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Ambitious oil output targets threatened by regulatory and political risks in Chad

2015-06-24 Protection Group International Ltd Ambitious oil output targets threatened by regulatory and political risks in Chad

This month Chad’s finance minister confirmed that the country planned to double current oil production by the end of 2015. However the IMF has warned that the boom in output will be short-lived without new discoveries and investment. Considering long-standing concerns over the operating environment in Chad, specifically with regard to regulatory uncertainty and governance, the country is likely to struggle to attract large-scale investment in the next two years.

Minister Kordje Bedoumra detailed the outlook for production at a 7 October OECD forum on Africa. Officials forecast that higher production from the Mangara, Badila and other fields in southern Chad will raise national output from around 100,000 barrels per day currently to around 200,000 barrels per day by the end of 2015. The planned increase comes at a crucial time for Chad’s economy, which relies on oil for around 90 percent of exports. Slowing output from ageing fields saw oil production fall in 2013 to the lowest level since 2004, resulting in lower GDP growth for the year than had been anticipated. According to a February 2014 IMF forecast, without new discoveries oil production in Chad will peak in 2016 and gradually decline thereafter, resulting in lower government revenues.

The Chadian government has sought to attract greater investment in hydrocarbons and other extractives in order to forestall the looming slump in earnings through new discoveries of oil and other minerals. However regulatory uncertainty will make it difficult to attract investment on the scale necessary to dramatically alter current projections in the next 2-4 years. Chad’s recent dispute with the state-owned Chinese National Petroleum Corporation (CNPC) is indicative of the concerns about the immature and unpredictable legal framework. In October 2014, the government said it was prepared to re-auction oil licenses that it seized from CNPC. The blocks were taken after the firm was accused of violating environmental laws by illegally dumping oil. Charges of environmental mismanagement at CNPC operations in the country date back to 2013, when the government appointed auditors to investigate the company. However the charges remain difficult to verify and indeed a 2012 report prepared by the Agence Française de Développement research bureau failed to identify serious environmental concerns at CNPC’s fields in Chad. The environmental charges could in part reflect populist pressure by workers in the oil sector, who staged several protests in 2014 against management and working conditions at Chinese oil companies in Chad.

Further underscoring the unpredictable nature of the government in its approach to the management of the oil sector, in March authorities filed a USD 837 claim against a consortium of oil companies led by US-based Chevron. The government argued that a previous agreement for operators to pay royalties of just 0.2 percent was not valid because it was never ratified by parliament. While the 2 percent royalty fee the government is now demanding Chevron and Malaysia’s Petronas pay is competitive with terms found in other markets, of concern is the determination to impose it retroactively. Other examples also demonstrate Chadian authorities’ willingness to impose terms on operators that threaten the profitability of their investments. A refinery owned jointly by CNPC and the government halted operations for several weeks in 2012 after the government unilaterally lowered fuel prices to an unprofitable level in order to satisfy previous campaign pledges.

Alongside the regulatory challenges, serious governance threats are also likely to deter wider interest in Chad. The country is among the most corrupt in the world, ranking 163 out of 177 in Transparency International’s Corruption Perceptions Index. The World Bank previously invested heavily in the development of Chad’s oil sector but withdrew its commitments in 2008 after concluding that authorities failed to abide by pledges to use hydrocarbons revenues for social development.

These challenges, as well as other impediments to investment such as poor infrastructure, security costs and unclear channels for dispute resolution, will influence the appetite of foreign operators to engage in the Chadian oil sector in the next 12 months. Considering the high economic dependency on oil, this engagement will help shape the government’s ability to meet its ambitious short-term growth targets and the longer-term expansion of the oil sector in Chad.

 

Protection Group International Ltd

Ambitious oil output targets threatened by regulatory and political risks in Chad - Protection Group International Ltd
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