Duncan Williams, general counsel of Maurel & Prom, France’s largest independent oil and gas exploration and production (E&P) company, speaks to James Wilson about the changing business environment in Sub-Saharan Africa and the shifting opportunities for mid-sized oil and gas companies.
What proportion of Maurel & Prom’s work is related to Sub-Saharan Africa?
Eight years ago, when I joined M&P, Africa was nearly 100% of our work. It’s the cradle of the company and it’s where we really started in the oil and gas business. M&P’s history is a bit unusual as it is a very old firm that began in the early nineteenth century as a shipping company, trading extensively with France’s West African colonies. As shipping evolved the company foundered somewhat and in the nineteen-nineties the current management turned it into an exploration and production company. It’s a very old name and one still known in parts of Africa from those early days. The company’s initial E&P successes came in the Republic of Congo and in Gabon. While Africa used to be the exclusive centre of our E&P business and today remains our main core, as we add new projects we are looking at more opportunities outside Africa. This is partly to diversify risk but also partly because there are not as many great low-priced opportunities in Africa as there used to be 5, 10 or 15 years ago.
What are the main factors driving the changing risk-reward balance in the industry?
The oil price curve has changed people’s minds today. Eight years ago valuations were done with assumptions as low as $35 or $50 long-term price of Brent. Today many are at $75 to $85 but the actual market price has been stable at around $100 for three years or close to that. If you look at the last six years and you take out the financial crisis, you’ve basically got a price of oil that’s been hovering around $100 for quite some time and that’s really changed the market psychology and the way people look at investing in projects. In addition, project costs have gone up as the industry has experienced a resurgence. Add to this price context the fact that so much success has occurred in Africa in recent years and that has made investors think: “hey, we can go there and actually make money and it’s not just a big continent where there’s a bunch of trouble”. Many companies have been successful, like M&P, with big discoveries in Africa: new major projects in places like Ghana, Uganda, Mozambique and Tanzania. If you told people ten years ago that there would be large quantities of oil flowing in Ghana; that Mozambique or Tanzania might be the Qatar of this century, many investors would have laughed at you. This tremendous success is part of what is driving up valuations even in countries that haven’t yet achieved that success.
So the market has been pushed up the scale with bigger players and bigger capital investments needed?
That’s right, both onshore and offshore opportunities have become more capital-intensive today, requiring companies of a certain size and savoir-faire. It‘s hard to do an onshore project in many African countries because of the terrain: you have to build roads and bridges, while still protecting the forest, and these are complicated operations, especially in rainy tropical countries. If you add to it, let’s say, crime, violence, instability, or other similar dangers and uncertainties, then suddenly it becomes more risky and a $200 million offshore project looks a lot more interesting. But offshore projects are not just capital intensive, they require a different kind of intelligence. It takes a lot of technological savvy and a large team of people to pursue an offshore LNG project, for example, and not just pure geological and geophysical experience. Operating onshore takes its own technical know-how but also more ability to work with the local communities, to be a good corporate citizen on a local level and show that the project is good for the country. There can be more pressure in that sense when you are an onshore operator compared to an offshore operator. Smaller companies can on the other hand have some advantages in this regard; they start with a clean slate.
What are the most important legal issues for you at the moment in the region?
Governments in the region are today looking to create more durable partnerships and ensure that the host countries share, to a greater extent, in the benefits of oil production. That results in changing legal environments and more active partnership roles for the host governments. In addition, taxation is a frequent issue today, and probably the issue I personally have seen evolve the most. I ended up in this industry and working with Africa somewhat accidentally, because as a lawyer the timing was good to do M&A work for oil companies. When I arrived in Europe, like many Texans I knew hardly anything about Africa, not even the difference between Gambia and Gabon… During this period I have had the privilege to see the region shake off a certain torpor and start to move more rapidly.
The uptick of legal work in Africa started well before then obviously but it has really taken off in recent years. Ten years ago valuations on transactions were much lower, there were fewer deals, and African governments didn’t look to play as big a role in projects or in taxation as much then as they do now. They would by and large wait for the royalty payments and you would pay taxes as you produced. Today, many countries are looking to tax any potential capital gain or any kind of transfer, whether or not there is a definite value in a project, in exploration for example, even in cases where local laws don’t provide for it.
How can you prepare for this uncertainty in tax regimes?
To be able to navigate that environment you really need to know the thinking of the local officials in each country where you work and to do that you really need to have an ear on the ground. I would say that one problem we face is that the laws are often not clear and there is a lot of latitude in their application. Predicting how the law or regulations are going to be interpreted in a given situation requires knowing the latest thinking and recent precedents. That creates investment uncertainty and has to be managed contractually to the extent possible, which in turn makes knowledgeable counsel essential and even if you are prepared taxes can be levied after transactions have happened.
