploration rights in the agreement area in exchange for obligations it undertakes to the government. It allows for fairly automatic transition from the holding of an exploration licence to the holding of a production licence, if a discovery is made by the holder of an exploration licence. It also lays out clear steps and procedures to be followed when petroleum is discovered by a licence holder, involving the carrying out of initial tests and their evaluation to determine whether the discovery is of commercial interest. If the discovery is of commercial interest, the licence holder is to formulate and implement an appraisal programme, while at the same time applying for the declaration of a petroleum field over Re.vource.~Policy
Volume 20 Number 4 December
1994
the discovery area. After the declaration of a petroleum field within an exploration licence area, the licence holder has two years within which to apply for a production licence in respect of the petroleum field. The environmental provisions in the Model Agreement are noteworthy. The Agreement contains a comprehensive clause requiring the carrying out of environmental impact assessment prior to the commencement of exploration operations and also prior to the commencement of production operations. The measures and methods adopted for petroleum operations carried out pursuant to the Agreement have to take account of the results of the environmental impact assessments undertaken. The Agreement further lays on the oil company an obligation, inter alia, to ensure that ‘petroleum operations are carried out in an environmentally acceptable and safe manner consistent with good international industry practice and that such operations are properly monitored’. The company is also obliged to prepare and submit to the Minister for review contingency plans for dealing with emergencies with an environmental impact. The contractual provisions on the environment are backed up by the provisions in the Petroleum Act which ensure that applicants for exploration and production licences advert to environmental considerations. The fiscal regime adopted by the government as part of the overall petroleum regime consists of the following elements: royalty at 12.5% of the market value of petroleum produced and saved (which may be remitted, deferred or refunded by the Minister upon application to him by the holder of a production licence); petroleum income tax at a rate of 42%, with exploration expenditures expensed in full in the year in which they are incurred and development costs depreciated over three years at the rate of 33.3% per annum; a three-tier Additional Profits Tax; and with import duty exemptions on the main capital items of interest to petroleum explorers. The royalty is imposed by the Petroleum Act and the petroleum income tax and Additional Profits Tax (APT) are levied by the Petroleum (Taxation) Act. The Petroleum Act also provides for progressive annual rentals. The government has deliberately refrained from requesting any state participation. It has also refrained from seeking any signature or production bonuses or other up-front payments. This is intended to provide an incentive to the international oil industry. In addition the government has decided as a deliberate incentive to ring-fence both petroleum income tax and APT by licence area, and not by petroleum field, in order to enable an investor who makes a commercial discovery to recover his total expenditures, from any part of the licence area, more quickly by recouping his expenditures from the revenue flow from any oil or gas fields within the same licence area. 267
One of the attractive qualities of this tiscal regime is its simplicity. Each of its three elements has a policy rationale. Royalty is to ensure that there is tax revenue payabIe to the government as soon as commercial production begins from any licence area in Namibia. This is politically important, since the commencement of production without the payment of any tax on account of depreciation or prior recovery of development costs etc could generate adverse political effects and repercussions. Income tax bears the burden of securing an adequate share of revenues for government in average years. In very profitable years, it is the function of APT to capture an additionai part of the economic rent generated by the project. Its advantage is that it is self-acting in injecting a measure of progressivity into the fiscal package. It is triggered when the specified rates of return are achieved. The threshold rates of return specified in the Petroleum (Taxation) Act are: 15%, 20% and 25% in real terms. APT has the useful political function of ensuring that as the investor’s profitability increases, the state’s share revenues ~orrespo~lding~y increases, thus forestalling the Iikelihood of any political pressure for renegotiation or for unilateral action, in the face of increasing and visible oil company profitability linked with a stagnating proportion of take by the ~ov~~rnent. (On the advantages and disadvantages of APT, see Goss, 1986.) In the particular configuration of APT embodied in Namibia’s Petroleum (Taxation) Act, the tax rate of the first tier of APT is fixed at 25%, while the incremental tax rates for the second and third tiers of APT are biddable items to be negotiated with particular applicants for exploration rights. It can be seen thus that this tiscal package provides the gove~ment with flexibility to tailor the overalt tax burden to the particutar circumstances of an investor and/or his iicence area.
