What is the trouble with Malawi’s oil contracts?

Malawi’s geology suggests we stand a chance of finding oil and gas reserves. Discoveries in Tanzania and Mozambique have increased interest and expectations about what may lie beneath our land and lake. In 2009, regulations established six large blocks for exploration, and licences were subsequently awarded to companies. However, among other issues, the rushed signing of agreements, just days before the last elections, and the absence of a clear government position on licences that overlap with Lake Malawi National Park – one of Malawi’s two UNESCO World Heritage Sites – do not augur well.

Eight days before the 2014 elections, the Minister and Principal Secretary of Mining signed agreements with RAK Gas MB45 and Pacific Oil for half of the petroleum blocks in the country – one of which covers southern Lake Malawi. This was done behind the backs of key senior government officials who were developing a model agreement and against the advice of the Solicitor General. If oil reserves are found, the agreements may be valid for 30 years, covering exploration, production, and closure, as is standard international practice for oil agreements.

Yet these signed contracts were based on a draft model agreement that was only 80% complete according to civil servants involved. The main tax terms had not been assessed. But these determine potential revenue for the government coffers – hopefully to be used for much-needed improvements to public services and infrastructure and saved for future investment. This is the primary expected benefit from oil and gas extraction. We only have one chance to collect and use the revenue from resources that don’t grow back or can’t be manufactured so ensuring the agreements are good and following revenue is stewarded wisely and protected from theft is vital.

In a promising move, the Attorney General was asked to provide a legal opinion on the agreements in November 2014. He considered whether they should have been signed before oil reserves were found and if related companies could control more than two blocks. In his initial opinion, he called for renegotiation and even cancellation of the agreements. But in a second legal opinion not made public, it appears that in mid-2016 all companies were allowed to continue with exploration activities.

‘Malawi’s troubled oil sector: licences, contracts and their implications’ was released last month by Oxfam. It is hardly surprising given the suspicious circumstances surrounding the signing that the report points out weak tax terms. These include stabilisation provisions for the entire duration of the project (meaning even when laws change, companies can operate under old laws if they are more favourable for them), an unspecified reduction in the corporate income tax (leaving room for further negotiation for a tax that could be the main source of government revenue ), a significantly reduced royalty from the one proposed in company applications, and an incoherent set of provisions for the allocation of profit oil that are ‘more generous to the company’, leaving a share of only 20-30% for government instead of the best practice of 65-85% in the oil sector.

At the end of last year, the government renegotiated two agreements. These will hopefully be an improvement on the first ones, but Malawi’s Natural Resources Justice Network and Publish What You Pay asked the president not to approve the addendum and instead launch an inquiry. In a press release on 27 February, the 30+ organisations called for the Attorney General and law enforcement agencies to investigate why the agreements were signed just days before the election, why the government negotiation team was intentionally left out, and if payments by oil companies to Malawian organisations were made in connection with the signing of agreements. They raise further concerns that Malawi has no petroleum policy and the law is so outdated it still refers to the Life President.

Alarm has also been raised about possible adverse consequences from oil exploration and production, particularly for the fragile, unique Lake Malawi ecosystem that is critical for lakeshore communities, business, tourism, wildlife, and agriculture as well as planned national projects. And I need another column to go into this. Suffice it to say, discussions and decisions about oil and gas must be holistic.

But it’s not all bad news. Through the Malawi Extractive Industries Transparency Initiative, the government has agreed to make all mining and oil contracts public – and it has already acted on this, and companies should be releasing information on their payments to government as well as the real (beneficial) owners of companies. This is important for Malawi because many of the oil and gas companies and subsidiaries operating in Malawi are registered in jurisdictions used to ‘minimise’ – or avoid – taxes and where it is possible to hide the real owners of companies, making it hard to know who is in control or should be held to account. 

By Rachel Etter-Phoya for ‘EnviroTalk’ with Charles Mkoka, The Sunday Times, 12 March 2017