SIERRA LEONE’S OIL

POTENTIAL

AND RELATED

GOVERNANCE ISSUES

AUGUST 2011

Report produced by the Association of Journalists on Mining and Extractives (AJME)

Editor-In-Chief: Theophilus S. Gbenda

Contact: C/O Network Movement for Justice and Development (NMJD)

29 Main Motor Road, Brookfields, Freetown

+232-76-982623 / +232-76-771749

Table of Content

Executive Summary........................................................................................................................................ i

1. Introduction............................................................................................................................................. 1

2. Background on the Sector and Exploration Activity...................................................... 1

3. Oil and Economic Opportunities for Sierra Leone........................................................... 2

4. Institutional and Governance Framework............................................................................ 3

4.1. Petroleum Fiscal Regime.......................................................................................................... 4

4.2. Policy Reform............................................................................................................................... 5

4.3. The Role of Civil Society........................................................................................................... 7

4.4. Donor Support.............................................................................................................................. 7

4.5. The Oil Sector and SLEITI........................................................................................................ 8

5. Opportunities.......................................................................................................................................... 9

6. Challenges.............................................................................................................................................. 10

7. Conclusions........................................................................................................................................... 12

References........................................................................................................................................................ 14

Appendix: Overview of Oil Concessions and Map................................................................... 15

Executive Summary

Current estimates are tenuous at best, extrapolating from the Jubilee find in Ghana some have hinted that the find may be as high as 250m boe. If these numbers were to be confirmed, this would still make Sierra Leone a comparatively small producer: Nigeria’s proved reserves stand at 37.2bn barrel and those of Equatorial Guinea at 1.7bn. Estimates for Ghana’s reserves still vary widely, but the country is thought to possess about 1bn barrels of oil.

Petroleum exploration and production will become a major contributor to domestic revenue mobilization and provide development financing opportunities that are likely much greater than those of the current mining sector. Given the lack of information on the amount of recoverable reserves, future oil prices, as well as companies’ capital and operating expenditures robust estimates regarding the potential tax revenues cannot be given, but a vague and conservative approximation suggests that revenues would amount to no less than 100 million USD per year.

The Petroleum Exploration and Production Act established a Petroleum Resources Unit (PRU), which serves as the regulatory authority for the sector. The PRU is part of the Office of the President. Its task is to monitor, regulate and facilitate oil and gas investments. It negotiates Petroleum Agreements with oil companies. Although the PRU has a rather technical brief, the Unit has significant decision-making/discretionary power.

In a regional perspective, the fiscal terms – i.e. tax and royalty rates, allowances and government participation – for the extraction of petroleum are relatively investor-friendly.

In 2009 the President established a task force, headed by the secretary to the President, Emmanuel Osho Coker, to develop a new petroleum policy for Sierra Leone and restructure the Petroleum Resources. As consultations lacked in depth, awareness of the policy appears to be very limited beyond those who were directly engaged. The draft policy reflects concerns regarding good governance and prudent economic management of oil revenues for current and future generations of Sierra Leoneans. Its success however, will largely depend on the commitment and capacity to translate the policy into action. It seeks an overhaul of the existing institutional framework governing the sector. The draft policy also makes some provisions for the reform of the fiscal system.

While the reform situation is still very fluid, there is a sense of urgency amongst some policy makers to put a new policy in place. However, not all stakeholders in the sector are adequately equipped to engage in the reform process and public discussion of Sierra Leone’s petroleum policy.

The Government is also planning to set up a National Oil Company. The degree of state participation sought and precise institutional set up have not been clarified yet. There needs to be a clear distinction between commercial and potential regulatory role of national oil companies. Furthermore, there is crucial potential of attracting international investors.

Currently CSOs engagement with oil has been minimal. This is due to a certain asymmetry of information which causes CSOs to shy away from more active involvement. Since the announcement of the find in September 2009, a number of donors and NGOs have been involved – to varying degrees – in the petroleum governance and policy reform: The Revenue Watch Institute, Accra-based Africa Centre for Economic Transformation (acet), Norad’s Oil for Development Programme as well as the International Senior Lawyers Project (ISLP), the World Bank, GTZ, the Commonwealth Secretariat and Norad.

With the prospect of becoming an oil producer in the medium term, the inclusion of revenue streams from petroleum production into reporting under Sierra Leone EITI will undoubtedly become an issue. At the moment discussions regarding the extension of SLEITI are reduced.

There is less evidence of the creation of significant employment opportunities in the sector, as rather than direct employment, the growth of the petroleum sector can provide opportunities in ancillary sectors such as transport, catering hotels etc.

One of the most prominent concerns of stakeholders is that Sierra Leone might fall victim to the so-called resource curse, commonly associated with slow growth and a deterioration of institutional quality. Sierra Leone’s institutional capacity is particularly weak: Sierra Leone ranks very low on governance indicators measuring government effectiveness, corruption and public sector management, although some progress has been made. Even though the draft petroleum policy calls for the application of environmental standards in line with international practice, this lack of capacity endangers their enforcement. It can be noted however, that offshore production of petroleum is less disruptive to communities than on-shore operation of the extractive industries. Low government capacity and high levels of patronage and corruption increase the likelihood of oil wealth not being put to development-oriented use. It will become a question of civic education as well as managing expectation while at the same time, it is just a matter of time before the issue of oil revenues will become politicised. Currently the SLPP opposition is limiting itself to low-profile attacks on the Government for its secrecy regarding negotiations, a situation that is likely to change in the run-up to the 2012 elections.