of
~ar~etj~~ Namibia ‘spe~~o~e~~prospects At the core of the government’s strategy for marketing Namibia’s petroleum prospects was an emphasis on disseminating the facts about Namibia’s geological prospectivity. This was done within the context of communicating to the investing Gommunity the favourable general investment conditions in Namibia, such as political stability, good infrastructure and the attractive legal framework for inward investment provided by the Foreign Investments Act 1990. This Act seeks to facilitate foreign investment in Namibia. Accordi~lgly, it provides for foreign investors to invest in Namibia without any initial screening. It is only if an investor wants any of the special guarantees and incentives available under the Act that it needs to apply for a Certificate of Status Investment. Some of these special incentives available
to holders of such Certificates are the right - after Namibia is no longer bound by the treaty obligations under the Common Monetary Area a~angem~nts with South Africa, Lesotho and Swaziland-to retain the proceeds of export sales offshore, and the right, notwithstanding the provisions of any other law to the contrary, to purchase from the Bank of Namibia convertible foreign exchange for the remittance of profits, dividends and the proceeds of disinvestment. A private sector investment conference was organized in Windhoek in February 1991 to explain these general investment ~ondjtions in Namibia to the investment community and generally to encourage investment in Namibia. The Ministry of Mines and Energy and NAMCOR took an active part in the conference and the opportunity was seized to present both the geological prospectivity of offshore Namibia and the Ministry’s plans at the time to put in place an attractive legal and fiscal framework for petroleum exploration and production This more general conference served as the launch pad for a systematic marketing strategy which fulminated in specific petroleum promotion meetings in London and Houston in May I99 1. These London and Houston meetings were organized on behalf of the government by a geophysical company which had shot speculative seismics offshore Namibia under a contract with NAMCOR which enabled NAMCOR and the company to share between themselves the revenue from the sale of geophysical data to interested oil companies. Because of the commercial interest of the company in selling data to oil companies, it acted as a good marketing agent in bringing the Namibian acreage to the attention of exploration companies and persuading them to purchase the data on offer. These data included not only information generated by the company’s own seismic surveys, but also accumuIated pre-existing geophysicat data belonging to the government or NAMCOR, some of which was reprocessed to improve its saleability. The London and Houston meetings offered an opportunity for representatives of the Namibian government to make presentations to representatives of the oil companies on the geological prospectivity of Namibia and atso on the economic and legal framework applicable to petroleum exploration and production in Namibia. The two meetings were very well attended and they proved an effective way of attracting the interest of a wide range of oil companies. Apart from the forma1 meetings, many private discussions were hetd with particular companies which were considering making applications for exploration licences under Namibia’s First Licensing Round. Many of these private meetings had been arranged in advance by the geophysical company responsible for arranging the meetings.
Petroleum exploration in Namibia: SK Date-Bah
Fair bidding procedures
as promotion measures
While it is admitted that the geological prospectivity of a country’s acreage is likely to have more of an impact on the investment behaviour of oil companies than bidding procedures, nevertheless the perception by such companies of the fairness of a country’s bidding procedures and bid analysis process can influence the companics’ decision whether or not to invest in that country. The formulation of a bidding process that induces confidcnce in potential investors is therefore of some importance. In Namibia, the government succeeded in establishing a rational and fair bidding procedure and the bid analysis process which was implemented after the closing date for bids was thorough and methodical and gained the respect of the oil companies. The formal invitation for bids under Namibia’s First Licensing Round was published by the Permanent Secretary of the Ministry of Mines and Energy in April I99 I The bid invitation declared the whole of the territory of Namibia, with the exception of the onshore area already under licence to Etosha Petroleum Company, to be open for bidding. The absence of restriction on where companies could apply for acreage was a deliberate act of policy. Because of the long absence of Namibia from the international market for petroleum exploration capital, it was thought prudent by the govcrnment to allow the companics freedom to determine which areas they wished to apply to explore. The formal invitation listed the information that had to be included in the applications for licences. These included the applicant’s financial strength and technical competence, its research and development expertise and experience, particularly in respect of technical and geological issues relevant to cost effective operations in Namibia, its proposals on the biddable items in the Namibian petroleum regime (namely, minimum exploration work and expenditure commitment, bank guarantee, minimum annual training sum and the second and third tier incremental APT rates). The applicants also had to submit a geological and geophysical evaluation of the licence area applied for. The invitation also indicated the criteria that would guide the government in evaluating the applications received. These were stated to be: The technical competence and the financial strength of the applicant (as documented in the application) to be able to carry out exploration for and exploitation of petroleum in a cost efficient way suitable for the conditions in Namibia. The applicant’s willingness to perform a complete evaluation of the petroleum potential in the licence area within an agreed time frame. This would include the proposed minimum work programme and expenditure.
