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China-South Sudan Oil Deal Raises Red Flags

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Fawzia Sheikh

Fawzia Sheikh

Fawzia is a contributor to Oilprice.com

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Government Mismanagement Under DRC President Kabila Frustrates Foreign Investors

The Democratic Republic of Congo has been slow to cash in on the continent’s oil rush and may end up forfeiting a lucrative opportunity, a situation some Africa experts blame on a dysfunctional government unconcerned by neighboring countries’ progress in the sector.

“Congo has the potential to be one of Africa’s major exploiters of hydrocarbon,” said Peter Pham, senior vice president of the National Committee on American Foreign Policy, a New York-based think tank. The money can assist with rebuilding infrastructure and offering services to millions of Congolese dependent on international aid, Pham told OilPrice.com.

The potential resource boom here has lured oil majors and new players alike, but they are “all being collectively sent on this wild goose chase by the government,” he charged. The dysfunctional regime is “making a mess out of their potential oil sector in the best-case scenario, and [in] the worst-case scenario they may miss this altogether,” he warned.

Government mismanagement under President Joseph Kabila – which has led to questionable decisions regarding the country’s petroleum resources like a recent incident involving Tullow Oil plc and the Divine Inspiration Group – is unnerving investors, Pham said.

DRC has up to four oil production areas, according to Pham. The Albertine Graben (which featured in the controversy surrounding Tullow Oil and the Divine Inspiration Group) has received the most attention.  The Tanganyika Graben (based along Lake Tanganyika on the border with Tanzania) has “at least 10 blocks potentially,” he noted. There is also a “huge area” in the middle of the country that may have up to 25 major blocks, he added, as well as an area off DRC’s small coastal basin between Angola and Cabinda.

The current president and his late father, Laurent Kabila, divided the Albertine Graben into several blocks, Pham said. “The problem is they’ve either sold the blocks several times over, or where there is [clearly] one licensee -- for one reason or another -- Kabila has withheld the final presidential approval that would permit them to go on ahead.  And as a result, they have virtually no production.”

Through a presidential decree, the government in June awarded two companies the rights to oil blocks 1 and 2 in northeastern Congo. The two unknown oil companies, Caprikat Ltd. and Foxwhelp Ltd., are registered in the British Virgin Islands and owned by South African President Jacob Zuma’s nephew, who paid the government $6 million in signature bonuses for the blocks.

DRC had already given the two blocks – but withheld presidential ratification – to London-based Tullow Oil and the Divine Inspiration Group of South Africa.

"We have always been a long term supporter both of investment in Africa and the rapid move over the last few years by some countries to a more transparent process for the award of contracts,” a Tullow spokesman said at the time of the new awards. The firm said it is reviewing its options.

Divine Inspiration Group spent more than $4 million in signing bonuses and fees for block 1 in 2008, according to a Bloomberg report.

In 2006, Tullow Oil paid $500,000 for blocks 1 and 2, states a June 25 research note from IHS Global Insight.

DRC denied any wrongdoing and dismissed the oil companies’ reactions.  It hopes to finalize a new petroleum law mandating competitive bidding and the standardization of agreements, states IHS Global Insight in a report.

The practice of awarding one license to multiple firms will deter foreign investment because companies must then factor into their business model litigation costs and related delays, Pham warned. “Who in their right mind wants to jump in?” he questioned. Oil firms will be “either mired in legal disputes years to come or they’re simply going to walk away,” he said. The “most telling indictment” of the regime’s attitude is that outside investors are not bidding on several oil blocks, he noted.

Internal politics has also played a part in Kabila’s moves in the oil and gas sector. He and his former hydrocarbons minister had “a political falling-out,” which explains why the president is not approving deals that his new foe had previously made, Pham maintained.

Moreover, the continent is shifting away from business deals with big signing bonuses and smaller royalties, to ones in which an African country shares in royalties and profits down the road, he noted. As a result, he said, signing bonuses today tend to be “relatively nominal,” which assists in the fight against government corruption.

However, if you are Kabila, “uncertain about your future, you’d rather have the money upfront, rather than royalties that are paid 10 years from now when you’ll be long gone,” Pham told OilPrice.com, adding that DRC elections are due to be held by this time next year. “The regime is very much in this mode of ‘let’s grab it while we can,’” he argued.

Beyond the petroleum industry, Canada’s First Quantum Minerals Ltd. has also been caught up in the uncertain business climate, said Gus Selassie, an Africa analyst with IHS Global Insight in London. The DRC government has been reviewing contracts awarded during the war years and the latter part of Mobutu Sese Seko’s rule, and ended up revoking licenses like First Quantum’s, Selassie said in an interview.

First Quantum’s license was canceled “on a technicality,” but the case has been referred to arbitration, which provides a “degree of protection” for foreign investors, he noted. Yet unlike the risk-taking companies involved in DRC’s “extractive industries,” most investors are adopting a “wait-and-see approach,” he added.

Ultimately, international companies involved in all industrial sectors may end up taking a cue from Vodacom, the largest mobile operator in Congo, which has been “so badly burned by governmental corruption and everything else” that it is considering abandoning its license there, Pham noted.

The impact of lingering violence on the foreign investment climate, meanwhile, has been less troublesome but is still a problem, analysts argue. DRC fought a war with several African countries in which millions died between 1998 and 2003, and is now home to the United Nations’ largest peacekeeping mission.

Even though the country is less volatile these days, “it’s one of those situations where, as soon as you think it’s gone quiet, something will happen” due to the number of insurgents still fighting in the oil-rich east and a Congolese army that is “not the most professional,” Selassie said.

Anaylsys by. Fawzia Sheikh for OilPrice.com




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