Dialogue with the GoSL and donor assistance should be focused on the following aspects:

a) Strengthen stakeholders in government, as well as the Parliament and CSOs and also enable working-level officials to implement and enforce the policy

b) Strengthen media organisations should be enabled to sensitise and educate a wider public on petroleum related issues.

c) Encourage the GoSL to reinforce a more participatory approach

d) Support the efforts to enshrine fiscal transparency through means of inclusion into the SLEITI.

e) Aid the GoSL to devise a private sector development strategy

1. Introduction

In September 2009 the US independent oil firm Anadarko announced the discovery of a hydrocarbon system off the Sierra Leonean coast. The company operates the Venus B-1 exploration well in its offshore block SL-6/07 on behalf of its partners Woodside (Australia), Repsol YPF (Spain) and Tullow (UK/Ireland). In the 3^rd and 4^th Quarters of 2010, Anadarko plans to drill additional wells in the Mercury and Jupiter Prospects in Blocks 6 and 7.[1] The Venus-B1 well is sited in 1,800m of water some 94km off shore. The company did not drill an appraisal well at the site, choosing to drill another exploration well, which has led some to argue that the first find may not be commercially viable.[2] Appraisal is not expected to be completed until 2011.

Current estimates are tenuous at best, extrapolating from the Jubilee find in Ghana some have hinted that the find may be as high as 250m boe (Tullow stated a gross upside potential of 500 million barrels of oil equivalent)[3], with more potential as exploration intensifies. If these numbers were to be confirmed, this would still make Sierra Leone a comparatively small producer: Nigeria’s proved reserves stand at 37.2bn barrel and those of Equatorial Guinea at 1.7bn. Estimates for Ghana’s reserves still vary widely, but the country is thought to possess about 1bn barrels of oil. The find is thus much more comparable with Côte d’Ivoire’s relatively modest 100m bbl of proved reserves.[4] The find has increased the prospectivity of the entire sub-region from Ghana to Guinea.

Before the completion of appraisal concrete estimates of the oil sectors impact on the Sierra Leonean Economy cannot be given, however, assuming that commercially exploitable quantities of oil are present and oil production will commence in the medium term, the consequences and opportunities for Sierra Leone will be enormous.

2. Background on the Sector and Exploration Activity

Oil exploration off the Sierra Leonean coast had already been carried out in the early 1980s. After Mobil and Amoco had abandoned their wells in 1982 and 1984 respectively, exploration in Sierra Leone’s waters was only restarted with the collection of seismic data in 2000/01 by TGS-NOPEC. The prospective area was originally divided into 7 Blocks which were subsequently awarded in two bid rounds.

Attracting reliable investors has not been without problems. Licenses of blocks 1 through 4 have re-allocated multiple times as investors with limited commitment, expertise or financial means have failed to comply with the work programmes set out in the petroleum agreements.

The first bid round was opened in April 2002 and closed in May 2003. The US-based real estate firm #8 Investments was awarded block 4, the Nigerian firm Oranto Block 5 and the Spanish major Repsol YPF blocks 6 and 7. Petroleum agreements with 7-year exploration programmes were signed in August 2003. In February 2008, #8 Investments formed Prontinal and farmed 15% of the acreage in block 4 to Australian-based Elixir which also became operator of the Block. Following disputes with its joint venture partner Prontinal about non-payment of fees for seismic data, Elixir sold its interest back to Prontinal, which is now the sole operator of block four. The company has since relinquished 50% of its acreage in the block.

The Second Bid Round for the remaining blocks 1-3 opened in October 2004 and closed in May 2005. These blocks are outside the Sierra Leone Liberia Basin and proved harder to sell. Block SL-3 was awarded to Frazimex of Nigeria in October 2005 but was terminated in 2009 by the PRU for failure of the company to comply with the work programme and has been awarded to European Hydrocarbons. In 2006 Block SL-1 was awarded to Oil Field resources - a subsidiary of British Virgin Islands-registered Nigerian independent Amber Petroleum. This was later relinquished and in 2008, Luxemburg-based Young Energy Prize was granted concessions for blocks 1 and 2. In addition three new blocks – SL-8, SL-9, SL-10, - have been designated. Currently, these are open but preparation of a licensing round and data collection are under way.

The boundaries of blocks 5 and 6 have been redrawn, which has led to a dispute between the operators of what are now blocks 5/07 and 6/07, Oranto and Anadarko and the Government of Sierra Leone. The GoSL had re-allocated about 10% of Oranto’s block 5, which originally contained about 80% of the Venus Structure, to Anadarko, upon which Oranto launched arbitration proceedings. Oranto itself had in the past narrowly avoided the termination of its license due to failure to comply with the training requirements stipulated in the work programme for block 5. Regardless of the legality, such disputes may harm Sierra Leone’s reputation as a reliable partner for investment.

3. Oil and Economic Opportunities for Sierra Leone

Petroleum exploration and production will become a major contributor to domestic revenue mobilization and provide development financing opportunities that are likely much greater than those of the current mining sector. Without knowledge of the size of the find and estimates of exploration and operating costs it cannot be known just how much the sector would contribute to the Sierra Leonean Economy. Currently, the only revenue accruing to the government are those from companies’ training obligations and surface rentals. These contribute to the financing of the operations of the Petroleum Resources Unit. In 2006, training funds and surface rentals have amounted to approximately 800,000 and 1.1m USD respectively. With the creation of new blocks the progression of exploration revenues from surface rental are likely to increase. Although these figures may seem modest – they are significant if compared to the GoSL’s revenues from mining royalties and licenses (approx 5m USD). Given the uncertainty regarding revenue forecasts and figures detailing the economic impact of the petroleum sector, it is worthwhile to put the sector in the context of the current state of the Sierra Leonean economy.

