Liberia, the most recent West African country to embark on a course of oil exploration, offers opportunities for investment in oil and gas exploration and production in a largely unexplored region of the Gulf of Guinea. The nation is currently in its third round of a bidding process that has resulted in contracts for African Petroleum, Anadarko, Chevron, and Simba Energy. Anadarko and African Petroleum have begun exploratory drilling and Chevron expects to commence drilling operations in the fourth quarter of 2011. Simba Energy, the only company with onshore interests, is in the final stages of converting a reconnaissance license to a production sharing contract for onshore exploration.

Liberia’s offshore territory is divided into seventeen near-shore blocks: ten have contractual agreements, two are under negotiation, and five have been through a third bid round with no awards. Also, thirteen ultra-deepwater blocks have been outlined and will open for bidding in coming years.

The Gulf of Guinea contains oil reserves estimated to comprise 33 billion barrels. Other oil-producing countries in the region include Nigeria and Angola – the first and second largest oil producers in Africa - Gabon, Equatorial Guinea, Ghana, and Sierra Leone. This resource-rich region is vulnerable to the “resource curse” and the Government of Liberia, under the leadership of President Ellen Johnson Sirleaf, hopes to avoid this fate through implementing economic and political reforms. Even so, President Sirleaf’s government faces significant challenges including: under-developed infrastructure, a perceived lack of qualified local personnel, fledgling institutions, volatile politics, and a largely poor population with limited access to capital to invest in the oil and gas industry. October’s presidential elections will determine whether President Sirleaf can continue her reform program. A change in government in this stable but fragile democracy could handicap the nascent oil and gas industry.

The Regulatory and Legal Framework

The Ministry of Lands, Mines and Energy regulates the oil and gas industry while the National Oil Company of Liberia (NOCAL), established in 2000, administers and controlsthe rights, title, and interest in oil and gas deposits and reserves in Liberian territory. NOCAL also facilitates the development of the oil and gas industry in Liberia and is mandated to grant exploration licenses and negotiate all petroleum contracts.

The hydrocarbons law is the New Petroleum Law of Liberia enacted in 2002. It requires 20% equity to be granted to NOCAL, 10% equity to be made available for purchase by Liberians, and purchase contracts valued at US $3 million or less to be awarded to Liberian contractors. The Petroleum Law has only been partially implemented and local content provisions have not been enforced in the first two bidding rounds, primarily because there are no guidelines to implement them. Whether the ongoing third bidding round will be subject to the provisions will depend on the legislature issuing timely guidelines.

The Petroleum Law does not prescribe any forum for dispute resolution, stipulating simply that the applicable law for all contracts is Liberian Law. Investors can propose detailed arbitration clauses to ensure that any future disputes do not go through the Liberian court system, which does not presently possess the capacity to deal with oil and gas disputes and is still undergoing reforms to address perceived corruption and inefficiency. A dispute has already arisen between NOCAL and a company holding the contract for a near-shore block. Allegedly in violation of its Production Sharing Contract, the company has not started drilling five years after acquiring the block. In response, NOCAL has issued a mandatory sale order, which apparently is an action that is not addressed in either the Production Sharing Contract or the Petroleum Law. While NOCAL is reviewing potential buyers provided by the company, the dispute could end up being resolved through arbitration.

Liberia’s Environmental Protection Agency (EPA), established in 2006, is responsible for preparing Environmental and Social Impact Assessments. The Petroleum Law specifies that an environmental impact study should be part of every contract. The EPA, however, was not included in the first and second bidding rounds, another example of partial implementation of the Petroleum Law.

Challenges for Investment in Liberia

The legacy of fourteen years of civil war has crippled Liberia’s infrastructure. There is no adequate port in the exploration region although Port Buchanan, south of the capital Monrovia, has been earmarked for development should exploration efforts succeed. The development of Port Buchanan would be an avenue for implementing local content policies, and NOCAL has announced that foreign companies will have to partner with local companies to develop port facilities.

Investing in Liberia remains a risk, but the potential for lucrative earnings in this underexplored region of West Africa is undeniable. NOCAL, while impeded by a lack of capacity in human resources and industry expertise, is committed to developing the legal framework necessary to attract and retain investors and benefit Liberians. The company acknowledges Liberia’s limitations but believes that once exploration leads to oil production there will be momentum to update the Petroleum Law and develop human resources and infrastructure.