The invitation further indicated that after evaluation of the applications, selected applicants would be invited to Namibia for negotiations on their applications, while reserving the government’s right to accept or reject any application without any obligation to give any reasons or otherwise to justify its decision. In this writer’s view, the Namibian invitation to bid set out a fair and rational framework for international oil companies to make applications for Namibian licences. The invitation which was published before the promotion meetings in May I99 1 in London and Houston was in itself a positive promotion measure and lent itself to being so presented at those promotion meetings. The bid analysis process and procedure which the government adopted in relation to the applications that it received also contributed to a favourable image in the international petroleum industry for Namibia. It applied its announced criteria for evaluating the applications and invited shortlisted companies for negotiations with the government negotiating team. The analysis of the economic and geological/geophysical submissions required by the bid invitation was acknowledged by the companies which were invited for negotiations to have been very professionally carried out by the government negotiating team. The type
qf negotiating process, as a promotion measure
The government negotiating team which was established by the government of Namibia quickly established a sound reputation for professionalism with the oil companies which in itself became a promotional factor. The government appointed a multidisciplinary team consisting of geologists, a geophysicist, an explorationist, an accountant, lawyers, a petroleum economist, a government tax expert and an investment promotion official, led by the Permanent Secretary of the Ministry of Mines and Energy. NAMCOR provided the organizational support for the GNT. The GNT took steps, the details of which are not in the public domain, to weld itself together as an integrated and disciplined negotiating team. This involved clarifying the objectives that the team wished to achieve in the negotiations and developing the appropriate tactics for achieving them. The team approached each round of the negotiations with careful preparation. The GNT’s negotiating position was assisted by the government’s declared policy of not considering applications for licences outside official licensing rounds. Interested oil companies thus had to pay attention to the First Licensing Round. The Namibian Cabinet gave the GNT a full mandate to evaluate the applications received under the First Licensing Round and to negotiate with selected companies. It is a matter of public record that the GNT discharged 269
Petroleum exploration in Namibia: SK Date-Bah
this function well and with rapidity and succeeded in concluding five petroleum agreements with oil companies. The fact of this achievement and the orderly and professional way in which it was achieved has served in itself to promote Namibia as an attractive frontier oil province. This vindicates the contention of this writer that devising an effective, expeditious and efficient negotiating process for oil exploration agreements can serve as a promotion measure for the country that successfully organizes such process. Involving international aid agencies in the promotion process The government of Namibia, in organizing a new order for its upstream petroleum sector, requested and received international aid from the Commonwealth Secretariat and the Norwegian aid agency, NORAD. The latter provided assistance on geological and geophysical matters with both funding and human resources and the former provided legal and economic inputs into the government’s promotion efforts. For a small developing country, the ability to mobilize and manage such assistance by aid agencies can be an important part of its petroleum promotion process. Namibia succeeded very well in taking advantage of the technical assistance offered to it and managing it well and integrating it firmly into its own agenda and processes.
Evaluation An important feature of the Namibian petroleum regime is the attention it pays to environmental protection. In many developing countries, the relevant regulatory legislation and petroleum agreements do not provide adequately for environmental protection. It is, of course, a matter for political judgment by host states how they balance environmental considerations against the imperatives of development. But increasingly, the advocates of sustainable development do not see environmental protection and the exploitation of non-renewable natural resources as conflicting activities; rather, they see them as complementary activities in achieving sustainable development (Gao, 1994). To a large extent this perspective informs the approach adopted in the Namibian Petroleum Act and Model Petroleum Agreement. In this respect, the Namibian regime is quite modern and a model that would repay study by other developing countries. In fashioning environmental provisions in a petroleum regime for a developing country, however, there is a policy justitication for making such provisions less onerous than those in the developed countries in order to attract investment capital that is fleeing the rigorous regimes increasingly 270
being imposed in the developed countries. Developing host countries have to strike a balance between the needs of environmental protection, on the one hand, and those of economic growth through the extraction of non-renewable natural resources, on the other hand. The balance struck in each country may differ, reflecting national priorities and perceptions and local political attitudes. The balance struck in Namibia gives prominence to environmental considerations, but within a framework which gives primacy to the needs of production. Another attractive feature of the Namibian petroleum regime is its relative simplicity. Notions of permanent sovereignty over natural resources do not hold it back from granting direct concession rights to foreign oil companies in exchange for obligations undertaken to the Namibian government by these companies. The role of the national oil company is not to be the sole grantee of concession rights from the state; but rather to assist the government in the granting of exploration and production rights; in promoting the acquisition of such rights by international oil companies and in monitoring the implementation of concession rights granted to international oil companies. The Model Petroleum Agreement is a modern concession and embodies many of the clauses evolved by experience in the recent past in the international petroleum industry. The fiscal regime is in part fixed (by legislation) and in part flexible. (The majority of the fiscal terms are fixed.) A fixed royalty, petroleum income tax rate and first tier APT rate establishes a level of stability in expectations. The biddable items of the second and third APT rates, the sum offered by the company for the training of Namibians and the work programme inject a scope for competition between the oil companies that has proved beneficial for Namibia and enabled the fiscal regime and work programme to be tailored to particular licence areas and particular investors. This writer believes that this element of competition is desirable in the context of many developing countries. Though this competitive element usually implies the need for negotiation by the government and the expenditure of time and effort by high-level staff in government, this is necessary, in this writer’s view. Efforts to make biddable items non-negotiable, as in Ecuador, by adopting a sealed bid procedure and assessing the bids by reference to a stated points system results in excessive rigidity in the evaluation process and may be counterproductive. In conclusion, this writer considers that the Namibian model of petroleum policies and measures is worthy of consideration by other frontier petroleum provinces in the developing world. It is simple, does not require excessive negotiation and is sensitive to the increasingly important environmental considerations. It proved itself Re.wwce.~ Poliq, Volume 20 Number 4 December
1994
Petroleum exploration in Namibia: SK Date-Bah
during the First Licensing Round by enabling rapid and effective negotiation of balanced agreements with international oil companies.
Acknowledgement The views expressed in this paper are those of the author alone
and
do not
necessarily
reflect
those
of the
ment of Namibia or of the Commonwealth
Resources Policy Volun~c~20 Number 4 December 1994
Govern-
Secretariat.
