GABON: U.S. OIL COMPANY SELLS ASSETS DUE TO OIL

C O N F I D E N T I A L SECTION 01 OF 02 LIBREVILLE 000506 SIPDIS DEPARTMENT FOR AF/C FOR LISA KORTE E.O. 12958: DECL: 09/24/2019 TAGS: EPET ENRG EIND TPHY GB SUBJECT: GABON: U.S. OIL COMPANY SELLS ASSETS DUE TO OIL SECTOR TRENDS Classified By: Ambassador Eunice Reddick for reasons 1.4 (b) and (d) ¶1. (SBU) Summary: U.S.-owned Marathon Oil sold its permits and holdings in Gabon to a French company, but will continue to monitor its exploration of offshore blocks from Houston. This move effectively discontinues Marathon's active operations on-the-ground. Another U.S. company, Vaalco, remains and has increased its commitment in Gabon. Nonetheless, diminishing oil production has cut into government revenues for Gabon, which makes revitalizing the oil sector and encouraging new investments important priorities for newly-installed President Bongo. End Summary. -------------- BACKGROUND: WHERE IS THE OIL? -------------- ¶2. (C) Despite attempts to diversify, Gabon is still heavily reliant on its petroleum sector, which accounts for 82% of exports and approximately 65% of revenue. The government has stated it wishes to expand other economic sectors including tourism, mining, fishing, and timber, but multiple factors hinder private investment and growth. Diminished production in the well-mined oil fields of Gabon underscores the need for diversification. In 1997, production was approximately 370,000 barrels per day (bpd). Twelve years later, this figure is estimated to be closer to 235,000 bpd. Business Monitor International stated in their 2009 report that "Gabon is neither a significant regional producer nor consumer of gas." They also forecast a decrease in production over the next decade of 11.3%. ¶4. (SBU) There is a general consensus among local branches of oil giants that the significant decrease in production can be partly attributed to the exploitation of the same sites and lack of development of new ones. Many players believe that once the "below the salt" surveying process is refined, there will be a renewed oil boom offshore. However, without more players exploring onshore as well as offshore, the petroleum sector of Gabon will continue to suffer diminished revenues. In addition, wider economic diversification requires improved fiscal policies, institutional capacity-building, infrastructural improvements, and the curbing of corruption. ¶5. (SBU) Gabon is expected to launch an oil licensing round for more than 40 blocks from two of its deepwater basins in May 2010. Also in 2010, oil firms operating in Gabon will be banned from flaring gas, according to a government spokesperson. The government will seek to use new technologies to recover the gas, and also increase LNG production. -------------- GOODBYE, MARATHON -------------- ¶6. (U) Marathon's physical departure from Gabon takes place against the backdrop of the stagnating oil sector and its own technical limitations. On August 28, Marathon Oil signed an accord with Perenco which signs over all their Gabonese interests and assets, including permits, to the French company. The contract was ratified by the Gabonese Ministry of Energy on September 23. Included in the deal are the contracts of 85 Marathon employees. ¶7. (C) Stephen Lum, the head of Marathon,s operations in Gabon, explained the company's decision to sell its active holdings to Perenco as tactical. He claimed Marathon was "not disenchanted with Gabon" and he said that Marathon has devoted almost $10 million in the last year alone in seismic and deepwater evaluation of Gabon,s potential deposits. Marathon, present in the country since 1993, has exhausted its current holdings and has encountered unspecified "technical difficulty" in extracting more. Perenco is better equipped to handle the technical challenges of Marathon,s sites, according to Lum. Marathon will continue to explore Gabonese waters from their base in Houston rather than maintain a local operation. Lum stated that the transfer of financial and administrative assets should be completed by the end of 2009. -------------- HELLO, PERENCO -------------- ¶8. (U) Perenco began operations in Gabon in 1992, with the acquisition of two offshore fields south of Port-Gentil. The former production is officially given as 50,000 bpd utilizing LIBREVILLE 00000506 002 OF 002 29 offshore and onshore licenses, but estimate the new holdings will increase their production by 15,000 bpd. Perenco has been aggressively developing new reservoirs, and this new acquisition is in line with their recent expansions, including the Loche East Field site in 2007. Its partnership with the Gabonese Government is strong, as it is the gas provider to the power plants in Libreville and Port-Gentil, which results in approximately 680,000 cubic meters of gas per day used. Perenco also works closely with Total Gabon. -------------- VAALCO'S PAYOFF -------------- ¶9. (C) Another U.S. company, Vaalco, is staying in Gabon. It has invested significantly in exploratory drilling both offshore and onshore in Gabon, and despite setbacks, recently discovered a successful development well expected to increase its production significantly. In 2008, Vaalco invested $14.9 million in exploration, spending $2.5 million alone on unsuccessful Gabonese prospects. Undeterred, Vaalco allocated additional funds in early 2009 for more exploratory drilling in Mutamba, which is a promising onshore development, as well as a new prospect offshore. Its methods have reaped recent rewards, with a successful discovery in late 2008 in Ebouri field which started production in April ¶2009. The new well set a production record for the company, with 24,993 bpd from the Etame Marin block, a statistic which is now the average for the site. -------------- COMMENT -------------- ¶10. (SBU) Gabon's oil sector has languished due to overexploitation and new technological needs, but Vaalco's new wells indicate that persistence and willingness to explore additional sits could have a long-term payoff for U.S. companies. Economic diversification is high on the new President's agenda, but encouraging new investment in the oil sector will remain a critical priority as he attempts to put Gabon back on sound economic ground. REDDICK