Liberia's Oil Block Bid Round: Comments and Questions from NRGI and ACET

These comments come at a time of enormous challenge and tragedy in Liberia. The Ebola outbreak has resulted in a public health crisis and tremendous economic pressures for the country. We underscore our strong sympathy for the Liberian people during these difficult times and appreciate that in this context the Liberian Government must seek funds to address immediate needs. Our comments are not intended to detract in any way from the gravity of Liberia’s present situation or to undercut the governance priority of countering the current crisis. Our organizations’ involvement to date in Liberia’s petroleum sector reform has been driven by the aim of supporting responsible development of the sector in a way that maximizes benefits for the country. It is with this same goal and in the interest of facilitating stakeholder dialogue and information sharing even in these challenging times that we provide these comments.

Executive Summary*

Liberia recently announced it is conducting a competitive bid round for exploration and development of four offshore oil blocks (LB-6, LB-7, LB-16 and LB-17).[i] The structure of this new bid round incorporates commendable elements meant to ensure that it is conducted in a professional and transparent manner, including:

• a licensing process conducted through competitive bidding, rather than opaque direct negotiations as has often been the case in other countries

• a model production sharing contract (PSC) that attempts to mirror many provisions of the draft petroleum legislation currently before Liberia’s legislature

• a commitment to transparency in the licensing process and with regard to contracts that ultimately result.

Nevertheless, the context in which the bid round is occurring presents some fundamental risks. Most significantly, international experience has shown that proceeding with a bid round without a solid legislative framework in place (currently the situation in Liberia due to a stalled legal reform process) can produce suboptimal results, including inconsistency between contracts and law. While we are not in a position to question the decisions being made by the government of Liberia in the extraordinarily challenging context of the Ebola public health emergency and associated financial difficulties, we feel in our role as international analysts that it is important to note that deals signed in times of acute crisis traditionally tend to be sub-optimal or otherwise problematic in the long term. When short-term financial needs are extremely severe, government officials often lack the bandwidth to thoroughly analyze deals destined to last decades, and the attention of citizens and watchdog groups are diverted.

As the government proceeds with the bid round and the finalization of the model PSC, we raise the concerns and recommendations outlined below. Our analysis is based primarily on review of the Bid Invitation Letter, the model PSC, and the various documents regarding pre-qualification and local content released to date via the bid round website.[ii]

• Communication. Clearer communication is important around the government’s expectations for the bid round and the rationale for reversing the previously stated position that there would be no new bid rounds until the legislative reform is finalized.

• Liberian investor preference. The inclusion of a preference for bidder groups including an upstream petroleum company from the Economic Community of West African States (ECOWAS) in which Liberian investors have an interest may be targeting laudable goals, but it also poses important risks. This is particularly the case where Liberian investors are "carried" (i.e. not contributing capital). In order to strengthen the credibility of the process, it is imperative that the government include particularly strong pre-qualification criteria and heightened transparency measures (as outlined below). In addition, in order to ensure that the preference contributes to developing Liberia’s private petroleum sector and positive economic spillovers, we recommend that the government require in the PSC that the relevant Liberian entity hold the interest in the contract for a certain period of time after commercial discovery.

• Pre-qualification and associated transparency. The pre-qualification procedures as drafted could be improved by (i) specifying thresholds for financial and technical capacity, (ii) requiring bidders to demonstrate both technical and financial capacity at the time of award (as per the draft legislation[iii]), rather than one or the other, (iii) providing, as in the draft legislation, that pre-qualification information (e.g., beneficial ownership, technical/financial basis for qualification) will be made publicly available, (iv) specifying that the information to be publicly disclosed on beneficial ownership should set out the ultimate "natural person" owner, and (v) increasing the specific pre-qualification requirements for Liberian and ECOWAS investors. With respect to this last issue we recommend that the government require that Liberian investors not only be existing companies but also meet minimum requirements as to available capital, number of employees and experience and/or plans for the sector.

• Use of data fees. The government should clarify its policy regarding use of the data fees payable almost immediately upon signature of the PSCs ($34 million in aggregate for all blocks). While these payments will be made directly to TGS-NOPEC, a company contracted by the government to assist with data management and bid round administration, past experience suggests that it is likely that a significant percentage will be paid to the National Oil Company of Liberia (NOCAL). Given the country’s urgent fiscal needs and the plan under draft legislation to transfer payments of this type to the petroleum directorate (to be formed), we recommend that Liberia clarify that any data payments owed to the state be transferred to the Consolidated Fund.

• "Profit oil" tiers. The model PSC’s fiscal regime includes only two tiers for the split of "profit oil," with the top tier covering all investor rates of return above 15 percent. This does not provide the state with a higher share of the return in the event that a project proves particularly profitable (i.e., well above 15 percent). In the long term, this may artificially limit the benefits Liberia gains from highly profitable petroleum projects, and may imperil the long-term stability of the contracts.

The Natural Resource Governance Institute (NRGI) and the African Center for Economic Transformation (ACET) have been involved in various capacities in Liberia’s petroleum law reform since 2011, including supporting the government during the petroleum policy[iv] formation, providing public comments on draft legislation[v], and participating in public consultations on legislation in Monrovia earlier this year. It is with the same goal of supporting responsible development of Liberia’s oil sector and facilitating stakeholder dialogue and information sharing that we now provide these initial thoughts on the current bid round. As the process progresses and further information is made available, we may update or revise our comments as appropriate in light of new developments and feedback received.