References Ciao. Z (1994) Agreements:
‘International Petroleum Exploration and Exploitation a Comprehensive Environmental Appraisal’ Journal o/ Energv and Natural Resources Law 12 (2) 24&256 Goss, C (I 986) Petroleum and Mining Taxarion: Handbook on a Method for Equitable Sharing of Profits and Risk Cower, Aldershot, and Brookfield. VT Light, M P R and’shimutwikeni, H (1991) ‘Namibia, practically unexplored, may have land, offshore potential’ Oil and Gas Journal 8 Auril 85-89 Miller, R McG, Carstens, H, Walden, T (1994) ‘Namibia’s hydrocarbon potential being opened for further exploration’ Oil and Gas Journal 5 September 123-l 28 Toivo, A T Y (1991) Text of speech in the author’s possession
271
Vo1.20, No.4, pp. 265-27
Copyright
0
1995 Elsevier
Printed in Great Britain.
I. I994
Science Ltd
All rights reserved
0301.4207/94
$10.00
+ 0.00
Promoting petroleum exploration in Namibia S K Date-Bah Economic and Legal Advisory Services Division, Commonwealth Secretariat, Marlborough House, Pall Mall, London SW1 Y 5HX. UK
This article examines the Namihian experience in the formulation of policy for the promotion of exploration in a frontier petroleum province by international petroleum companies, to determine whether the Namihian model is suitable for borrowing by other frontier petroleum territories in developing countries. After considering the policy and law in place in Namibia at its independence and reviewing the various new policy and institutional measures instituted by the government which came into power at independence, the article concludes that the Namibian model is worthy of consideration by other frontier provinces in the developing world because of the simplicity of the regime, the fact that it does not require excessive negotiation and responds to environmental concerns.
Many developing countries actively seek to attract risk capital for investment in petroleum exploration and development. The extent of their success in this endeavour differs from country to country. Where a particular country achieves relative success, it may be instructive to study its policy measures, laws, administrative practices etc for lessons of wider applicability. Namibia offers a very interesting example of the devising and putting in place of a fresh policy and legal framework for petroleum exploration and development in a frontier developing country jurisdiction. It also provides an opportunity to observe the impact of a new regime on petroleum company behaviour. Because of the international isolation of Namibia during the years when United Nations economic sanctions were in force against it before its independence in March 1990, there had been hardly any significant investment there by international petroleum companies. Given its prospective geology (Light and Shimutwikeni, 1991; Miller et al, 1994) the country therefore had a unique opportunity to attract international exploration capital after its attainment of independence. The issue for its government therefore was how to achieve the right mix of policies and measures to ensure that private capital was attracted to explore for oil in Namibia on terms that gave the govemment an adequate ‘take’ and regulatory control, but Resources Policy Volume 20 Number 4 December 1994
assured the investors security for their capital and a fair return on their investment. It is the intention of this paper to examine the experience of the Namibian government in developing a new petroleum regime and to analyse the particular model of a petroleum regime which Namibia adopted in response to the challenge of finding the right mix of policies and measures to deal with its particular circumstances. There will be a consideration of whether the Namibian model is worth adopting by policy makers in other frontier petroleum territories in the developing countries who are considering the formulation of a new petroleum regime for their jurisdiction or revamping an existing one. This evaluation will come at the end of the paper but, prior to that, the paper begins by outlining the law and policy relating to petroleum exploration and production which existed in Namibia at independence. It then proceeds to discuss the various petroleum promotion measures adopted by the government after independence.
Policy and law at independence At independence on 21 March 1990, Namibia had no statute exclusively dedicated to regulating the exploration for, and production of, petroleum. Petroleum was 265
Petroleum exploration in Namibia: SK Date-Bah
regarded as a mineral under the general mining legislation, namely, the Mines, Works and Minerals Ordinance 1968. The fiscal regime applicable to petroleum was accordingly the same as that which applied to minerals (other than diamonds and gold, which under the Income Tax Act had a special regime). Some prospecting grants had been made in respect of petroleum under this fiscal and legislative regime. The Kudu gasfield (Namibia’s only hydrocarbon discovery) had been discovered under these arrangements. The Mines, Works and Minerals Ordinance was not regarded as modem by the SWAP0 government which came to power at independence. For instance, it had no provisions for compulsory relinquishment of acreage by holders of prospecting grants and no obligation was laid on the government to secure a work programme from prospective holders of prospecting licences before granting them such licences. These among many other defects in the old legislation led the new government to decide to replace it with more modern legislation. It decided to prepare and enact petroleum legislation (as well as new minerals legislation).