Currently, the Sierra Leonean economy is dominated by agriculture and the mining sector. Principal exports are Diamonds, Rutile and Bauxite, which make up 53% of export revenues and 8 per cent of GDP. Despite the importance of the mining sector for the Sierra Leonean economy, government revenues from the sector are low: In 2008, total tax revenues stood at 11.4% of GDP[5] or USD 230m, which is very low by international and even sub-regional comparison. The World Bank[6] puts the government revenues of the sector from royalties, taxes fees and rents at approximately USD 10.5m per year – this low figure is in part due to the informal character of alluvial diamond mining. Sierra Leone is highly dependent on external aid, approximately 42% of which in the form of budget support.[7] Although the mining sector forms a significant part of the Sierra Leonean Economy, this does not translate into Government revenues. In 2009, revenues from royalties and licenses were 20.12bn Leones, approximately 5m USD. It is estimated that as the sector will become more profitable in the next 5-10 years, increasing government revenue to about USD 500m mineral exports could rise to up to USD 1.2bn per year. In 2008, export revenues from diamonds, rutile and bauxite stood at 163.6m USD.[8]

If Sierra Leone is to produce oil, the revenues accruing to the government will likely dwarf those of the mining sector as of this year. Given the lack of information on the amount of recoverable reserves, future oil prices, as well as companies’ capital and operating expenditures robust estimates regarding the potential tax revenues cannot be given, but a vague and conservative approximation suggests that revenues would amount to no less than 100 million USD per year.[9]

In contrast to diamond mining, revenues from petroleum production are more easily appropriable by the state. The relative ease of capture implies that – in contrast to alluvial diamond mining - the oil industry will be largely part of the formal economy. This however, does not mean that an oil bonanza does not attract rent- or patronage-seekers. Even if commerciality is declared, it is not expected that oil revenues begin to flow in the short term – the earliest dates given estimate production to come on stream sometime after 2015.

4. Institutional and Governance Framework

The current legislative framework is set by the Petroleum Exploration and Production Act of 2001. Beyond that, the Income Tax Act of 2000 and subsequent amendments govern taxation in the sector. Individual contracts with oil companies are based on a Model Petroleum Agreement, which in turn is based on the Petroleum Act. Since Sierra Leone had no proven oil reserves at the time, the Model Agreement sought to provide incentives for investment, for instance by avoiding provisions for signature bonuses.

The Petroleum Exploration and Production Act established a Petroleum Resources Unit (PRU), which serves as the regulatory authority for the sector. The PRU is part of the Office of the President. Its task is to monitor, regulate and facilitate oil and gas investments. It negotiates Petroleum Agreements with oil companies.[10] It became operational in January 2004. The Unit assists the assessment and negotiating committees as Technical Advisor. Although the PRU has a rather technical brief, the Unit has significant decision-making/discretionary power. On the other hand it has been criticised by opposition parties and from within Government (i.e. Ministry of Finance) for not being autonomous from the president’s office, which ultimately leads to a concentration of decision-making power.[11]

Assessment and negotiations of bids submitted during the licensing rounds appear to have been rather broad-based. Assessment was done by a Bid Assessment Committee consisting of the Vice President, the Minister for Mineral Resources, the CSOs Sierra Leone Association of Journalists and the 50:50 Women’s Group, as well as Parliament, the University and Fuel Distribution Agencies. Likewise, negotiations were undertaken by a committee chaired by the Vice President, consisting of the Attorney General, the Minister of Finance, Ministry of Mineral Resources, the Commissioner General of the NRA, Parliament and the University.[12] Formally, this is a rather inclusive approach to licensing, but given limited expertise amongst stakeholders other than the PRU, the main locus of negotiations is still the PRU and the President’s Office. Once other stakeholders gain more know-how regarding the sector, the representation of multiple interests in bid rounds will surely contribute to transparent and open licensing practices.

4.1. Petroleum Fiscal Regime

In a regional perspective, the fiscal terms – i.e. tax and royalty rates, allowances and government participation - for the extraction of petroleum are relatively investor-friendly. Sierra Leone operates a tax/royalty system. The fiscal terms and companies’ minimum work programmes are determined in individual petroleum agreements, guidelines for which are set in a model petroleum agreement.

The Petroleum Exploration and Production Act of 2001 provides for the payment of royalties unless otherwise agreed in the Petroleum Agreement. The Model Petroleum Agreement states that royalties have to be delivered in kind, but upon request of the state it may also be received in cash. In practice, royalty rates are defined in the petroleum agreement, vary across the different licenses and are levied ad valorem based on the market price. The Model Petroleum Agreement provides for a rate of 8% in deepwater of more that 200m and 10% in shallow water of up to 200m.[13]

Income tax regulations are set out in the Income Tax Act of 2000, although there may be different rates set in the petroleum agreement. A rate of 30% applies to resident companies and contractors, non-resident companies are liable to pay a rate of 25%.[14] There are a number of capital allowances for mining set out in the income tax act, which also apply to the petroleum sector. The depletion, depreciation and amortization rate in the first year of expenditure is 40% and 20% in the three subsequent years. Exploration costs are fully deductible and losses may be carried forward indefinitely. As yet there are no provisions for state participation in the form of carried/free interest. The agreements also require companies to pay for training Sierra Leoneans in Petroleum Sector, at a rate of USD 125,000 per year. Surface rentals are defined in the model agreement and stand at USD 30 per km² during the initial period of production, USD 50 during the firstextension, USD 75 during the second and USD 100 during the production period. Currently these, as well as revenue from application fee, sale of data and the training fund make up the only petroleum sector related revenue stream – in 2006 the PRU collected just over 800,000 USD in surface rentals. The GoSL recently introduced a Goods and Services Tax, from which petroleum and mineral exports are exempt. Imports on inputs used in petroleum exploration is exempt from excise duties.

According to the PRU, stability agreements are in place which protect companies from future changes in tax legislation. Such agreements are not uncommon and are often deemed necessary to attract investors to a frontier country such as Sierra Leone. Still, the Petroleum Exploration and Production Act provides for a revision of the Petroleum Agreement’s terms in significantly changed circumstances. The Deputy Minister of Finance, appears to be in favour of contract renegotiation in the context of the formulation of a new petroleum policy for Sierra Leone.

Sierra Leone has adopted an Environmental Protection Agency Act in 2008. The effectiveness of Environmental regulation is questionable as enforcement capacity is limited. While application for environmental impact assessments are necessary for the extractive sector, UNCTAD notes that in practice, these assessments are rarely undertaken.[15] Under the current legal framework, the polluters would be liable for all the damages caused. The Sierra Leone Environmental Protection Agency can oblige firms to take out insurance or give other financial guarantees to cover the costs associated with the clean-up of environmental damage caused by operations. The Act does not specify any industry-specific regulations.

