Legal strategies and tools for mitigating legal risks associated with oil and gas investments in Africa

• Author: Damilola S. Olawuyi
• Date: 01 September 2015
• Published date: 01 September 2015
• DOI: http://doi.org/10.1111/opec.12043

Legal strategies and tools for mitigating

legal risks associated with oil and gas

investments in Africa

Damilola S. Olawuyi

College of Law, Afe Babalola University, Rm 10, Ado Ekiti, Nigeria. Email: dolawuyi@ogeesinstitute.edu.ng

Abstract

Africa provides unique opportunities for international oil and gas companies to spearhead oil explo-

ration and production in emerging markets, and to acquire interests in fields with unexplored eco-

nomic potentials. Despite these investmentoppor tunities, entrants into oil and gas markets in Africa

often face legal risks that pose monumental threats to the economic viability of oil and gas invest-

ments. These include resource nationalism; lopsided contractual provisions in oil production con-

tracts that confer unfair advantages on national oil companies; arbitrary change in contract terms;

delays in operational approvals,complex local content requirements and high corruption potentials,

among others. If not properly considered and managed,these risks may reduce the positive economic

prospects and gains in a hitherto profitable investment enterprise; they mayalso fr ustrate a first time

investor.While these legal risks have been perceived as disincentives to oil and gas investments in

Africa, this paper takes the view that these risks do not call for surrender, rather they could be effi-

ciently managed at contract negotiation phases.

This paper draws examples from key resource-based African countries to providean overview

of the commonly encountered legal risk points in African oil and gas investments.The paper pro-

vides suggestions on how to effectivelydeal with these risks as early as possible through extensive

due diligence and diligent contract negotiations.

1. Introduction

Africa is home to a significant percentage of the world’s oil and gas reserves (African

Development Bank and the African Union, 2009). According to the 2012 BP Statistical

Energy Survey, Africa had proven oil reserves of 132.438 billion barrels at the

end of 2011, equivalent to 41.2 years of current production and 8.01 per cent of the

world’s reserves (BP Petroleum, 2012). Consequently, African countries continue to

provide international oil and gas companies with lucrative opportunities to spearhead

new oil and gas discoveries and to consolidate on oil and gas exploration and pro-

duction in previously explored fields, especially marginal fields (Mercier and Olawuyi,

2013). Countries such as Egypt, Nigeria, Libya, Algeria and Angola continue to attract

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significant oil and gas investments, while Ghana, Tanzania, Kenya and Uganda increas-

ingly appear to be the next great oil and gas market opportunities in Africa (Katsouris,

2012).

Despite these opportunities, however, oil and gas investments in African markets have

not been the most straightforward endeavor(Economic Intelligence Unit., 2012). Over the

years, there havebeen concerns on how legal and regulatory requirements such as resource

nationalism, lopsided contractual provisions in oil production contracts that confer unfair

advantages on national oil companies; expropriation and regime change; delays in opera-

tional approvals, complex local content requirements and high corruption potentials

among others may frustrate a first time investor, reduce the positive economic prospects

and gains in a hitherto profitable investment enterprise, and pose significant legal risks to

oil and gas investors, if not properly dealt with (Gerda du Toit, 2013). Legal risks refer to

the risk of financial, reputational or investment loss; legal liability; or dispute settlement

costs to a company or institution that mayarise from defective contractual arrangements or

transaction (McCormick, 2010).

This paper examines key legal risks in oil and gas investments inAfrican markets. It

provides an overviewof the distinctive legal risk points that must be anticipated and care-

fully addressed when negotiating contracts for oil and gas investments in Africa. Even

though some of the legal risks discussed are not peculiar toAfrica, as this paper will show,

conventional means of addressing legal risks through contractual provisions, internal

regulation and consistent business practices alone are not adequate in African markets.

Much greater attention and legal due diligence is therefore necessary to effectively

manage contract negotiation processes to preventlegal risks. Typically, legal due diligence

involves investigating the facts, risks and opportunities of a transaction, entity or person

before consummating a contractual relationship. Through detailed and careful due dili-

gence, some of the legal risks commonly encountered in African oil and gas marketsmay

be comprehensively managed. The ultimate aim of the paper therefore is to provide a

summary of more effective due diligence strategies to address legal risks that may arise

from oil and gas investments inAfrica.

This paper is divided into four parts. This introduction being the first. Part 2 discusses

examples of legal risks that mayarise from oil and gas investments in African markets. Part

3 discusses key due diligence strategies that may be employed to prevent legal risks. It

examines the required checks that a prudent investor or advisor must undertake to prevent

exposure to legal risks. The paper concludes in Part 4.

2. Distinctive legal risks in African oil and gas markets

An average investor going to do business in Africa would typically be concerned

about how to obtain oil prospecting permits and licenses, incorporate a local subsidiary,

Damilola S. Olawuyi248

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