Petroleum promotion measures by the postindependence government of Namibia Measures relating
CO the
institutional,fbamework
The Ministry of Mines and Energy at independence inherited the responsibility for administering the Mines, Works and Minerals Ordinance. Furthermore, under the pre-independence arrangements, the state oil company, SWAKOR (which was subsequently renamed NAMCOR in 1990), had played a leading role in organizing offshore seismic surveys and had discovered gas in the Kudu field. These two state agencies were thus the two principal government organs, which existed at independence, for promoting Namibia’s petroleum prospects. The issue of policy which the new government faced was whether to centralize its petroleum promotion efforts in the Ministry alone, to devolve even more responsibility to NAMCOR, or to keep the two agencies working in concert. In the end, the decision taken by government, which is enshrined in the Petroleum (Exploration and Production) Act 1991 (which will subsequently be referred to as the Petroleum Act), was to make the Ministry the decision maker on licences and allied matters relating to petroleum exploration and production, but to give NAMCOR a statutorily recognized advisory role in relation to the Ministry. This policy has, in retrospect, served the government very well since it has enabled NAMCOR to play a coordinating and technical role in support of the Ministry’s 266
licensing and regulatory functions under the Petroleum Act. The Ministry has led the country’s petroleum promotion drive. But, obviously, it has also had other responsibilities beyond petroleum. NAMCOR, on the other hand, because of its exclusive dedication to the promotion of petroleum exploration and production in Namibia, has had no distractions from this purpose and has thus been able to play a highly concentrated and effective role in organizing promotion efforts. It has, for instance, negotiated offshore seismic survey contracts with overseas speculative seismic survey companies, arranged for promotion meetings overseas and presented information on Namibia’s geological potential and investment conditions at international fora. It assisted the government in devising the terms for Namibia’s First Licensing Round which concluded in 1992 and for the Second Licensing Round opened on 1 October 1994. It has provided logistical and technical support for the government negotiating team during the various phases of the First and Second Licensing Rounds, including organizing the announcement of the invitations to bid under the Rounds, coordinating the assessment of the bids received, making its senior officials available to serve on the government negotiating team alongside other members from the Ministry of Mines and Energy and other Ministries and assisting the Ministry with the administrative responsibilities following from the petroleum agreements signed with the oil companies under the First Licensing Round. Formulation
qf the new regime
The new government set a high priority on preparing new legislation that would promote Namibia’s acreage by providing a modern legislative framework for orderly licensing and fair regulation of the upstream petroleum industry in Namibia, establishing internationally competitive terms for prospective investors and clarifying the role of NAMCOR in relation to the industry. To facilitate the attainment of these objectives, the government requested and obtained technical assistance from the Commonwealth Secretariat, which made legal and economic expertise available to support the Ministry’s petroleum promotion efforts. With the help of this technical assistance, the government succeeded in putting in place a new petroleum regime embodied in three legal instruments: the Petroleum Act, the Petroleum (Taxation) Act 199 1 and a Model Petroleum Agreement 199 1. This new petroleum regime provided an attractive framework within which to promote Namibia’s petroleum prospects. As the Honourable Toivo Ya Toivo, the Minister of Mines and Energy, said in his speech at the Second Reading of the Petroleum (Exploration and Production) Bill 199 I on 27 February I99 1, ‘A necessary part of any Government’s strategy for attracting
Resources Policy
Volume 20 Number 4 December
1994
Petroleum exploration in Namibia: SK Date-Bah
international private petroleum exploration capital to its territory is to devise a suitable legislative framework within which both the Government’s objectives and the investment goals of foreign oil companies can be reconciled’ (Toivo, 1991). The petroleum regime fashioned by the government of Namibia was intended, among other objectives, to promote and facilitate the rapid, thorough and systematic exploration of Namibia’s petroleum potential; to enable expeditious and effective development of any discovery of commercial interest; and to achieve an adequate and fair share for government of any revenues generated from future development and production of a discovery of petroleum. These objectives were intended to be achieved while at the same time giving private capital sufficient incentives and the opportunity to achieve its investment goals. The main specific elements of this regime are discussed below. The Petroleum Act vests all rights to reconnaissance or exploration for, or the production and disposal of, petroleum in the Namibian state. The state in turn, through the Minister of Mines and Energy, is authorized to license private entities to engage in these activities. This combination of state control over petroleum rights, even in relation to private lands, and a licensing regime which enables the invitation of private capital to engage in exploration for petroleum is commonplace and familiar to the international petroleum industry. The Petroleum Act makes provision for three licences: reconnaissance, exploration and production licences. It also requires the Minister to enter into a petroleum agreement with any person to whom he wishes to grant an exploration licence. Such petroleum agreements therefore occupy a central role in the promotion strategy of the government. Accordingly, in 199 1 also, the government prepared and published a Model Petroleum Agreement to serve as a basis for negotiation with prospective investors in petroleum exploration in Namibia. Namibia’s Model Petroleum Agreement is a modern concession conferring on the oil company concerned exclusive exploration rights in the agreement area in exchange for obligations it undertakes to the government. It allows for fairly automatic transition from the holding of an exploration licence to the holding of a production licence, if a discovery is made by the holder of an exploration licence. It also lays out clear steps and procedures to be followed when petroleum is discovered by a licence holder, involving the carrying out of initial tests and their evaluation to determine whether the discovery is of commercial interest. If the discovery is of commercial interest, the licence holder is to formulate and implement an appraisal programme, while at the same time applying for the declaration of a petroleum field over Re.vource.~Policy
Volume 20 Number 4 December
1994
