Malawi’s draft petroleum policy in place, government admits flaws in oil sector governance

201707 Malawi Mining & Trade Review Cover Oil Search Saga

Draft petroleum policy in place

  • Govt. admits flaws in oil sector governance

By Deborah Manda

Government says it is formulating a new policy to govern oil exploration and production activities in order to ensure that petroleum resources that may be found in the country are exploited for the benefit of the current and future generations without compromising on the sustainable management of the environment.

Minister of Natural Resources, Energy and Mining Bright Msaka, whose ministry has been blamed by civil society organisations for governing the subsector without adequate legal framework, admits that there have been flaws in the management of the industry which have prompted his ministry to take action.

He explains that, among other things, the government’s overarching strategy, the Malawi Growth and Development Strategy (MGDS), whose goal remains wealth creation and reduction of poverty through sustainable economic growth and infrastructure development, does not mention the utilisation of petroleum resources to attain such strategic goal.

Although the MGDS II isolated nine key priority areas, one of which was energy generation and supply, there was no direct mention of development of petroleum resources to attain that strategic goal,

says Msaka.

He says in the same vein, the National Energy Policy (2003) does not elaborate much on upstream petroleum subsector leaving much to imagination and discretion.

Msaka says:

The Policy does not specifically mention the petroleum resources in the energy mix, but uses liquid fuels as a generic term to encompass all liquid sources of the energy.

The problem with this approach is that it lumps together the upstream petroleum with biodiesel, ethanol, coal-bed methane and biomass in the development planning and strategy, so this sectorial policy is meant to fill this gap. When the current National Energy Policy will be reviewed and revised, this policy will be integrated within the revised energy policy.

He says it is important to put in place an appropriate upstream petroleum policy in anticipation of petroleum finds as Malawi, just like other countries straddling the East African Rift Valley system, is now a prime target for oil prospecting firms.

The country needs to have a stable and attractive policy and establish legal, regulatory, contractual and institutional frameworks for the regulation and sustainable management of petroleum resources to ensure that the country benefits from these resources and is able to deal with challenges associated with exploiting them,

he says.

Principal Secretary for the Ministry of Natural Resources, Energy and Mining, Patrick Matanda, explains that the development of the new petroleum policy started with a situational analysis of the oil and gas sector in the country with assistance from the Economic and Legal Section of the Commonwealth Secretariat, and through this analysis, the problems and gaps were identified which assisted in the drafting of the policy.

He says the draft policy was formulated through reviewing of policies from other countries, particularly those sharing similar geological setting as Malawi, and extensive consultations with various stakeholders that included other government institutions, local authorities, private oil companies, civil society organisations and the academia.

He says:

It should be acknowledged that successful implementation of this policy will require all the stakeholders to play their role. The Ministry of Natural Resources, Energy and Mining will provide overall leadership, oversight, guidance and direction to ensure successful implementation of the policy. This policy will assist the Ministry to develop appropriate legal, regulatory and institutional framework for the upstream petroleum sector. The Ministry will prepare a strategic plan for the implementation of the policy.

The draft policy recommends that much work needs to be done to investigate oil and gas occurrence in Malawi because insufficient exploration work done in the Lake Malawi region has heightened uncertainty regarding its petroleum resource potential and invariably discouraged investments in the Malawi upstream petroleum sub-sector.

With the absence of a coherent upstream petroleum policy and strategic action plan as well as inadequate legal, regulatory, contractual and fiscal framework for petroleum exploration and development, it was doubtful that investors would be willing to risk scarce exploration capital in a largely unknown and poorly developed legal and institutional setting,

it says.

It says without a clear-cut policy in place, the current institutional set up of the petroleum sub-sector will face a lot of challenges in terms of management, operational and functional performances.

The draft policy also calls on stakeholders to provide training opportunities for government personnel working in the oil exploration subsector.

Significant training and other capacity building efforts will have to be undertaken in order to enable the existing   institutions effectively carry out their different roles and mandates as this sub-sector needs qualified people,

it says.

Matanda explains that the adoption of the new policy will assist the government to deal with the issue of lack of trust by the general public in the governance of the petroleum sub-sector including licencing procedure, entering into petroleum sharing agreements and, management of revenues coming from the petroleum sub-sector.

The draft petroleum policy also says there is, currently, little clarity on the link between the legislative, regulatory and contractual articulation of the fiscal regime and there is not enough evidence to suggest stability of the fiscal terms negotiated with government in the Petroleum Act.

The fiscal provisions are also unclear with respect to natural gas so there is significant uncertainty in the application of the fiscal regime as all fiscal elements appear open to negotiations which implies that potential investors cannot predict the fiscal regime they will face.

The fiscal regime lacks a progressive fiscal element to enable the host country to capture a fair share of the economic value generated by the petroleum projects under a wide range of economic circumstances,

states the draft.

The draft policy, therefore, calls for the development and standardisation of a transparent fiscal regime for upstream oil and gas operations which attracts investment and generates revenue for the people of Malawi.

It also recommends that the government develops competitive petroleum tax laws that complement existing laws and clarifies and harmonises upstream petroleum fiscal terms across all licences and agreements in order to ensure a transparent and level playing field for all entrants into Malawi’s upstream oil and gas plays.

The draft policy says the government shall develop a progressive fiscal regime that imposes an internationally competitive level of fiscal burden for marginally profitable operations and ensures an increasing level of fiscal revenues to the government of Malawi as profitability of the operation increases.

The government shall ensure stability of fiscal provisions through clarifying the fiscal tools in the legislation and regulations and creating in-built progressive mechanisms in the fiscal regime, develop a clear fiscal regime for natural gas operations, minimise the risk of transfer pricing through the imposition of arms length restrictions on transfers, reduce the number of fiscal elements open to negotiation, reduce ministerial discretion for the deferral or remittance of fiscal payments, hire or train accountants specialised in petroleum taxes and ensure and maintain coordination with other stakeholders with roles to play in the administration of the fiscal regime,

it says.

A recently released report by a civil society grouping, Oxfam, lambasts the government for promoting oil exploration in the country in the absence of a clear policy framework [and for signing agreements with weak and incoherent tax terms, behind the backs of senior civil servants, and against the advice of the solicitor general].

***

This piece was initially published in Malawi’s Mining & Trade Review Issue Number 51 (July 2017).

The full edition is available for download here. This monthly publication is edited by Marcel Chimwala.

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