4.2. Policy Reform

In 2009 the President established a task force, headed by the secretary to the President, Emmanuel Osho Coker, to develop a new petroleum policy for Sierra Leone and restructure the Petroleum Resources Unit. Authorship of the policy lies with the Strategy and Policy Unit at the Office of the President. The policy was developed fairly quickly, in the first two quarters of 2010. Consultations of the policy have been taking place, and a number of civil society organizations were able to give their inputs. Although consultations were broad, they lacked in depth – the draft policy was presented and discussed in May 2010 during a one-day workshop. Awareness of the policy appears to be very limited beyond those who were directly engaged in the consultations and information-sharing between and within MDAs and CSOs is limited.

The draft policy reflects concerns regarding good governance and prudent economic management of oil revenues for current and future generations of Sierra Leoneans. It addresses a wide array of petroleum related issues, ranging from licensing to the fiscal regime and environmental policy. Interviewed stakeholders generally viewed it to be in line with international good practice. The draft policy also calls for increased openness, accountability and stakeholder participation. Despite its vagueness, the draft policy is an important step towards bringing the principles of good governance in natural resource management on the reform agenda. Its success however, will largely depend on the commitment and capacity to translate the policy into action. Importantly, and despite limited capacities for implementation, the mere fact that a policy document exists and puts issues of good governance in the petroleum sector on the agenda and puts policy-makers under pressure to deliver.

The policy provides for a reform of the Petroleum Exploration and Production Act of 2001.[16] It seeks an overhaul of the existing institutional framework governing the sector. While the office of the president will remain the locus for policy making, a new board of directors is to be given a supervisory role of the Petroleum Resource Unit. The latter is to be restructured.

The draft policy also makes some provisions for the reform of the fiscal system. These include the enshrinement of fiscal transparency and – where possible - the setting of tax and royalty rates in law rather than in individual petroleum agreements. A progressive form of income tax is also suggested, but specific proposals for the adoption of a so-called Resource Rent Tax have been deleted from the policy document.[17] Next to the reform of the Petroleum Exploration and Production Act the Income Tax Act is to be reviewed. There are plans to earmark revenues from petroleum production specifically for development purposes.

To address revenue volatility, the policy provides for the establishment of a Petroleum Fund and a fiscal rule. Although there are limited capacities to manage such a fund it could not only help budgeting and sterilize exchange rate risk, depending on its design and aims it would also allow future generations to benefit from the country’s mineral wealth. A Natural resources fund would also address issues of limited absorptive capacity in the country.

The fiscal regime shall be consistent with the principles of EITI and revenues from the sector are to be published under EITI. Equally, individual petroleum agreements are to be published – unless legitimate business interests would preclude publication.

The Government is also planning to set up a National Oil Company. The degree of state participation sought and precise institutional set up have not been clarified yet. This commercial entity would engage with foreign oil companies, enter into joint ventures with them and ultimately move expand operations beyond Sierra Leone.[18] The establishment of a national oil company does pose some problems. Often the creation of national resource companies in the upstream sector follows a desire to retain at least some semblance of ownership in the sector. While this is understandable, it is unlikely that a Sierra Leonean oil company will become a significant international player. Experience elsewhere has shown that the establishment of such companies often attracts rent- and patronage seekers. There also needs to be a clear distinction between commercial and potential regulatory role of national oil companies.[19]

According to one source, there is a sense amongst reform-minded individuals in the Sierra Leonean administration that in order to avoid the resource curse a new policy and governance framework has to be put in place quickly. There is a danger that such pressure and the resulting speedy reforms may come at the expense of thorough and potentially time-consuming consultations. Yet it is critical to get things right. While it is certainly desirable to decide on and implement reforms soon, oil revenues are not likely to flow before 2015, which is ample time for comprehensive consultations to put an adequate institutional framework to govern the sector in place.

4.3. The Role of Civil Society

As the issue of petroleum revenue management has only sprung up recently, civil society organizations have not yet concentrated on the issue. Whereas the previous exploration activities and agreements of the 1980s were shrouded in secrecy, the development of the new draft policy following the September 2009 find has seen a greater degree of transparency and consultation.

Currently CSOs focus mining sector-related issues, and engagement with oil has been minimal. Representatives from Network Movement for Justice and Development (NMJD) describe CSOs role as “semi-active.” This is due to the recentness of the phenomenon and the associated high degree of uncertainty. Also, the petroleum sector and oil revenues it is only perceived to become an issue in the medium term. Still, there is awareness that the formulation of a sector policy before production starts and further exploration is undertaken is critical. Civil society activity is also a function of capacity. Currently the National Advocacy Coalition on Extractives (NACE) are not actively engaging in discussion on petroleum sector governance for fear that their limited knowledge on the sector does not allow them to give any meaningful input. Information asymmetry causes CSOs to shy away from more active involvement in policy reform for fear to commit to policies they might not fully understand. Civil society are waiting to build up their capacities before engaging in discussion with GoSL – although there may be a danger that the lack of Civil Society pressure will result in non-engaged stakeholder to be presented with a fait accompli. To some extent, this might be exaggerated as the roles and competencies of some individuals overlap – e.g members of NACE (Mustapha Thomas) have indeed been actively involved in consultations on the new petroleum policy. Despite this engagement there is a considerable capacity gap in CSOs which hinders them to fulfil their roll to monitor the developments in oil sector effectively and educate the wider public.

As for the new draft petroleum policy, CSOs appear to be satisfied with the level of government consultation and maintain that significant inputs were made at the stakeholder consultation meeting. On the other hand some representatives from Civil Society are worried that the GoSL is unwilling to engage in meaningful dialogue on the reform of Sierra Leone’s petroleum policy while others feel that consultations have been fruitful and allowed for significant input from CSOs. The head of NMJD was invited to attend the task force meeting and CSOs were able to press for the circulation of the draft policy. However, there has not been a broad-based discourse on the draft policy between CSOs or the wider public. A major criticism voiced was the absence of downstream issues in the policy, including Sierra Leone’s energy policy and opportunities for industrial development in the form of further processing of petroleum and the development of ancillary sectors.