the discovery area. After the declaration of a petroleum field within an exploration licence area, the licence holder has two years within which to apply for a production licence in respect of the petroleum field. The environmental provisions in the Model Agreement are noteworthy. The Agreement contains a comprehensive clause requiring the carrying out of environmental impact assessment prior to the commencement of exploration operations and also prior to the commencement of production operations. The measures and methods adopted for petroleum operations carried out pursuant to the Agreement have to take account of the results of the environmental impact assessments undertaken. The Agreement further lays on the oil company an obligation, inter alia, to ensure that ‘petroleum operations are carried out in an environmentally acceptable and safe manner consistent with good international industry practice and that such operations are properly monitored’. The company is also obliged to prepare and submit to the Minister for review contingency plans for dealing with emergencies with an environmental impact. The contractual provisions on the environment are backed up by the provisions in the Petroleum Act which ensure that applicants for exploration and production licences advert to environmental considerations. The fiscal regime adopted by the government as part of the overall petroleum regime consists of the following elements: royalty at 12.5% of the market value of petroleum produced and saved (which may be remitted, deferred or refunded by the Minister upon application to him by the holder of a production licence); petroleum income tax at a rate of 42%, with exploration expenditures expensed in full in the year in which they are incurred and development costs depreciated over three years at the rate of 33.3% per annum; a three-tier Additional Profits Tax; and with import duty exemptions on the main capital items of interest to petroleum explorers. The royalty is imposed by the Petroleum Act and the petroleum income tax and Additional Profits Tax (APT) are levied by the Petroleum (Taxation) Act. The Petroleum Act also provides for progressive annual rentals. The government has deliberately refrained from requesting any state participation. It has also refrained from seeking any signature or production bonuses or other up-front payments. This is intended to provide an incentive to the international oil industry. In addition the government has decided as a deliberate incentive to ring-fence both petroleum income tax and APT by licence area, and not by petroleum field, in order to enable an investor who makes a commercial discovery to recover his total expenditures, from any part of the licence area, more quickly by recouping his expenditures from the revenue flow from any oil or gas fields within the same licence area. 267
One of the attractive qualities of this tiscal regime is its simplicity. Each of its three elements has a policy rationale. Royalty is to ensure that there is tax revenue payabIe to the government as soon as commercial production begins from any licence area in Namibia. This is politically important, since the commencement of production without the payment of any tax on account of depreciation or prior recovery of development costs etc could generate adverse political effects and repercussions. Income tax bears the burden of securing an adequate share of revenues for government in average years. In very profitable years, it is the function of APT to capture an additionai part of the economic rent generated by the project. Its advantage is that it is self-acting in injecting a measure of progressivity into the fiscal package. It is triggered when the specified rates of return are achieved. The threshold rates of return specified in the Petroleum (Taxation) Act are: 15%, 20% and 25% in real terms. APT has the useful political function of ensuring that as the investor’s profitability increases, the state’s share revenues ~orrespo~lding~y increases, thus forestalling the Iikelihood of any political pressure for renegotiation or for unilateral action, in the face of increasing and visible oil company profitability linked with a stagnating proportion of take by the ~ov~~rnent. (On the advantages and disadvantages of APT, see Goss, 1986.) In the particular configuration of APT embodied in Namibia’s Petroleum (Taxation) Act, the tax rate of the first tier of APT is fixed at 25%, while the incremental tax rates for the second and third tiers of APT are biddable items to be negotiated with particular applicants for exploration rights. It can be seen thus that this tiscal package provides the gove~ment with flexibility to tailor the overalt tax burden to the particutar circumstances of an investor and/or his iicence area.
of
~ar~etj~~ Namibia ‘spe~~o~e~~prospects At the core of the government’s strategy for marketing Namibia’s petroleum prospects was an emphasis on disseminating the facts about Namibia’s geological prospectivity. This was done within the context of communicating to the investing Gommunity the favourable general investment conditions in Namibia, such as political stability, good infrastructure and the attractive legal framework for inward investment provided by the Foreign Investments Act 1990. This Act seeks to facilitate foreign investment in Namibia. Accordi~lgly, it provides for foreign investors to invest in Namibia without any initial screening. It is only if an investor wants any of the special guarantees and incentives available under the Act that it needs to apply for a Certificate of Status Investment. Some of these special incentives available
to holders of such Certificates are the right - after Namibia is no longer bound by the treaty obligations under the Common Monetary Area a~angem~nts with South Africa, Lesotho and Swaziland-to retain the proceeds of export sales offshore, and the right, notwithstanding the provisions of any other law to the contrary, to purchase from the Bank of Namibia convertible foreign exchange for the remittance of profits, dividends and the proceeds of disinvestment. A private sector investment conference was organized in Windhoek in February 1991 to explain these general investment ~ondjtions in Namibia to the investment community and generally to encourage investment in Namibia. The Ministry of Mines and Energy and NAMCOR took an active part in the conference and the opportunity was seized to present both the geological prospectivity of offshore Namibia and the Ministry’s plans at the time to put in place an attractive legal and fiscal framework for petroleum exploration and production This more general conference served as the launch pad for a systematic marketing strategy which fulminated in specific petroleum promotion meetings in London and Houston in May I99 1. These London and Houston meetings were organized on behalf of the government by a geophysical company which had shot speculative seismics offshore Namibia under a contract with NAMCOR which enabled NAMCOR and the company to share between themselves the revenue from the sale of geophysical data to interested oil companies. Because of the commercial interest of the company in selling data to oil companies, it acted as a good marketing agent in bringing the Namibian acreage to the attention of exploration companies and persuading them to purchase the data on offer. These data included not only information generated by the company’s own seismic surveys, but also accumuIated pre-existing geophysicat data belonging to the government or NAMCOR, some of which was reprocessed to improve its saleability. The London and Houston meetings offered an opportunity for representatives of the Namibian government to make presentations to representatives of the oil companies on the geological prospectivity of Namibia and atso on the economic and legal framework applicable to petroleum exploration and production in Namibia. The two meetings were very well attended and they proved an effective way of attracting the interest of a wide range of oil companies. Apart from the forma1 meetings, many private discussions were hetd with particular companies which were considering making applications for exploration licences under Namibia’s First Licensing Round. Many of these private meetings had been arranged in advance by the geophysical company responsible for arranging the meetings.
