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Previous generous terms supported Senegal's upstream
development
Discoveries in Senegal since 2014 have confirmed the country as
a highly attractive deepwater investment destination, with drilling
by Cairn Energy and Kosmos Energy—including Senegal's first
offshore wells in 20 years—leading to major oil and gas finds.
Senegalese discoveries to date account for more than half of the
estimated nine billion barrels of recoverable resources in the
wider Mauritania, Senegal, Gambia, Guinea-Bissau, and
Guinea-Conakry (MSGBC) Basin.
Figure 1: Senegal: Announced upstream development
projects
Senegal's rapid evolution from frontier to de-risked frontier
and emerging producer has been facilitated by favourable
contractual terms. The 1998 Petroleum Code terms equated to an
average government take for offshore production sharing contracts
(PSCs) of around 53%. The 1998 terms have underpinned the viability
of planned multi-phase oil and gas developments, despite falling
oil prices from mid-2014.
Proven below- and above-ground attractiveness has also driven
substantial M&A activity, as basin-opening explorers monetise
large equity positions and cede operatorships to fast-followers.
More deals in existing consortia are likely, with Cairn, Kosmos,
and other players likely to further dilute their holdings.
Senegal seeks to capture increased value from next wave of
discoveries
Senegal's hydrocarbon production is set to expand rapidly from
2022, increasing state revenues and ensuring gas for domestic use
in support of President Macky Sall's "Emerging Senegal" development
plan.
However, the president has been criticised for not demanding
more from investors, as the country turns to resource wealth to
bolster the distribution of benefits and jobs. Political opponents
and civil society groups called the 1998 terms outdated and overly
generous to foreign investors.
The 2019 code substantially increases government tax take
Political pressure and the desire to maximise the benefits of
upstream development led the government to introduce a new
Petroleum Code and Local Content Law in February 2019. The new,
non-retroactive code shifts Senegal to an exclusively PSC-based
regime. Royalty/tax contracts previously offered for onshore areas
will no longer be available. Competitive bid rounds will now be
prioritised over contract awards via direct negotiation, as the
government seeks to avoid further criticism of opacity in its
choice of foreign investors and its relationship with them.
The new code substantially increases tax take—introducing
fiscal terms more in line with those of other emerging
producers—as the government gambles that the tightened terms
will not discourage new investment at a critical point for the
sector. IHS Markit fiscal modelling shows that average government
take under the 2019 ultra-deepwater PSC terms is approximately 73%,
a marked increase on the 53% for offshore contracts under the 1998
terms.
Local content law increases regulatory burden
The new local content law steers clear of establishing an
onerous quota system mandating local participation levels, as
introduced in other African producers such as Ghana. However, the
need to submit a detailed local content plan on an annual basis
will moderately increase regulatory burden for international oil
companies (IOCs). And due to Senegal's lack of regulatory capacity,
it remains unclear how effectively the authorities will be able to
monitor compliance with the law. This could leave scope for future
government crackdowns on IOC and service company compliance,
resulting in fines and/or operational bans.
Figure 2: Senegal: Evolution of selected Oil and Gas Risk
ratings
Senegal's Oil and Gas Risk ratings downgraded due to new
legislation
As a result of the legislative changes, Senegal's above-ground
attractiveness has changed in some important respects, with IHS
Markit PEPS Oil and Gas Risk ratings for Government Take, State/NOC
Role and Regulatory Burden all downgraded. However, the country's
reliance on foreign capital and technical expertise means that
International Openness - the government's openness to foreign
investors versus a National Oil Company (NOC) - remains unchanged.
Moreover, now that new legislation has been introduced a period of
stability is likely to ensue, with no further major changes
currently expected to Senegal's key hydrocarbon sector ratings
during our five-year forecast period.
Senegal presents IOCs with opportunity for Atlantic Margin Play
expansion
Senegal's first upstream licensing round - likely to be launched
later in 2019 - will test IOC appetite for its new E&P
terms.
The round could offer established deepwater players already
present in Senegal and the broader MSGBC Basin an opportunity to
expand their footprints from fast-followers to basin leaders.
However, new entrants not seeking an operated position may choose
to pursue farm-in opportunities in existing consortia to benefit
from Senegal's previously generous terms, avoiding the increased
tax take that comes with new licenses.
Figure 3: Oil and Gas Risk overall ratings: Senegal in
context
Despite the erosion of attractiveness resulting from the new
legislation, Senegal's relative strength in above- and below-ground
factors will help the country remain the leading upstream
investment destination in the MSGBC basin, especially given the
breadth of acreage on offer. Senegal's acreage provides deepwater
investors prime access to the Atlantic Margin play. These factors
should also enable the country to set itself apart from regional
competitors, such as Equatorial Guinea, Gabon, and the Republic of
the Congo, for licensing and IOC capital.
Screen upstream opportunities and above-ground risk with one
tool:
PEPS
Roderick Bruce is a Principal Research Analyst at IHS
Markit.
