Exploring oil in Rwanda

THE government has announced plans to sign a Production Sharing Agreement (PSA) with Vanoil Energy Ltd, the Canadian oil exploration firm before the next phase of exploration begins. The oil exploration results are expected this month. Based on seismic studies, hopes are high that the country has oil deposits.As the speculation rages on, the Ministry of Natural Resources, Vanoil and the country’s geologists are not giving anything to chance, saying they would not speculate. They insist that to speculate on the facts would only cause anxiety among the people. However, history speaks of the Portuguese travellers who as far back as the late 19th century suspected that oil might lie beneath parts of East Africa after noticing a thick, greasy sediment wash up on the shores of Mozambique. As it turns out, the Portuguese were right. Seismic tests over the past 50 years have shown that countries up the coast of East Africa have abundant natural gas.This claim is corroborated by an article published in the Arabic Oil and Gas Journal, recently, which indicates that, Vanoil saw Sudan-like features on Rwandan seismic, indicating the possibility of oil discovery in Rwanda. The announcement to sign the PSA with Van Oil corroborates this further.Early data compiled by industry consultants also suggests the presence of massive offshore oil deposits. This has spurred oil explorers to start drilling more wells in East Africa, a region they believe is an oil and gas haven just waiting to be tapped. “I and a lot of other people in oil companies working in East Africa have long been convinced that it’s the last real high-potential area in the world that hasn’t been fully explored,” says Richard Schmitt, chief executive of Black Marlin Energy, a Dubai-based oil prospector in East Africa. “It seems, for a variety of geopolitical reasons, that more than anything else, it’s been neglected over the last several decades. In Uganda, oil exploration in the Albertine graben began in 2006, where geologists discovered two billion barrels of oil. Other countries with oil are Nigeria, Angola, DRC, Equatorial Guinea, Ghana, Sudan and Libya in Africa. In March, this year, Kenya announced its first oil discovery, in the northern part of the country, where Africa-focused British firm Tullow Oil Plc has been exploring for the commodity, and is now in the process of confirming the commercial viability of the find.Implications The life of the common man and woman will improve for the better because oil in itself is a blessing to the economy. And the government’s mission of promoting industrialisation and fighting poverty would be boosted by the discovery of oil. There is no need for pessimism. Many benefits will be expected from oil. Access roads to marked oil wells will be constructed to speed up transportation of materials to sites while extraction of the commodity would boost trade with neighbouring countries. However, there would be need to train staff to work in the oil industry. Should oil be there, the national coffers would bulge and poverty proportionately reduced.Equatorial Guinea managed to triple its GDP in a few years, courtesy of oil exploitation, though not many Guineans lives changed for the better.There will be increase in revenue in terms of value addition tax, Pay As You Earn (PAYE) and income tax. The life of common man or woman would drastically change. Through the government’s emphasis on accountability and zero tolerance to corruption, more Rwandans would benefit. If government officials account for every coin, then just know what will be asked of the oil wells and accruing money, analysts say.Laws will be put in place to curb any misuse of oil revenues more so the issue of oil agreements like the Production Sharing Agreement (PSA) which will have to be enacted before production starts. However, at the initial period of oil production, most of the revenue would go to financing cost recovery among companies that invested in the exploration and development phases. The exchange rate would appreciate and make imports cheaper to the point of undercutting local producers, more so in agriculture and manufacturing. The legal framework must have a stabilisation clause, which protects the profitability issues of the oil company or companies in relation to a change in legal regimes, according to experts.The oil agreements must be thought out to protect the oil resources if the economy is to be turned around. The oil companies normally want a blanket to protect them from losses in case of legal amendments. In case of change, parties may normally negotiate the effect of the changes in the law and necessary adjustments are made in order to maintain the economic benefit of the licensee, experts say.Standard way of contractsA legal framework is key to guarantee efficiency in oil management. The issue of control of oil may be vested in the hands of the government on behalf of the Republic of Rwanda, or management may be vested in the state. The difference is that if the resources are vested in the state, it means obtaining full authority before any action is carried out.But when it is vested in the government though, in both cases, the president remains the final decision maker- meaning the president can sit with his cabinet and decide for the people without necessarily consulting them. If the oil is discovered, then the government and oil company share the revenues. In case the country does not discover oil, the oil company fully bears the affiliated risks. If oil is discovered, then the title and assets would belong to the government. Normally, a prior agreement is signed, which stipulates that the government would receive revenues after the oil company has recovered its exploration costs . Then new agreements are signed after the discovery.Categories of oil agreementsThe state is required to renounce all oil prospecting rights while the oil company prospects for the oil and if they find it, it becomes theirs. The government gets some taxes under concessional terms.The second is risk property, where the company comes with its money and if they strike oil, the country reimburses all prospecting costs to the company and thereafter leaves reverting all rights to the government.And thirdly is the production sharing agreement, which the government expects to sign with Vanoil.Under this, the company uses its own funds to prospect for oil then shares the proceeds with the government on predetermined rates. But experts say there is a possibility of a company inflating costs that would ultimately be recovered when production starts. Usually, the agreement should state that before the company goes into production, there should be an agreement on the work plan and the costs.In the oil industry, when a country employs the production sharing agreement, the cost of producing oil is shared between the government and the oil companies. But due to poverty in Africa, the oil companies foot the cost and recoup their costs when oil production starts. It is after the companies recover their money that the country begins to actually benefit from oil revenue.The expenses are covered in what is described as recoverable costs, where everything the company spent money on is paid back by the government, including telephone telecommunications bills, transport, food, accommodation, corporate social responsibility bills, and postage bills.Africa is said to have in the past 60 years led in dirty oil business, where oil extraction destroys community roads while oil pipelines are located in community homesteads, which puts the lives of the locals at risk of oil accidents. In some cases, oil has penetrated deeper into soils and water bodies. Oil companies ought to therefore comply with safety and environmental standards. In a number of countries such as Azerbaijan, Bolivia, Liberia, Ghana, parliamentary approval of natural resources contracts is required, on aspects such as opening up new areas for exploration, licensing, contract allocation, and possibly transfer of license. Parliament should play an oversight role in the petroleum sector. Any oil discovery would no doubt contribute to the early achievement of the poverty eradication strategy.

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Exploring oil in Rwanda