Petroleum exploration in Namibia: SK Date-Bah
Fair bidding procedures
as promotion measures
While it is admitted that the geological prospectivity of a country’s acreage is likely to have more of an impact on the investment behaviour of oil companies than bidding procedures, nevertheless the perception by such companies of the fairness of a country’s bidding procedures and bid analysis process can influence the companics’ decision whether or not to invest in that country. The formulation of a bidding process that induces confidcnce in potential investors is therefore of some importance. In Namibia, the government succeeded in establishing a rational and fair bidding procedure and the bid analysis process which was implemented after the closing date for bids was thorough and methodical and gained the respect of the oil companies. The formal invitation for bids under Namibia’s First Licensing Round was published by the Permanent Secretary of the Ministry of Mines and Energy in April I99 I The bid invitation declared the whole of the territory of Namibia, with the exception of the onshore area already under licence to Etosha Petroleum Company, to be open for bidding. The absence of restriction on where companies could apply for acreage was a deliberate act of policy. Because of the long absence of Namibia from the international market for petroleum exploration capital, it was thought prudent by the govcrnment to allow the companics freedom to determine which areas they wished to apply to explore. The formal invitation listed the information that had to be included in the applications for licences. These included the applicant’s financial strength and technical competence, its research and development expertise and experience, particularly in respect of technical and geological issues relevant to cost effective operations in Namibia, its proposals on the biddable items in the Namibian petroleum regime (namely, minimum exploration work and expenditure commitment, bank guarantee, minimum annual training sum and the second and third tier incremental APT rates). The applicants also had to submit a geological and geophysical evaluation of the licence area applied for. The invitation also indicated the criteria that would guide the government in evaluating the applications received. These were stated to be: The technical competence and the financial strength of the applicant (as documented in the application) to be able to carry out exploration for and exploitation of petroleum in a cost efficient way suitable for the conditions in Namibia. The applicant’s willingness to perform a complete evaluation of the petroleum potential in the licence area within an agreed time frame. This would include the proposed minimum work programme and expenditure.
The invitation further indicated that after evaluation of the applications, selected applicants would be invited to Namibia for negotiations on their applications, while reserving the government’s right to accept or reject any application without any obligation to give any reasons or otherwise to justify its decision. In this writer’s view, the Namibian invitation to bid set out a fair and rational framework for international oil companies to make applications for Namibian licences. The invitation which was published before the promotion meetings in May I99 1 in London and Houston was in itself a positive promotion measure and lent itself to being so presented at those promotion meetings. The bid analysis process and procedure which the government adopted in relation to the applications that it received also contributed to a favourable image in the international petroleum industry for Namibia. It applied its announced criteria for evaluating the applications and invited shortlisted companies for negotiations with the government negotiating team. The analysis of the economic and geological/geophysical submissions required by the bid invitation was acknowledged by the companies which were invited for negotiations to have been very professionally carried out by the government negotiating team. The type
qf negotiating process, as a promotion measure
The government negotiating team which was established by the government of Namibia quickly established a sound reputation for professionalism with the oil companies which in itself became a promotional factor. The government appointed a multidisciplinary team consisting of geologists, a geophysicist, an explorationist, an accountant, lawyers, a petroleum economist, a government tax expert and an investment promotion official, led by the Permanent Secretary of the Ministry of Mines and Energy. NAMCOR provided the organizational support for the GNT. The GNT took steps, the details of which are not in the public domain, to weld itself together as an integrated and disciplined negotiating team. This involved clarifying the objectives that the team wished to achieve in the negotiations and developing the appropriate tactics for achieving them. The team approached each round of the negotiations with careful preparation. The GNT’s negotiating position was assisted by the government’s declared policy of not considering applications for licences outside official licensing rounds. Interested oil companies thus had to pay attention to the First Licensing Round. The Namibian Cabinet gave the GNT a full mandate to evaluate the applications received under the First Licensing Round and to negotiate with selected companies. It is a matter of public record that the GNT discharged 269
Petroleum exploration in Namibia: SK Date-Bah
this function well and with rapidity and succeeded in concluding five petroleum agreements with oil companies. The fact of this achievement and the orderly and professional way in which it was achieved has served in itself to promote Namibia as an attractive frontier oil province. This vindicates the contention of this writer that devising an effective, expeditious and efficient negotiating process for oil exploration agreements can serve as a promotion measure for the country that successfully organizes such process. Involving international aid agencies in the promotion process The government of Namibia, in organizing a new order for its upstream petroleum sector, requested and received international aid from the Commonwealth Secretariat and the Norwegian aid agency, NORAD. The latter provided assistance on geological and geophysical matters with both funding and human resources and the former provided legal and economic inputs into the government’s promotion efforts. For a small developing country, the ability to mobilize and manage such assistance by aid agencies can be an important part of its petroleum promotion process. Namibia succeeded very well in taking advantage of the technical assistance offered to it and managing it well and integrating it firmly into its own agenda and processes.