4.4. Donor Support

Since the announcement of the find in September 2009, a number of donors and NGOs have been involved – to varying degrees – in the petroleum governance and policy reform. Donors were quick to get involved in the sector: The Revenue Watch Institute, Accra-based Africa Centre for Economic Transformation (acet), Norad’s Oil for Development Programme as well as the International Senior Lawyers Project (ISLP) visited Sierra Leone twice (11^thto 16^th October, 2009 and 29^th November to 4^th December 2009) and have since been supporting the Sierra-Leonean Government in the revision of the legal framework and the design of the draft petroleum policy. Under the umbrella of the ISLP law firm Baker and McKenzie advised the government on petroleum exploration and area relinquishment matters. Norad, acet and RWI have set up a competence centre for petroleum and run support to the GoSL as a pilot project for the centre. The Revenue Watch Institute – like other donors - is currently focused on mining, but seek provide petroleum-related capacity building for parliament and CSOs in the near future. German Development Cooperation, GTZ resource governance, has advised on including the oil sector into EITI and meeting of transparency standards. The World Bank has been consulted on the newly developed draft policy. In addition, the Commonwealth Secretariat is providing assistance in the drafting of a new petroleum law. Norad is also assisting the GoSL the management of existing licenses, and preparations for an open bidding round for new licenses.[20]

4.5. The Oil Sector and SLEITI

Sierra Leone is a member of the Extractive Industries Transparency Initiative (EITI). EITI implementing countries establish a multi-stakeholder process in which representatives from government, civil society and extractive companies come together and seek to make transparent company payments and government revenues in the oil, gas and mining industries. Currently, the Sierra Leonean EITI process (SLEITI) is limited to revenue streams from the mining sector.

With the prospect of becoming an oil producer in the medium term, the inclusion of revenue streams form petroleum production into reporting under Sierra Leone EITI will undoubtedly become an issue. While the draft policy recognizes the need to apply the EITI principles to the petroleum sector, few discussions have been taken place on concrete implementation challenges.

At the moment discussions regarding the extension of SLEITI are reduced. Currently, SLEITI is in the process of restructuring as the role of EITI Champion has moved from the Minister of Presidential and Public Affairs to the Chief of Staff in Office of the President. EITI Stakeholders in the Ministry for Presidential and Public Affairs (PS Tekman Kanu) as well as Civil Society (NACE and NMJD) had voiced the commitment of the EITI Multi-Stakeholder Group to include revenues and payment from oil production in the reporting process. However, currently, Sierra Leone has not yet been validated as EITI compliant. After the country had missed the original deadline in March 2009 an extension until September 2010 was granted. At present, most of the Multi-Stakeholder Group and Secretariat’s energy is therefore concentrated on achieving validation. Once the country has been validated, capacities to address the issues of extension will be freed up. Regardless, the SLEITI stakeholders are faced with a number of challenges. Most prominently, these include the widening of the stakeholder group, capacities regarding the petroleum sector as well as technical issues pertaining to reporting such as materiality (i.e. the threshold for coverage of a revenue stream under EITI) or the design of templates.

Although discussions have been limited so far, a strategic approach emerges to include all oil-related revenue streams in EITI reporting. This however may limit manageability of Sierra Leone’s EITI process. Covering not only oil production but also revenue streams occurring during the licensing and exploration phases is costly and stakeholders need to weigh the costs and benefits of extending EITI reporting to those revenue streams.

The widening of the stakeholder group – and the potential necessity to create distinct oil and mining subcommittees – are likely to complicate EITI decision-making. Possible additional stakeholders are firms active in exploration and production of petroleum, representatives from the Petroleum Resources Unit and possibly additional members from the negotiating/bid committees. Extending SLEITI’s multi-stakeholder may equally pose coordination problems. This relates both to more issues being covered and the fact that more members – with different interests and focus of work – will need to be accommodated. However, in Liberia the expansion of the multi-stakeholder group to other sectors has added quality to the overall process.

5. Opportunities

For an economy like that of Sierra Leone, the prospect revenues from oil production provide a significant opportunity to finance development. The commerciality of the deposit depends on many factors including the size of the find, the extraction and capital costs and the oil price. Currently the only certain revenue flows are those from surface rental and training obligations under the petroleum agreement, which in the past have amounted to approximately 800,000 and 1.1m USD respectively. As the sector will not generate any government revenues in the short term, the Government has not made and concrete projections of revenues or formulated detailed priorities on expenditure. Still, oil revenues could relieve funding pressure in key sectors such as energy and transport infrastructure, health and education as formulated in the GoSL’s PRSP-II/Agenda for Change. Currently the lack of supply of electricity and the inadequacy of the transmission network, roads and telecommunications is a major impediment to the development Sierra Leone. Most electricity production is fuelled by petroleum, all of which is currently imported. Future domestic production of petroleum would do away with the dependence on imports. Social investment is also inadequate – investment is needed in education and health infrastructure. Improved domestic revenue mobilisation will also lower the dependence on donor support, which in the past has been proven to be unreliable.[21]

There is less evidence of the creation of significant employment opportunities in the sector and much of the population is likely to remain dependent on agriculture and mining. While World Bank estimates put employment in the mining sector to up to 300,000 persons directly employed[22], the nascent petroleum sector will certainly not match these figures – even Nigeria’s much larger oil sector provides employment only for approximately 55,000 Nigerians.[23] Available estimates for the much more comparable (but still larger) oil producers of Ghana or Trinidad and Tobago put employment in their respective sectors at about 3,000–4,000 persons. The failure of resource wealth to generate sustained economic growth has often – at least partly - been attributed to the enclave character of the sector, i.e. the absence of linkages with the local economy. The extraction of natural resources creates relatively little employment, inputs are often imported, whereas the raw materials are often processed elsewhere. Also, the profits generated by foreign firms from the extraction of resources are often repatriated rather than reinvested in the local economy. Withholding taxes and mandatory “local content” legislation may partly remedy this situation.

