Ethiopia: A lot of hot air over gas

(Kaleyesus Bekele)

Part of Ethiopia’s geology resembles the oil and gas fields of the Middle East and, indeed, natural gas fields were first discovered as far back as 1972. Despite the fact that commercially viable volumes of gas are present, the Ethiopian government has so far been unable to put together an arrangement to extract the gas. Kaleyesus Bekele looks back on an astonishing series of missed opportunities

THE HISTORY OF OIL AND GAS Exploration in Ethiopia dates back to the 1950s. After several oil field discoveries were made in the Middle East, hopes were high for similar results in Ethiopia as some its geological formations, particularly in the Ogaden basin, a vast arid land in southeast Ethiopia, resemble those of the Middle East. But so far, the gas has remained undisturbed under the ground despite the fact that many international oil companies were engaged in oil and gas exploration projects in the Ogaden basin’s 350,000 sq km of land. It was an American company, Tenneco, that hit the jackpot in 1972. The company discovered a natural gas reserve in Calub, a locality 1,200 km southeast of Addis Ababa, estimated at 76bn cubic metres. Tenneco also discovered a non-commercial crude oil reserve with a thickness of one metre at Hilala.

Tenneco was not lucky enough to reap the fruit, though. In 1974, a socialist revolution swept the country, which ousted the imperial regime with whom Tenneco had signed a 50-year concession agreement. Tenneco was expelled by the former socialist government of Ethiopia in 1977, together with many other Western companies.

Following the expulsion of Tenneco, a former USSR company, Soviet Petroleum Exploration Expedition (SPEE), started working on the Calub and Hilala gas fields. SPEE drilled more wells in Calub and Hilala, and confirmed the natural gas reserve in Calub. SPEE discovered a gas condensate at Hilala 4 at a depth of 4,750 metres. However, SPEE’s contractual agreement was also terminated in 1994 after the fall of the military regime.

After SPEE pulled out of Ethiopia, the Ethiopian government signed several agreements with different companies that pledged to invest millions of dollars in the gas fields. The American company Secor, the Russian companies Methanol Joint Stock and StroyTrans Gas, the Jordanian company SITech International and Petronas, the Malaysian oil and gas giant, all signed memorandums of understanding (MoU) and petroleum development agreements to develop the gas fields.

However, Secor, which signed the agreement in 2000, vanished into thin air, while Methanol and StroyTrans Gas, which had signed an MoU in 2002 with the government-owned company, Calub Gas SC and the Ministry of Mines, demanded that the government should come up with the funds required to execute the project while they would provide the technology.

SITech International, which had pledged to invest $1.7bn in 2003, was unable to raise any significant capital. The company said it was unable to commence work on the project until 2006. Alemayehu Tegenu, former Minister of Mines, revoked the petroleum development licence given to SITech and decided to offer the project to tender.

The Ethiopian government had tried to develop the gas fields in collaboration with the private sector by establishing Calub Gas SC and was selling shares of the company to the public. The World Bank, which agreed to finance the small-scale gas development project designed by the company, signed a loan agreement for $66.3m. However, in 2001, the World Bank suspended the loan, insisting that the project should be privatised. Repeated attempts to jointly develop the gas fields with the company were not successful. Later on, the government liquidated the share company.

“The bank’s move surprised everyone,” says a senior official of the defunct Calub Gas SC, “because the bank usually does not suspend loans once it signs an agreement. Second, the well-completion work was done with the first round of payment secured from the bank. The gas reserve was made ready for production and it was made to rise to the surface. So production was supposed to start as soon as possible.

“Only a gas treatment plant is required to start production. The fact that the gas was made ready for production could cause pressure build-up and that is a big risk for the wellbeing of all the gas wells,” the veteran geologist said.

In 2006 the Ministry of Mines put up a tender inviting international oil and gas companies interested in developing the gas fields. Petronas won the tender and in June 2007 signed a petroleum development and production sharing agreement with the Ministry.

Petronas made an upfront payment of $8om to the Ethiopian government. The company planned to build a gas treatment plant and to construct a gas pipeline all the way from the gas fields to the port of Djibouti. The total investment was estimated at $1.9bn. Petronas has been analysing and interpreting the petroleum data collected from the gas fields. However, due to a managerial decision, Petronas relinquished all its concessions and pulled out of Ethiopia in 2010.

Following the withdrawal of Petronas, the Ministry of Mines put up a tender to select a company that would take over all the concessions held by Petronas in the Ogaden in March 2011. Subsequently, in July 2011, the Ministry awarded the Calub and Hilala natural gas fields and eight exploration blocks (that belonged to Petronas) to a Chinese oil and gas company based in Hong Kong, PetroTrans, which had won the tender.

Furious reaction

After a year, in July 2012, the Ministry cancelled the petroleum development agreement it had signed with PetroTrans, saying the company has failed to commence work on the project according to schedule. In a letter dated 1st July 2012 and signed by Mines Minister Sinkenesh Ejigu, the Ministry notified PetroTrans of the termination of the petroleum development agreement. The company had agreed to develop the gas fields within three years. PetroTrans furiously protested the Ministry’s decision. The company claims that it was analysing and interpreting old data collected from the concessions. It explained to the Ministry that it hired specialised companies that would collect seismic data and drill exploration wells. PetroTrans said it was negotiating with companies that would construct the gas pipeline and gas treatment plant.

In a letter signed by president and CEO of PetroTrans, John Chin, and addressed to Sinkenesh, the company listed the works it had undertaken and asked the Minister to revise her decision. The company had spent more than $18m on the project. It paid $11m in signature bonus to the Ministry.

It had also paid for land rent and community development projects. The company said has been working on the paperwork required to do the field work, adding that it was about to commence field work at the time of the termination of the contract. The Ministry did not accept the explanations, saying that PetroTrans is a broker company.

Executives of PetroTrans said they want to resolve the problem with the Ministry in a round table discussion and resume work on the project. However, they said, if the Ministry refuses to do so, they want to be compensated for the loss they incurred. Sinkenesh admitted that PetroTrans has spent a significant amount of money for the project. However, she said, the Ministry would not pay compensation to the company.

PetroTrans, which entered into a tug of war with the Ethiopian government, filed its complaint to the International Chamber of Commerce (ICC) based in Geneva on 28th December 2012. The Ministry has responded to the complaints lodged by PetroTrans at the ICC and currently the case is being overseen.

The Ethiopian government recently established a new company called Ethiopian Petroleum Development Enterprise that will engage in developing the gas fields in collaboration with an international oil and gas company. “Our government this time shows a firm commitment to extract the gas reserves. We are looking for a reputable international petroleum company that is committed to jointly develop the gas fields,” Sinkenesh said.

However, PetroTrans said there is no company that will take over the projects before the disagreement is settled. “There is no company that will acquire the concessions, whose case could be presented to an international arbitration court. If there is any company that attempts to take over our concessions, we will sue it,” a senior official of the company said. Sinkenesh downplayed the warning, saying that the concessions belong to the Ethiopian government. “The concessions belong to the Ethiopian government and people. And they are in our hands. No one can prevent us from utilising them,” the Minister said.

Ethiopia is probably the only country on this planet that has been unable to develop a proven gas reserve for four decades.

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* Originally published at African Business, Oct. 2013 issue, titled “Ethiopia: A lot of hot air over gas”, authored by Kaleyesus Bekele.