The laws are frequently unclear and outdated. While you can usually count on your Production Sharing Agreement (PSA), you can never really be sure how much protection it will provide you. For example, one country in Africa has very clear provisions in its PSAs that say no taxation is applicable for nearly all transactions, but the tax authority has in the past refused to apply those provisions (claiming the PSAs are not published in the national gazette). So even though the government signs a contract and it says no tax, the tax authority does not feel compelled to abide by it. That kind of situation makes predicting and managing legal and tax risk much more difficult.
Are there other flashpoints at the moment putting a question mark over the success of oil and gas projects?
There is another issue most clearly exemplified in the new gas discoveries in Africa today. Of course one must make a distinction between Sub-Saharan Africa on the one hand and on the other North Africa, which is a very different place. In addition, one should distinguish larger and more robust economies such Nigeria, where a solid gas market exists, from other African countries. In a few places with significant gas discoveries, it will be eight to ten years before the LNG (liquefied natural gas) projects come into production. In the meantime significant gas resources are idle in countries that desperately need electricity. They are generating some but often by burning diesel, which is a waste of resources, very expensive and bad for the environment. With these identified natural gas resources, one would hope a rational system for developing power generation and transmission could be developed, which would be a huge boon to the economy and for everyday life. The problem of course is how to ensure prompt payment for the gas supply and the building of the electricity transmission facilities. Private companies are not donors and their shareholders need a return on capital, otherwise they can’t make the investment required to make local gas projects work. Hopefully the World Bank and other multilaterals will continue to bridge the gap and provide guarantees for gas purchases. This will be a growing issue over the next few years all over Africa: there’s going to be more and more pressure to get that gas out of the ground to produce electricity locally.
What are the typical legal difficulties you come up against?
In just about every country that we work in the hydrocarbons codes are generally outdated and don’t take into account the new cost of investing in projects; as valuations have gone up so has the cost of capital. Some countries have been working on a new code for years but they can’t seem to get it passed. You don’t quite know what’s in it and it’s not a very transparent process. The most famous recent example was the Petroleum Industry Bill (PIB) in Nigeria, which had so many different competing drafts of it circulating, without much clarity on what the actual bill was and where it was going.
What is your approach to external counsel and when do you decide to draft in outside help?
We look to external counsel firstly to do the heavy lifting when we have a big project that is document intensive, since we are a small in-house team. In addition, we look for outside counsel who really know the ins and outs and the local trends in any given country we’re working in. Outside counsel can add value when they have direct working relationships with the ministries and they are really able to tell us what the thinking is on various issues within the government organisations and what the recent practices are. In many cases you can go and look up the law, but that’s not going to tell you how things are going to happen and how it will be interpreted. In many cases you have to know what happened in recent deals and the only way to know that is to be practicing in that country or to have recent experience in a given place.
Do you tend to approach local counsel directly for this or do you rely on international counsel?
Usually we look to European lawyers who have significant experience in a given jurisdiction and who work there regularly. We find lawyers based in Europe know what clients expect and bring more ideas to the table, not to mention that they are more reactive and easier to get on the phone! Some, not all, local lawyers don’t maintain the reactivity level that we have in Europe. Often the best balance is lawyers who are based in Europe, but who travel regularly to countries in Africa, have experience there and know what is going on. There are really effective local lawyers as well, but it can be difficult to identify them. Once you find them, you really hang on to them.
Are there developments in the legal market that are of interest to you as a client?
There are more and more lawyers who have real expertise in Gabon, a very important country for M&P, such as Herbert Smith Freehills, Orrick, Ashurst and solo practitioner François Nouvion, or firms that have great project and financing experience such as Simmons & Simmons or DLA Piper. There are more firms specialising in the whole gamut of services needed by E&P companies in Africa and elsewhere, such as Bracewell & Guiliani’s new office in London. I was pleased to see the mergers of Herbert Smith and Freehills or Norton Rose and Fulbright to create mining and oil and gas firms that can span the globe between the African and European practice to North America and all the way to Australia and Asia, providing a consistent level of quality. More and more firms are jumping on the African bandwagon, but Africa is not just one big continent. Each country has its specificities and I would say in each there are still only a handful of firms that know with real substance and in detail the lay of the land.
Maurel et Prom
About the author
Duncan Williams is the General Counsel of Etablissements Maurel & Prom, a Paris-listed exploration and production company. Having worked with M&P since 2005, he has managed on a wide variety of acquisitions and divestments of assets and subsidiaries in a wide range of projects, onshore and offshore, upstream and drilling services businesses in Africa, the Americas and elsewhere, as well as capital market transactions and debt financing in Europe. Prior to joining M&P, he practiced corporate and securities law in New York and Paris at Willkie Farr & Gallagher. A member of the New York Bar, he is a graduate of Tulane University in New Orleans and Fordham School of Law in New York.