this week, gabon has officially stated that it would like to expropriate assets of three international oil companies (IOCs), one of which include addax–a company that makes up approximately one-third of sinopec’s international acreage. the expropriated production field in dispute–obangue–represents about 3% of sinopec’s portfolio, and if addax’s other two fields are taken away–tsiengui and koula–it would be another deep cut to addax’s operations, as these two fields contribute roughly 2-3% of the company’s earnings. in total i estimate gabon to be 5-6% of sinopec’s portfolio.
while most people view this looming dispute as an equity story, gabon, which is one of the few countries in the region that posts budget surpluses but it also dealing with declining oil outputs, there’s also a fixed income narrative. gabon has a $1 billion dollar eurobond due in 2017 that has traditionally been a safe bet for those in the african sovereign bond space, as it generally tracks global oil market dynamics. the three fields in question produce 40,000 barrels of oil per day, which translates to 20% of gabon’s total oil output and 16% of its export earnings ($1.6 billion). however, the country has been late on some of its payments recently, and some of its bondholders with whom i’ve spoken have raised surprising questions on its creditworthiness.
so what does this all mean for investors with gabon exposure? i’ll answer three sets of questions.
Q1: what will the outcome of the court case be for addax? what does this mean for future chinese investment in to gabon?
Q2: will this impact upcoming offshore bid rounds in gabon?
Q3: how does the power struggle in the bongo family feed in to expropriatory risk?
A1: china is not likely to win its case against gabon, and will have to increasingly comply with resource nationalist demands from the government. many companies have undergone government-led audits of their contracts in the past year. while addax is arguably the most high-profile of these reviews, canadian natural resources, as well as france’s maurel & prom and perenco have also been looked at. perenco was able to mitigate their expropriatory risk by accepting more onerous fiscal terms on a license that was set to expire. while many observers of china-africa relations see african countries as being squarely on #teamchina or #teamUSA, ali bongo’s gabon has shown that it does not favor west, east, or south. as such, the claim that chinese companies were unfairly targeted will likely fall on deaf ears in an arbitration court. moreover, the gabonese government has also pursued similar action against cmec for failing to develop mining assets in a timely manner (see previous posts).
gabon’s government–which is undergoing a huge infrastructure buildout in efforts to achieve middle-income country status–claims that addax purchased its acreage at a substantial discount when oil prices were low. now, as gabon’s fiscal surplus which was 7.5% in 2012, looks to be halved and some to between 2-3% of gdp because of exponential increases in government spending, it will be looking to plug this gap as much as possible. gabon suggests that addax (before it was a subsidiary of sinopec) purchased the production fields at a $780 million discount when oil prices were around $70. it now demands that it make up for the difference. while to many western observers this is a clear example of seller’s remorse, i think international regulatory bodies–the world bank, imf, icc court of arbitration, et. al–are beginning to side with resource-rich african countries in cases like this. they believe that african countries who may have inked deals that might have not maximized state revenues to the fullest extent are entitled to take another look at contracts, especially if they were signed by leaders who were corrupt autocrats. a similar case is underway in guinea’s simandou iron ore mine, where it looks increasingly likely that vale will have to pay for bsgr’s sins.
A2: no, but small and medium-cap oil companies looking to invest onshore and in shallow offshore will have to compete with the government parastatal. after delaying offshore bid rounds due to environmental concerns in the aftermath of macondo, and failed attempts at closed auctions, gabon is planning a semi-open bid round for its offshore acreage sometime this summer. the deep offshore acreage up for grabs has pre-salt geology, which if developed properly, could be a boon for gabon’s lagging revenues. the government recognizes this, and if perenco is any historical indicator, companies with a proven track record of developing this geology (which tend to be the larger IOCs), will (a) be successful in winning bids and (b) not face expropriatory risk, so long as the contract penned with the government accurately reflects where oil prices will be going over the lifetime of the awarded field.
furthermore, there is a growing trend in west and central african resoruce-rich countries to force more established companies from onshore acreage that is technologically easy to develop for hydrocarbon parastatals. i’ve seen this in conocophillips’ divestment from nigeria for oando, as well as the emergence of angolan oil companies (read, shell companies) onshore. put simply, a state-owned oil company can develop onshore and shallow acreage, while deepwater pre-salt plays cannot. for gabon to chase out the few companies who have the expertise to jumpstart a lagging oil industry.
moreover, while the country still has yet to pass a new oil bill–some investors may question why a company may want to commit when it is clear that there will be a new regulatory framework–those who participate in the deepwater offshore licensing rounds will likely be immune to the slight increase in higher taxes and royalties, as well as forced government partnership and equity in some projects, because the government does not have the technological wherewithal to participate. it’s also increasingly likely that the government may not be able to finance some of its activity in the future event it does chose to form a partnership with iocs, especially if the government’s surplus continues to decline.
A3: bongo’s extended family is powerful enough to create headaches for him and investors, but not strong enough to completely derail investment. that said, contracts penned with omar will be put under closer scrutiny. since coming in to power, ali bongo has surprised many by doing a clean sweep of his father’s corrupt business networks that have become deeply engrained in the country. as addax’s acquisition occurred in 2009–the time when ali came to power–addax’s targeting doesn’t come to a surprise for many gabon politics watchers who have seen ali increasingly cut the old patronage networks and create new links for him and his closest allies. the fact that the state parastatal has been operating in obangue, instead of the old direction générale des hydrocarbures (which houses many of the ancien regime) is a sign that ali, through his associates who run the parastatal, is slowly taking control of the oil sector.
this is not to say that ali has complete control over investment decision-making in gabon, as he continues to face backlash from his many half-siblings and extended family members who want a greater share of the pie, or a politically-important oil union (ONEP) which has been increasingly prone to strike as of late and briefly disturb global oil markets. ali’s extended family still pulls many political strings within the country–but not the majority of them–and could very well continue to make life difficult as the country tries to present a more transparent image of its oil industry that has long been thought of as a vehicle for corruption. they could flex their muscles by aggravating onep (which would lead to strikes, 1-2 day blips in global oil prices, as well as continuing to complicate gabon’s re-admittance to the EITI initiative. the latter would perpetuate the oil sector’s image as highly corrupt and discourage equity investment among those who are worried about american or european business corruption investigations, as seen in cobalt’s problems in angola and civil society backlash.
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