Member Article

International Oil Companies (IOCs) that have been eyeing East Africa may want to look beyond established jurisdictions like Kenya and Mozambique. Across the water that is, to the Indian Ocean islands of Seychelles, Mauritius and Comoros. All three islands offer interesting opportunities, but in this short article I’ll be concentrating on just one of them – Seychelles.

General Background and Geology

Seychelles, which lies outside the cyclone belt, enjoys a stable weather system, with daytime highs ranging between 25 and 31⁰ C. Besides being a high-end tourism destination, Seychelles has a thriving fishing industry, and a versatile port that can accommodate container ships and tankers. There’s an international airport, with flights to Europe, Africa, the Middle East and Asia. Telecommunications are good. The country is politically stable. The population of some 87,000 is well educated. In short, it’s a good place to do business.

From a geological perspective, Seychelles was once part of the supercontinent Gondwana which, as result a of the rifting that occurred during the early Permian period, led to the formation of East and West Gondwana, as well as the micro-continent where the island nation now finds itself. Seychelles also finds itself in the Seychelles Rifts AU, one of four assessed geological provinces and assessment units (AUs) along the central coast of East Africa.

The Petroleum Industry

As things stand, Seychelles is underexplored and only four exploratory wells have thus far been drilled. The first three wells were drilled in 1980 and 1981. Although commercial quantities of hydrocarbons were not discovered, these wells uncovered oil and gas shows and proved that Seychelles possesses a working hydrocarbon system. In the words of Eddy Belle, CEO of PetroSeychelles: ‘Three wells were drilled by Amoco in 1980 and 1981. They found all that is necessary to have an oil province.” It was not until 1995 that Enterprise Oil drilled a fourth exploratory well that turned out to be dry.

The petroleum industry in the Seychelles is a truly nascent industry that has much exploration ahead of it, as well as a long way to go before production of domestic hydrocarbon resources might be considered. Notably, the aforementioned PetroSeychelles - which is an arm of government - oversees the upstream petroleum sector, promoting and supervising oil exploration programs in the Seychelles Exclusive Economic Zone. A government-owned company, Seychelles Petroleum Company (SEYPEC), operates in the downstream sector. It used to be the case that SEYPEC was the regulator, not PetroSeychelles, however, since SEYPEC had a share in the companies conducting the exploration, a conflict existed between that shareholding and its obligations as a regulator. Consequently, PetroSeychelles was formed. According to Eddy Belle, PetroSeychelles is well-placed to reduce the amount of time that it may take for Seychelles to develop its own petroleum industry. To this end, Belle has stated that “when it comes to decision-making, we’re much faster than a ministry…being an independent body that has its own funds, we move much faster…because we are also like a national oil company, discussion with other companies is much better as we are more or less on the same wavelength.”

The Indian Ocean islands have, unsurprisingly, seen benefits in working together closely towards the development of their potential resources. For example, Seychelles and Mauritius are in agreement regarding a Joint Licensing Area in terms of which revenue will be split on a 50/50 basis – the two are hammering out a legal framework for the Joint Management Area (JMA), and some form of authority that will deal with licensing and oversee activities in the JMA. Seychelles and Mauritius have also submitted a joint submission to the Commission on the Limitation of the Continental Shelf (CLCS) for an extended continental shelf in the south east (Seychelles is itself also seeking an extension of the CLCS in the north).

Legal Framework

The Petroleum Mining Act says that the state owns petroleum accumulations within the Seychelles, and that the government can grant non-exclusive licences to companies to carry out exploration services. The Act also allows the government to enter into a Petroleum Agreement with an IOC in terms of which the company is granted exclusive rights to explore for, and produce, petroleum within Seychelles – the size and location of the acreage to be included in the agreement will be settled by negotiation, but the size must not exceed 10,000 square metres.

There is a Model Agreement in existence, and this provides for a duration of 34 years if commercial discovery occurs. This period is divided into two phases - an Exploration Phase of nine years (itself made up of three, three-year periods), and a Development and Production Phase that starts on the date on which the company decides that it’s commercially viable, and continues for 25 years.

In June 2013 Belle said this: ‘We are working on updating our petroleum model agreement….we’re making it in line with what is happening elsewhere in the world... this is where we will look at models like that of Norway.” Not only has Seychelles turned to the Norwegians for assistance, it has also sought advice from the Extractive Industry Transparency Initiative (EITI), the World Bank and the Commonwealth Fund for Technical Cooperation. As Belle has, rightly, stated: “we’re small so we don’t have capacity, which means we have to rely on others who have the capacity to assist us.’

Fiscal Regime

In Seychelles, there are three principal revenue-sharing mechanisms:

· A royalty of 10% levied on the market value of oil produced and saved during each month.

· Petroleum Income Tax of 35%, which is paid in accordance with the Petroleum Income Tax Act 2008.

· Petroleum Additional Profits Tax (PAPT), a resource rent tax levied on cash flows. The Model Agreement provides for a two-tier structure for PAPT - the first becomes due once the company has earned a particular threshold rate of return on its investment, and the second becomes due after the company has earned an even higher post-tax rate of return. The first threshold rate of return which triggers payment of PAPT is 15% and the tax rate is 25%, the second threshold rate and tax rate are negotiable.

Licensing Initiative

As part of its Open File Licensing Initiative, Seychelles invited IOCs to bid for exploration blocks in June 2012. Two applications were received, one from Afren Plc, and one from WHL of Australia. Both companies now hold exploration licences. WHL has already entered the drilling phase and it is in the process of farming out. Afren has conducted a survey and it is apparently in the process of identifying a deep-water drilling location, with drilling due to start in the last quarter of 2014. According to Belle, Petro Seychelles has been trying to establish links with Sinopec and with CNOOC. He says that ‘they can see the merit here, but there is an element of risk because we are still frontier…however, once we have the first discovery then there will be a flood of companies.’

The Open File award process works as follows – an application for a 10,000 square km area can be made at any time, PetroSeychelles will then verify if the minimum criteria are met, and there will be a notice of the application’s filing and the solicitation of competitive applications (with a 90-day limit). There is no need to reveal the identity of the applicant or the proposed terms.

The variables in the Petroleum Agreement should be the following: area; work program; rental payments; relinquishing terms; fiscal terms; and training commitment. The Exploration Phase should include the following: Period 1 (years 1-3), funding for seismic (US$15 million); Period 2 (years 4-6), funding for at least one well (US$25 million); and Period 3 (years 7-9), again funding for at least one well. As for the recommended minimum acceptable applicant qualifications, these include technical and professional capacity, as well as financial ability.

The weighting criteria for competitive bids are as follows:

· Work program: geological prognosis, 10%; Period 1 commitment, 40%; and Period 2 proposal, 10%.

· Fiscal considerations: Tier 2 PAPT and any other items, 10%.

· Applicant qualifications: technical, 15%; financial, 15%.

Conclusion

Seychelles may be a frontier area, but much data is available, and interesting leads have been mapped. The data confirms that a working petroleum system exists, with all the necessary ingredients - source, reservoir, seals and structures - to make the area an oil and gas province. The government has recognized the importance that the discovery of petroleum would have for its objectives, and it has put in place the required legal framework to facilitate exploration and the eventual production within its marine boundaries. There are exciting opportunities for companies to bid in the Open File system, or to farm into existing licences. The Indian Ocean islands seem promising and Seychelles may well demonstrate that not all the action, so to speak, is to be found on the continent itself.

For more information, please contact:

Dr Luke Havemann

Oil and Gas ENSafrica

+27 11 302 3004

[email protected]