The current petroleum legislation mandates employment of Sierra Leonean nationals as far as possible, but given the absence of skilled labour in the sector this does not translate into jobs for Sierra Leoneans. Currently the work programmes mandate that companies provide for the training of Sierra Leonean nationals and training of statisticians and geologists has been under way. There are, however, challenges regarding the retention of qualified personnel. The issue of local capacity is also addressed in the draft policy. The GoSL aims to create networks between universities, industry and business associations and ensure that companies contribute to skills development for Sierra Leoneans.

Current legislation as well as the draft policy encourage local content, i.e. where possible, companies have to make use of locally sourced inputs. So far, local content has been limited – there are reports that Anadarko has procured goods and services in Senegal rather than Sierra Leone.[24] Rather than direct employment, the growth of the petroleum sector can provide opportunities in ancillary sectors such as transport, catering, hotels etc. Growth in the sector would provide a window of opportunity for private sector development. There have already been successes regarding the removal of administrative barriers and provide access to finance – but the creation of linkages with the petroleum sector and access to oil companies’ value chains would be critical. Private sector development is also critical to help diversify the economy which would otherwise become nearly completely dependent on the extraction and export of natural resources.

6. Challenges

One of the most prominent concerns of stakeholders is that Sierra Leone might fall victim to the resource curse, commonly associated with slow growth and a deterioration of institutional quality. Natural resource abundance is associated with higher levels of corruption and the deterioration of institutions as oil revenues increase incentives for rent-seeking.[25] While there is no deterministic relationship between natural resource wealth and the resource curse – as examples such as Botswana, Norway and Australia show – many countries with newly found resource wealth have a weak institutional and governance framework that inhibits them to address adequately the potentially negative effects of natural resource wealth. Commonly, the following issues need to be addressed: The establishment of a fair and transparent licensing mechanism and fiscal regime, the creation of institutions that can effectively monitor and regulate the sector, the design of sound expenditure policy, macroeconomic policy to avoid deindustrialization and exchange-rate appreciation - i.e. the Dutch disease.[26]

The literature on the role of natural resources and development suggests that ultimately the extent to which natural resources harm or foster growth and governance depends on the initial institutional capacities. Dependence on natural resource exports commonly associated with low levels of economic growth, corruption and rent-seeking, a weakening of state structures and even conflict. Compared to other new petroleum producers, Sierra Leone’s institutional capacity is particularly weak: Sierra Leone ranks very low on governance indicators measuring government effectiveness, corruption and public sector management[27], although some progress has been made.[28] Low government capacity and high levels of patronage and corruption increase the likelihood of oil wealth not being put to development-oriented use. The World Bank notes that the government has begun public financial management reform, but the process has been undermined by low levels of transparency, limited budget credibility and predictability.[29] Management of oil revenues will pose considerable additional burden on public institutions. Those institutions that could provide oversight such as Parliament and the Anti-Corruption Commission lack human and financial resources. Patronages, clientelism, are persistent and threaten good management of Resources. This situation is exacerbated by the fact that decision-making is concentrated in a small group of people and an effective system of checks and balances is lacking.

Stakeholders across the board are concerned about too high expectations about oil revenues, and the draft policy refers to high expectations and the anxiety of the resource curse. Given that to date little is known in the public about petroleum revenues and – according to CSO representatives – there is no debate, there are currently no expectations to speak of, although this situation might change once concrete figures become public. Hence there is a danger that once commerciality is announced, public demands for expenditure will rise. This may tempt policy makers to engage in unsustainable spending programmes or borrow against future oil revenues.

Although public discourse about oil revenue management and the developmental potential of Sierra Leone’s petroleum sector is limited it is just a matter of time before the issue of oil revenues will become politicised. Currently the SLPP opposition is limiting itself to low-profile attacks on the Government for its secrecy regarding negotiations, a situation that is likely to change in the run-up to the 2012 selections. Despite the fact that petroleum extraction is located off shore, production of oil is likely to affect the social fabric of the producing region, the Bonthe district. While there have been no calls for sub-national revenue sharing agreements to date future calls for fiscal compensation by those who bear the social and environmental brunt operations cannot be ruled out.

Offshore production of petroleum is less disruptive to communities than on-shore operation of the extractive industries. Still, care has to be taken that oil production is not disruptive to local communities, e.g. by impeding access to fishing grounds. Oil spills could lead to a severe destruction of livelihoods. Although the draft petroleum policy calls for the application of environmental standards that are in line with international practice, Sierra Leone’s authorities currently lack the capacity to enforce such standards. Rather than relying on corporate self-regulation, the adoption of stricter environmental regulations and monitoring practices and enforcement mechanisms on the part of Sierra Leone can help levelling the playing field for investors and make the country a more attractive destination for investors.

7. Conclusions

The prospective oil revenues provide substantial opportunities for the development of Sierra Leone and will significantly alter the country’s economy. The discovery is, however, not without danger as Sierra Leone does not yet dispose of adequate institutions to manage its oil wealth. While the reform situation is still very fluid, there is a sense of urgency amongst some policy makers to put a new policy in place. However, not all stakeholders in the sector are adequately equipped to engage in the reform process and public discussion of Sierra Leone’s petroleum policy – a key ingredient of effective accountability mechanisms – has been minimal. Although this is cause for some concern, the fact that oil revenues will not start flowing any time soon means that there is ample time for thorough consultations on reforms. The Government of Sierra Leone is aware of the problems associated with natural resource wealth and has launched a policy reform process and approached the international community to assist in the design of a new petroleum policy for the country. The drafting of a policy is an important achievement in itself but capacity constraints are the key challenge to implementing the new petroleum policy.

Given that decision-making power in the petroleum sector are rather concentrated it is important to establish a system of checks and balances and equip the Sierra-Leonean institutions with the capacities to manage the sector and ultimately remove the bias of the framework and decision-making from the executive by including other institutions. In the context of the challenging institutional environment, there is a high demand for external assistance to develop capacities both in the administration and civil society. Training efforts currently undertaken by the GoSL and Petroleum companies are technical and the issue of oil revenues has not yet gained salience in other MDAs. Complementary capacity building measures are necessary to enable a larger part of stakeholders to engage in policy reform.

