Monrovia – In this first part of three-part series on we look at what is currently happening in the Liberian oil basin one year on from the collapse of the National Oil Company of Liberia.

What is the status of the different oil contracts between Liberia and oil companies and what does the future hold for the country’s oil industry?

Liberia’s oil industry is at a crossroads: If no new production sharing contracts (PSCs) are signed and existing ones are not extended, there will be no oil company operating in the Liberian offshore oil basin by the end of the first half of 2018. That was the dire message conveyed by NOCAL officials during a recent series of outreach program in communities along the basin.

Status of the Liberian oil basin – courtesy of NOCAL

ExxonMobil with Canadian Oversea Petroleum Limited (COPL) and two other companies—African Petroleum and Chevron (Oranto)—make a total of just three companies operating in the basin operating four of the 30 existing oil blocks.

ExxonMobil (83%) with COPL (17%) has an eight-year production sharing contract (PSC) with Liberia for block 13, which expires April 5, 2018. Chevron (70%) alongside Oranto (30) has three separate blocks 11, 12 and 14. As well as their half-year extension periods, both blocks 11 and 12 have expired. Chevron with Oranto is now left with a solitary block 14 whose nine-year PSC with the government runs up to July 29, 2018.

Anadarko (47.5%), Repsol (27.5%) and Tullow (25%) have relinquished block 15. The PSC on that block expired on June 23 this year. Repsol (75%) and Tullow (25) had relinquished blocks 16 and 17 respectively as early as 2012 and 2013, the latter at the end of a 10-year PSC with Liberia. Anadarko (80%) again with Repsol (10%) and Mitsubishi (10%) relinquished block 10 for which it had a seven-year PSC that expired in 2015.

The current inactivity of the Liberian offshore oil basin is not unique to Liberia. Frontier oil countries like Liberia are suffering as the result of the ensuing global oil crisis. Experts say the price of oil is likely to remain low due to oversupply of countries such as Saudi Arabia and Iran and the increase of oil obtained from previously untappable sources in the U.S. with a new technology known as fracking.

The current prices are around US$50 per barrel, just over a third of the price of oil in 2008. Oil companies cannot afford to spend millions of dollars drilling in offshore wells with these prices. The number of rigs worldwide has dropped by 30 to 43 percent, according to a rig count compiled in March by Simons & Co. International, an energy investment group based in United States. Rig count has also plummeted by 43 percent in Africa and Latin America, it said.

NOCAL on the other hand has yet to recover from bankruptcy. Without new income from PSCs and without the sale of seismic data that has plummeted since the global oil crisis began it has no sources of income. A year ago after the company revealed it was in financial turmoil, President Ellen Johnson Sirleaf announced reforms saying it had been grossly mismanaged and oversized. Senior executives, the board of directors and more than two thirds of its workforce were laid off. An interim leadership, led by Cllr. Althea Sherman, has since been tasked with reviving NOCAL.

The history of the formation of the basin itself goes as far back as 600,000 years ago. According to geologists Africa and South America were once a large continent but drifted apart thousands of years ago, leaving the two continents with similar features, including fossils, the repository of hydrocarbon from which you get crude oil.

A reef that runs along the West Coast of Africa shares geological features with Brazil, which is a major oil-producing country. And this seems the case with discovery of oil in Ghana and off the shores of two of Liberia’s neighbors—Sierra Leone and Ivory Coast.

Drilling in the Liberian offshore oil basin began in the 1940s in shelf wells, which showed traces of hydrocarbon but insufficient for commercial value. Exploration activities intensified after NOCAL’s formation in 2000, with an acquisition of 2D survey before licensing rounds began in 2003.

By the interim government period in 2003, Liberia had already begun signing PSCs with international oil companies that would later be revised and ratified by the government of President Sirleaf which came into office in January 2006.

Some Liberian experts are convinced oil will eventually be found in commercial quantities in Liberia. They say it’s just a matter of time.

“When it comes to offshore activities, there are prospects for discovery offshore in Liberia,” said Urias Taylor, a petroleum engineer who was employed with NOCAL from 2011 to 2015. “Some of the wells drilled in the shelf area and down the deep water have shown the presence of a working hydrocarbon system but is the matter of having a big field and limited players.”

Taylor said that the nature of the Liberian oil basin demands extensive drilling activities in order to discovery an offshore reserve, something he said must inform future PSCs. Liberia’s geology is different from Brazil’s in ways that will make finding the oil more challenging.

Taylor explained that the small size of the rivers emptying in the Atlantic Ocean from Liberia stops the drainage of the fossil sediment. Oil is formed from hydrocarbon which comes from fossils—the remains of plants and animals—and are trapped in sedimentary rocks for many, many years beneath the ocean.

The giant Amazon River (the world’s largest river by volume) makes it easier and faster for fossil sediments to deposit, giving Brazil real potential for oil discovery. The Amazon River is 4,345 miles long. Cavalla, the largest of Liberia’s six major rivers, is just 320 miles long.

More drilling is the key, said Taylor. He points out that the large and productive Jubilee Oil Field in Ghana was discovered after more than 50 wells were drilled. So far in Liberia just 10 have been drilled.

