Vaalco Expects Increased Oil Production in Gabon

Houston-listed Vaalco Energy, which has been producing oil from Gabon’s Etame Marin field since 2002, will increase its oil production in 2020 by 35% compared to 2019. Gross reserves and resources for the company’s Gabon assets are around 115mn bl; Vaalco’s share, net of royalties, is 31mn bl, while it produces around 18,000 barrels per day gross in Gabon.

“We are committed to Gabon. We have focused on reducing operating costs and, fortunately, have no capex required in the near term—we can defer this for now. All this has put the company on the right footing in the current uncertain environment,” Vaalco Energy’s chief executive Cary Bounds said last week.

The company further plans to purchase South Africa based Sasol’s 27,75% stake in the Etame field after Sasol stated it hope to end its West African oil operations last June.

Several factors have determined the country’s increased attractiveness, including a new hydrocarbons code passed in July 2019. The new code specifies the state’s minimum stake in the PSCs is reduced from 20% to 10%, and the 35% income tax on profit oil has been scrapped. Other taxations have been lowered as part of the government’s move to woo foreign investment.

Bounds further stated that the new code was long overdue.

“The previous version was introduced when oil was over $100 and was very onerous to foreign investors. Those terms might have made sense if oil had stayed at those price levels, but do not at today’s prices. The new code is a big improvement and gives foreign investors more confidence to come in and invest,” he said.

In light of a governmental push to increase exploration activities and oil output, Gabon launched a licensing round in 2018 which has shown to be very successful up to now, with 12 production and sharing agreements signed with foreign explorers, a first since 2015.

On a regional level, however, new currency regulations could damper Gabon’s efforts. The country, which is also a member of the Organization of the Petroleum Exporting Countries, is part of the Central African Economic and Monetary Community (CEMAC) and uses the Central African Franc (CFA), which is governed by the Bank of Central African States (BEAC).

The new regulations, which came into force in March 2019 and gradually implemented until September the same year, required that companies retain their revenues in local banking institutions and must be denominated in CFA francs. Thus obligating companies to exchange US dollar revenues into francs, which adds exchange fees and increase risks incurred by currency fluctuation.

The Central Bank agreed to a moratorium specifically in the oil industry until the end of this year.

“There are some exceptions we think are applicable to the oil and gas industry… if the CEMAC region wants to attract investors it needs to make sure cash can be repatriated. To attract new investments, cash needs to be able to move freely. Yet the new regulations restrict currency flows and would be costly and inefficient,” he said.

Founding partner at energy-focused capital markets firm Auctus Advisors, Stephane Foucaud reckons: “[Apart from] a few exceptions, Gabon is now more about small companies maximizing production from existing fields. I do not see that as a negative. Sometimes—particularly in an industry where assets are more mature or smaller—smaller companies often operate at lower costs. They are able to do more with marginal assets while the majors have no interest.”