Sensitisation and hence public awareness about the oil find are limited and largely the domain of CSOs. Limited knowledge about the state of affairs in the petroleum sector could create distrust amongst the population and also lead to spending pressure. The adoption of a more open stance regarding the sector could remedy this situation.

The petroleum sector itself will most likely not mitigate one of the most pressing problems of the country, namely (youth) unemployment. Next to the establishment of an appropriate institutional framework to manage the sector, a key priority should be on private sector development both to create linkages between the oil sector and the rest of Sierra Leone’s economy in order to diversify the economy and relieve the dependence on natural resource exports.

Against this background, dialogue with the GoSL and donor assistance should be focused on the following aspects:

a) Strengthen stakeholders in government – the Ministry of Finance and Economic Development, the Revenue Authority, the Environmental Protection Agency – in their capacities to shape Sierra Leone’s petroleum policy. Assistance should aim to strengthen these actors not only in their capacity to formulate policy but should also enable working-level officials to implement and enforce the policy.

b) Strengthen - also vis-à-vis the executive - the role of other stakeholders, including Parliament and CSOs. Given the necessity foster a broader dialogue on petroleum, media organisations should be enabled to sensitise a wider public on petroleum related issues.

c) Encourage the GoSL to reinforce the multi-stakeholder nature of current discussion and decision-making on policy reform and emphasise the need for thorough consultations rather than a speedy reform process.

d) Support the efforts to enshrine fiscal transparency in the management of petroleum resources. Specifically, engage with stakeholders in the SLEITI to develop a road map for the extension of Sierra Leone’s EITI process to petroleum-related revenues.

e) Aid the GoSL to devise a private sector development strategy and – in concert with petroleum companies – provide opportunities for Sierra Leonean entrepreneurs to access value chains in the sector.

References

“Scramble for last licenses”, Africa Energy Intelligence, 17. March, 2010

BP Statistical Review of World Energy, 2010

“How Sierra Leone Performed in 2009 - Failed Economy or a Slow Gradual Process of Growth?”, Concord Times, January 9, 2010.

Economist Intelligence Unit, Country Report Sierra Leone, June 2010

GoSL, Petroleum Resources Unit, Annual Report 2006

GoSL, Petroleum Resources Unit, Annual Report 2005/2006

GoSL, Strategic Policy Unit, Petroleum Policy for Sierra Leone, June 2010

IMF, “Sierra Leone: Fifth Review Under the Arrangement Under the Poverty Reduction and Growth Facility”, IMF Country Report 10/15, 2010

Kaufmann, Danny, Kraay, Aart and Mastruzzi, Massimo, “Governance Matters VIII: Aggregate and Individual Governance Indicators, 1996-2008”, World Bank Policy Research Working Paper 4978, World Bank, Washington, D.C, 2009

Leite, Carlos and Weidmann, Jens, “Does Mother Nature Corrupt? Natural Resources, Corruption and Economic Growth”, IMF Working Paper WP/99/85, 1999

Oil landscape set to change in Freetown”, Upstream, 29. Feb 2010

McPherson, Charles, “National Oil Companies. Evolution, Issues, Outlook”, in: Davies, Jeffrey, Ossowski, Rolando and Fedelino, Annalisa (eds.), Fiscal Policy Formulation and Implementation in Oil Producing Countries”, International Monetary Fund, Washington, D.C, 2003

Norad, “Oil for Development Annual Report 2009”

“Oil, gas reserves rise as oil output declines”, Oil and Gas Journal, 21. December, 2009

PEFA, “Republic of Sierra Leone: PFM Performance Assessment Report Final Draft 18 June 2007”

Ross, Michael, Does Oil Hinder Democracy? World Politics, , 53, 2001, pp. 325-361

Ross, Michael, The Political Economy of the Resource Curse, World Politics, 51, 1999, pp. 297-322

Strategic Partnership with Africa (SPA) 'Strategic Partnership with Africa: Survey of Budget Support, 2008

United Nations Conference on Trade and Development, “Investment Policy Review Sierra Leone”, United Nations, New York and Geneva, 2010.

UNDP, Sierra Leone as Seen Through International Economic and Social Indicators, UNDP Freetown, 2009

“Anadarko targets Liberia and Sierra Leone for drilling”, Upstream, 9. July 2010

“Anadarko, Repsol, Tullow in Sierra Leone oil find“, Reuters, 16. September 2010

“Controversy as acreage tracts are redrawn but government keeps its eye on the main prize” Upstream, 19. February 2010

World Bank, “Project Appraisal Document – Mining Technical Assistance Project”, Report No. 43233-SL, 3. Nov. 2009

World Bank and African Development Bank, “Joint Country Assistance Strategy for the Republic of Sierra Leone”, Report-No 52297-SL, 4 March, 2010

Appendix: Overview of Oil Concessions and Map

Block	Company
SL-1	Young Energy Prize (Luxemburg)
SL-2	Young Energy Prize (Luxemburg)
SL-3	European Hydrocarbons
SL-4	Prontinal (UK)
SL-5/07	Oranto[30] (Nigeria)
SL-6/07	Anadarko (40%), Repsol (25%), Woodside (25%), Tullow (10%)
SL-7	Anadarko (40%), Repsol (25%), Woodside (25%), Tullow (10%)
SL-8	Open
SL-9	Open
SL-10	Open

[1] “Anadarko targets Liberia and Sierra Leone for drilling”, Upstream, 9. July 2010

[2] “Scramble for last licenses”, Africa Energy Intelligence, 17. March, 2010

[3] “Anadarko, Repsol, Tullow in Sierra Leone oil find”, Reuters, 16. September 2010; “Controversy as acreage tracts are redrawn but government keeps its eye on the main prize”, Upstream, 19. February 2010; Tullow Oil – 2009 Full year results, www.tullowoil.com/files/pdf/2009_FY_Master_Slides_final.pdf