The last serious attempt to bring a new player into the basin came in 2014 when American company Kosmos moved to negotiate a contract for blocks 6 and 7, two of four blocks for which NOCAL held a bid round. The two blocks were previously part of a 2007/08 bid round but were never contracted.

However, Kosmos did not seal the deal. It was derailed by controversies over the bidding process involving fellow American company Liberty Petroleum and Nigerian company A-Z. These problems were then compounded by the 2014 Ebola epidemic which plunged Liberia and the whole region into crisis raising public mistrust in government and making investors nervous.

The Kosmos deal was the industry’s last hope of bringing in a major player.

In a statement at the time NOCAL boasted that the $US3bn company, listed on the NYSE, had “a strong balance sheet with $1.9 billion, in liquidity,” and a history of strict adherence to health, safety and environmental standards.

It was already operating in Ghana. “We want our people to know that Kosmos is ready to invest in pre exploration and exploration activities regardless of the weak oil prices and the reduction of recent industry-wide exploration projects for offshore West Africa,” NOCAL said via its website on the deal.

Liberia’s basin potential remains but experts say the country will have to reform the sector by passing into law the New Petroleum Law of Liberia. (The failure of the bill to pass was a factor in the failure of the Kosmos deal.)

The bill, first drafted in 2013, has XX in the legislature ever since. WHY WON”T LEGISLATORS PASS IT?  The future of many blocks depends on the bill.  A moratorium was imposed in 2012 on blocks 1, 2, 3, 4, 5 and all 13 ultra-deep blocks from block 18 to block 30.

NOCAL considers Block 1 to block 5 as “hotspots” as they have never been drilled, given a PSC for nor placed in a bidding round, as in the case of blocks 6 and 7 sought by Kosmos.  NOCAL’s concedes there have been failures.

“One key lesson is to acknowledge the importance of providing an investor-friendly business environment as we have limited control over the decisions made by potential investors,” NOCAL interim president and chief executive officer Cllr. Sherman admittedly said of the failed Kosmos deal.

Corruption and mismanagement have long plagued the sector. In a 2011 report on Liberia’s oil sector, Global Witness accused NOCAL of corruption and mismanagement in the report “Cure or Curse: How Liberia can boost or break Liberia’s post-war recovery”.

The report said that the Liberian PSC model may not have been the best for Liberia, and that different production percentage shares at different levels make tax structure complicated, and accounting regime unnecessarily difficult. They also cited lax terms and condition in the PSCs.

For instance, in the PSC for block 15 with Anadarko, Repsol and Tullow, 30 percent profit oil for government up to 30,000 bpd that can move 55 percent when production exceeds 300,000.

However, in the initial PSC with Peppercoast for Block 13 (now held by ExxonMobil), there was a clause of a 45 percent state equity shares up to the levels of 500,000 bpd and a 60 percent share of production over 100,000 bpd. NOCAL argued on its website then that it had negotiated those contracts based on Liberia’s weak negotiation position.

Some of these flaws are being treated in the draft Petroleum (Exploration and Production) Act of 2013. For instance, the new law, a revised version of the Petroleum Law of 2002, which secures five percent citizens’ participation, 10 percent state equity share and calculates royalties as per total value of production of petroleum from the oil block, excluding used, re-injected or oil lost in production.

Structurally, the new law provides for a petroleum directorate, headed by a director general, spearheaded by a minister, that will regulate and oil sector as well as monitor it. NOCAL will only manage the state’s commercial interest and stake.

ExxonMobil’s PSC might give Liberia a better deal—US$50 million signature bonus, 10 percent state equity and royalty of between five percent and 10 percent—compared to previous contracts in terms of signature bonus; however, the deal still violated the existent law, even in its weak status. American watchdog Revenue Watch Institute highlighted the danger in poor countries breaching their own laws.

ExxonMobil is the most active of the three operators left in the Liberian oil basin (Chevron and African Petroleum the other two). Following discussions with President Sirleaf in November, ExxonMobil’s Country Manager for Liberia and Ivory Coast Steve Buck announced that the company would begin drilling the Montserrado-1 of block 13. ExxonMobil placed its operations on hold due to Ebola.

“I am very excited to see Exxon Mobil here,” she said in November 2015 after a meeting with Buck. She said Liberia was “on the move” to recovery from the disease.

Apart from the scheduled ExxonMobil drilling of block 13, the future for oil and gas in Liberia may still be bright.  African Petroleum, which announced in 2012 that it had discovery oil in its Narina-1 well in block 9, has not relinquished any of its two blocks (the other being block 8).

Narina-1, the first oil well to be drilled since AMOCO Corporation drilled a well in the basin 1989, who knows whether African Petroleum’s discovery will not lead to commercial quantity after in the nearby future when the well had the same geological features that proved productive in Ghana and Sierra Leone?

By James Harding Giahyue/This story was produced in collaboration with the Thomson Reuters Foundation/New Narratives Liberia Oil Reporting Project, which is part of the Foundation’s pan-African programme Wealth of Nations | More >>