The interest of Senegal and national companies is at stake if the contract award of the oil exploitation of Sangomar Bloc is not conditioned by participation alongside contractors, national companies for "local content" strong
WHITE NOTE OF INFORMATION
ON THE AWARD OF THE FPSO FEED CONTRACT
EXPLOITATION OF THE PETROLEUM OF THE SANGOMAR BLOCK
Under the production sharing agreement, the Senegalese state is committed to reimburse the operator for all the investment costs (construction and financing of oil infrastructure).
This reimbursement, which will start from the date of first production of oil, will be carried out in the form of a levy in kind of oil by the operator and will last several years until full reimbursement of the investment costs.
At that date, the Senegalese state will automatically own the oil infrastructure.
For these reasons, the Senegalese state has a statutory right of verification and approval, which it must exercise in view of economic, social and political issues.
Context :
After a late start of the bidding process, the Sangomar Block Operator suddenly accelerated the selection process for the development of SNE.
It is preparing to issue its recommendation for the selection of a single contractor to carry out the FEED FPSO, in order to obtain the approval of the authorities before the presidential elections scheduled for late February 2019.
As a reminder, the contract FEED (Front End Engineering Design) is a contract for detailed engineering studies whose results allow to refine the technical and economic and operational solution and which considerably reduces the margins of uncertainty on the budgets to to hire.
Senegal therefore has an interest in imposing on Woodside to put in competition the contractors that are in the running on the design, financing, implementation and operation of the floating platform FPSO (Floating, Production, Storage and Offloading)
The operator also has two other issues to be regulated simultaneously: the license of the Sangomar block expires at the end of February 2019 and the operator requested an extension of validity. This is subject to approval by the Senegalese government of the Development Plan. This has been submitted for approval by the authorities concerning SNE. On the other hand, the operator would not have fulfilled all its obligations to assess the FAN discovery, located west of SNE on the same block, within the contractually agreed time limits.
The Senegalese authorities could require the retrocession of the areas on which the operator is in default, in order to put them on sale.
It is therefore clear that the Senegalese state has important levers on the overall process.
Regarding the process of awarding the FPSO FEED contract on Sangomar SNE to a single contractor the possibility of an immediate decision poses several problems:
A choice that commits public finances over periods of more than 10 years should not be done in haste.
The lack of transparency in the selection process, combined with the huge amounts involved (about US $ 2 billion), and the rush in this pre-election period pose a significant risk to the government, if it validated the recommendation and that the rumor and the media is seizing this information.
As the FPSO global market is currently overheated, engaging with a single contractor would reduce the trading margins of the oil palm operator and expose it and public finances.
This acceleration is also aimed at securing the approval of the authorities before the vote on the local content law, which is certainly not retroactive but whose existence would morally force operators and contractors to adopt more ambitious local content plans.
For the reasons mentioned above, it is recommended not to approve in the pre-election haste the choice of a single FPSO FEED Contractor.
There are two options that can be combined :
To approve the awarding of two FEED contracts to two competitors in order to postpone the final moment of selection from three to six months.
Delay by submitting the selection decision to the newly elected government.
Criteria for awarding the FPSO contract :
In addition to the criteria of competitiveness of the technical solution and financing, the criterion of local content should prevail for the award of the contract. In addition, the formalization of partnerships with local Senegalese companies must be a prerequisite imposed on the Sangomar operator for the selection of the FEED Contractor.
The award of contracts on Turtle should serve us as a lesson because no local content obligation is subject to the award of gas contracts to BP operator whose development plan was validated by both countries before the law local content is introduced at the meeting.
The Senegalese authorities must rectify the situation, seizing the opportunity of Woodside's counter-performance on FAN to impose the conditions of a strong happy local in exchange for the extension of the license on the block of blood that expires on 6 February 2019.
January 2019
FAR Price at posting:
5.5¢ Sentiment: Buy Disclosure: Held
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