[4] “Oil, gas reserves rise as oil output declines”, Oil and Gas Journal, 21. December, 2009, p. 18; BP Statistical Review of World Energy, 2010

[5] IMF, “Sierra Leone: Fifth Review Under the Arrangement Under the Poverty Reduction and Growth Facility”, IMF Country Report 10/15, 2010

[6] World Bank, “Project Appraisal Document – Mining Technical Assistance Project”, Report No. 43233-SL, 3. Nov. 2009

[7] PEFA, “Republic of Sierra Leone: PFM Performance Assessment Report Final Draft 18 June 2007”

[8] Economist Intelligence Unit, Country Report Sierra Leone, June 2010

[9] Although no robust figures exist to date the following example may illustrate the potential relevance of the sector for the Sierra Leonean economy: Assuming 200m barrels in recoverable reserves, a royalty rate of 8% (which is assessed on before costs are deducted) and an average oil price of 60 USD, the GoSL would collect 960m USD in royalties alone over the life-span of the project. Assuming a daily production of 35000 bbl, operating costs of 1m USD daily and capital expenditure of about 3bn USD, the GoSL could stand to collect, on average, approximately 100m USD in taxes and royalties annually for a production period of 15 years.

[10] The Petroleum Exploration and Production Act, 2001, Section 2

[11] “Reforms in Mind of Opposition, Upstream, 19^th February, 2010

[12] Petroleum Resources Unit, “Annual Report and Accounts 2005/2006”

[13] Prontinal’s Agreement was amended such that royalties payable now amount to 12% and 10% in depths of up to 200m and beyond 200m, respectively. Post-royalty income tax is capped at 30 per cent. For block 5, the royalty rate is set at 6.5% for fields in depths beyond 200m. See http://www.simco-pet.com/

[14] While this is an investor-friendly regime it runs somewhat counter to the Government’s aim to increase local ownership and participation in the sector.

[15] United Nations Conference on Trade and Development, “Investment Policy Review Sierra Leone”, United Nations, New York and Geneva, 2010.

[16] This issue is also being addressed by the Commonwealth Secretariat.

[17] A Resource Rent Tax (RRT), while theoretically appealing for its fairness and efficiency is difficult to administer in practice since its base is the accumulated cash flow of a company’s operations. Furthermore, Government revenues under a RRT are back-loaded, as tax revenues accrue only once the operations become profitable. See also: Tordo, Sylvana, Fiscal Systems for Hydrocarbons. Design Issues, World Bank Working Paper 123, Washington, D.C, 2008.

[18] “Oil landscape set to change in Freetown”, Upstream, 29. Feb 2010

[19] McPherson, Charles, “National Oil Companies. Evolution, Issues, Outlook”, in: Davies, Jeffrey, Ossowski, Rolando and Fedelino, Annalisa (eds.), Fiscal Policy Formulation and Implementation in Oil Producing Countries”, International Monetary Fund, Washington, D.C, 2003

[20] Norad, “Oil for Development Annual Report 2009”

[21] Strategic Partnership with Africa (SPA) 'Strategic Partnership with Africa: Survey of Budget Support, 2008

[22] World Bank, “Project Appraisal Document – Mining Technical Assistance Project”, Report No. 43233-SL, 3. Nov. 2009, p. 24

[23] Fajana, Sola, “Industrial Relations in the Oil Industry in Nigeria”, International Labour Office, Geneva, 2005; figures are estimates for 2000.

[24] “How Sierra Leone Performed in 2009 - Failed Economy or a Slow Gradual Process of Growth?”, Concord Times, January 9, 2010.

[25] Leite, Carlos and Weidmann, Jens, “Does Mother Nature Corrupt? Natural Resources, Corruption and Economic Growth”, IMF Working Paper WP/99/85, 1999; Ross, Michael, Does Oil Hinder Democracy? World Politics, , 53, 2001, pp. 325-361; Ross, Michael, The Political Economy of the Resource Curse, World Politics, 51, 1999, pp. 297-322

[26] Economists have used the term Dutch disease to describe the detrimental effects windfall revenues from the petroleum sector (or, in fact, any one sector) can have on an economy: new oil discoveries lead to a sudden increase in the demand for services and labour in the petroleum sector. With the appreciation of the local currency, brought about by the export of petroleum, the industrial and agricultural sector lose competitiveness as goods are imported more cheaply. Also, the non-tradable sector, such as housing and infrastructure expands. Although often presented as a threat to any resource-rich country, the existence of the “disease” is by no means undisputed. The term itself alludes to the phenomenon's appearance in the Netherlands in the 1960s. The discovery of natural gas was followed by a decline of the Dutch manufacturing sector: Corden, Max & Neary, Peter, “Booming Sector and De-Industrialisation in a Small Open Economy”, Economic Journal, 92, 1982, pp. 825-848

[27] Kaufmann, Danny, Kraay, Aart and Mastruzzi, Massimo, “Governance Matters VIII: Aggregate and Individual Governance Indicators, 1996-2008”, World Bank Policy Research Working Paper 4978, World Bank, Washington, D.C, 2009, Transparency International, Corruption Perceptions Index 2009, http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table, World Bank, Country Policy and Institutional Assessment. The scores are as follows: CPIA Public Sector Management 2.7 out of 6, Governance Indicators (on an index from -2.5-+2.5): Government effectiveness -1.13, Regulatory Quality -0.86, Rule of Law -1.03, Control of Corruption -1.07; Transparency International Corruption Perception Index 2.2 out of 10.

[28] UNDP, Sierra Leone as Seen Through International Economic and Social Indicators, UNDP Freetown, 2009

[29] World Bank and African Development Bank, “Joint Country Assistance Strategy for the Republic of Sierra Leone”, Report-No 52297-SL, 4 March, 2010

[30] In August 2010, Oranto has fought an arbitration case with the International Chamber of Commerce regarding demarcation issues of block SL-5.

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Monday, 22 August 2011

Sierra Leone Oil Sector Report by AJME