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Senegal’s first offshore exploration round will be a tax code test

By David Whitehouse
Posted on Tuesday, 4 February 2020 09:07

Senegal's future oil-related revenues are estimated at $23bn. REUTERS/Stephen Eisenhammer

Senegal’s oil and gas industry is billed as the engine of double-digit economic growth as well as a template for other African countries.

But analysts are questioning whether the new fiscal terms that will be used in the country’s first-ever offshore licensing round take sufficient account of stiff international competition for exploration capital.

“The big issue for potential upstream investors in Senegal is the fiscal terms on offer in the updated code,” says Roderick Bruce, principal oil and gas risk analyst for Africa at IHS Markit in London.

Government tax take has been increased “substantially” in the 2019 code versus the 1998 version, he notes. The bid round will be the “first real barometer” of whether Senegal has tightened terms too far, he says.

  • Fiscal modelling by IHS Markit shows that average government take under the 2019 ultra-deepwater terms is about 73%, compared with 53% under the old rules dating from 1998.
  • IHS Markit estimates that around 55 bid rounds are being planned globally before the end 2020, at least ten of which are in Africa, including in Angola, Gabon and Equatorial Guinea.
  • The rounds are chasing a “limited pool” of exploration capital, Bruce says.

Recent African bid rounds have seen licenses on offer go unawarded, Bruce notes. “That could happen again in Senegal.” Contract terms are set to play an even greater role in determining how successful countries are in securing new investment, he says.

The round, which was launched on January 31, comprises 12 blocks offshore Senegal. Applications to the ministry of petroleum and energy close July 31.

Ratings downgraded

Senegal is counting on the exploration to drive rapid economic growth. The Economist Intelligence Unit (EIU) predicts that Senegalese growth will slow this year but will pick up in 2021 as global confidence improves.

  • Growth will average 10% a year from 2022 to 2024 as oil production comes on stream. Investment in the oil industry will support industrial production and will prompt growth in transport, infrastructure and construction, the EIU says.

The need for exploration companies to submit a detailed local content plan on an annual basis will moderately increase the regulatory burden, Bruce at IHS Markit wrote in his research. “Due to Senegal’s lack of regulatory capacity, it remains unclear how effectively the authorities will be able to monitor compliance with the law.”

  • IHS Markit downgraded its Senegal ratings for government take, state/national oil company role and regulatory burden in view of the rule changes.
  • Still, the rating on international openness is unchanged and the raft of new legislation means that a period of stability is now in prospect, the firm says.

In comparison with many established hydrocarbon producers in the region, institutional transparency in Senegal is quite high, Bruce says, but this could turn out to be a double-edged sword. “That in turn generates more political and public scrutiny and higher popular expectations for an inclusive and fair use of revenues, he says.

Bottom Line: Senegal may find itself needing to make fiscal concessions to maximize its potential in a crowded exploration marketplace.

 

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