Evaluation An important feature of the Namibian petroleum regime is the attention it pays to environmental protection. In many developing countries, the relevant regulatory legislation and petroleum agreements do not provide adequately for environmental protection. It is, of course, a matter for political judgment by host states how they balance environmental considerations against the imperatives of development. But increasingly, the advocates of sustainable development do not see environmental protection and the exploitation of non-renewable natural resources as conflicting activities; rather, they see them as complementary activities in achieving sustainable development (Gao, 1994). To a large extent this perspective informs the approach adopted in the Namibian Petroleum Act and Model Petroleum Agreement. In this respect, the Namibian regime is quite modern and a model that would repay study by other developing countries. In fashioning environmental provisions in a petroleum regime for a developing country, however, there is a policy justitication for making such provisions less onerous than those in the developed countries in order to attract investment capital that is fleeing the rigorous regimes increasingly 270
being imposed in the developed countries. Developing host countries have to strike a balance between the needs of environmental protection, on the one hand, and those of economic growth through the extraction of non-renewable natural resources, on the other hand. The balance struck in each country may differ, reflecting national priorities and perceptions and local political attitudes. The balance struck in Namibia gives prominence to environmental considerations, but within a framework which gives primacy to the needs of production. Another attractive feature of the Namibian petroleum regime is its relative simplicity. Notions of permanent sovereignty over natural resources do not hold it back from granting direct concession rights to foreign oil companies in exchange for obligations undertaken to the Namibian government by these companies. The role of the national oil company is not to be the sole grantee of concession rights from the state; but rather to assist the government in the granting of exploration and production rights; in promoting the acquisition of such rights by international oil companies and in monitoring the implementation of concession rights granted to international oil companies. The Model Petroleum Agreement is a modern concession and embodies many of the clauses evolved by experience in the recent past in the international petroleum industry. The fiscal regime is in part fixed (by legislation) and in part flexible. (The majority of the fiscal terms are fixed.) A fixed royalty, petroleum income tax rate and first tier APT rate establishes a level of stability in expectations. The biddable items of the second and third APT rates, the sum offered by the company for the training of Namibians and the work programme inject a scope for competition between the oil companies that has proved beneficial for Namibia and enabled the fiscal regime and work programme to be tailored to particular licence areas and particular investors. This writer believes that this element of competition is desirable in the context of many developing countries. Though this competitive element usually implies the need for negotiation by the government and the expenditure of time and effort by high-level staff in government, this is necessary, in this writer’s view. Efforts to make biddable items non-negotiable, as in Ecuador, by adopting a sealed bid procedure and assessing the bids by reference to a stated points system results in excessive rigidity in the evaluation process and may be counterproductive. In conclusion, this writer considers that the Namibian model of petroleum policies and measures is worthy of consideration by other frontier petroleum provinces in the developing world. It is simple, does not require excessive negotiation and is sensitive to the increasingly important environmental considerations. It proved itself Re.wwce.~ Poliq, Volume 20 Number 4 December
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Petroleum exploration in Namibia: SK Date-Bah
during the First Licensing Round by enabling rapid and effective negotiation of balanced agreements with international oil companies.
Acknowledgement The views expressed in this paper are those of the author alone
and
do not
necessarily
reflect
those
of the
ment of Namibia or of the Commonwealth
Resources Policy Volun~c~20 Number 4 December 1994
Govern-
Secretariat.
References Ciao. Z (1994) Agreements:
‘International Petroleum Exploration and Exploitation a Comprehensive Environmental Appraisal’ Journal o/ Energv and Natural Resources Law 12 (2) 24&256 Goss, C (I 986) Petroleum and Mining Taxarion: Handbook on a Method for Equitable Sharing of Profits and Risk Cower, Aldershot, and Brookfield. VT Light, M P R and’shimutwikeni, H (1991) ‘Namibia, practically unexplored, may have land, offshore potential’ Oil and Gas Journal 8 Auril 85-89 Miller, R McG, Carstens, H, Walden, T (1994) ‘Namibia’s hydrocarbon potential being opened for further exploration’ Oil and Gas Journal 5 September 123-l 28 Toivo, A T Y (1991) Text of speech in the author’s possession
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