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Oil rich

Situated on the oil rich Gulf of Guinea and comprising the Rio Muni coastal enclave, the island of Bioko and the islands of Annobon, Corisco, Elobey Grande and Elobey Chico, Equatorial Guinea's total proven oil reserves are estimated at 1.28 billion barrels. Oil now accounts for 60% of GDP and 90% of total exports.

Oil was first discovered in Equatorial Guinea four decades ago, but was first produced offshore in 1991 from the Mobil-discovered Alba oilfield. Some six years later, production of liquified natural gas (LNG) began using wet gas from the Alba field. The Zafiro field was discovered in Block B in 1995, with an eventual production rate of 100,000 bpd. The field is now the country's major oil producer.

Other major Block B fields include Jade, Topacio, Amatista, Rubi and Serpentina, while in 1999, a deepwater field, La Ceiba with estimated reserves as high as 300 to 500 million barrels was discovered by Triton Energy and Energy Africa in Block G of the Rio Muni Basin. In mid 2000, Chevron and Vanco Energy signed production sharing contracts for the deepwater Block L and Corisco Block respectively.

Equatorial Guinea's possessions in the Gulf of Guinea are attended by a number of potential boundary disputes. The Zafiro field in Block B is contested by Nigeria, which is claiming that it is part of the same structure as the Ekanga oilfield which was discovered by Elf in Nigeria's concession block OML 102, some 3.5 kilometres north of Block B. President Obiang unilaterally adopted an equidistant median line defining territorial boundaries as stipulated under the U.N. Convention on the Law of the Sea in March 1999m - a decision that was accepted by regional neighbours Cameroon, Sao Tome & Principe, and Nigeria.

Another potential for dispute lies in the contested ownership of three islands in the Gulf of Guinea, including Mbagne Island to which Gabon also feels it has a claim. In July 2004 an agreement was reached which allows joint oil exploration pending a final resolution.

Midstream and downstream activities, and potential linkages

Equatorial Guinea has a small downstream oil industry that uses imported products. Getotal, equally owned by Total and Equatorial Guinea is the only player in the downstream industry.

The country has moved to expand midstream activities. The most important step was the construction of a major LNG plant, which began producing in 2007. Its annual capacity is estimated at about 3.4 million tons. A number of other ventures have been realized or are being considered:

• Reconstruction of the port in Malabo and installation of a deep-water port in Luba could significantly improve the trade environment. A joint venture led by GEPetrol was awarded a concession as an "Autonomous Free Zone" in the hope that it would help promote the area as a hub and service center for regional hydrocarbon-related activities.

• Recent attempts to reduce the flaring of gas and to use resources effectively have been very successful; saved resources, which would otherwise have been wasted and polluted the environment, are now feeding gas utilization projects. The methanol plant operated by a consortium led by Marathon has been a source of additional hydrocarbon growth. Similarly, formerly flared gas is now used to generate gas power that supplies electricity to Bioko Island.

• Finally, the government is considering local refining. Though it seems to have no concrete plans as yet, such a step could significantly resolve one of the major downstream problems- the marketing of fuel for local use. Currently this is set up as a monopoly, which impedes effective allocation of resources. The viability of local refining needs to be assessed thoroughly, taking into account future oil production, refining capacity in the region, and the effects on technology transfer.

LNG offers a major opportunity in the medium term, though linkages to the rest of the economy will be limited. The market for LNG is expected to experience a major breakthrough in coming years. With its new plant, Equatorial Guinea has the potential to become an LNG hub, receiving inputs for transformation from the region (in particular, Nigeria and Cameroon) and exporting LNG, mostly to the U.S. Recent announcements by Marathon, the company producing LNG, suggest that processing will be much more productive than expected. Given substantial economies of scale in LNG production, plans to double capacity are being pursued. However, because LNG requires sophisticated inputs, it is expected to have limited backward and forward linkages.

The industry is regulated by the Ministry of Mines and Hydrocarbons, which is also the only licensing authority. Originally the state was represented in an operating company called Guinea-Espanola de Petreleos SA (GEPSA), a 50/50 joint venture between it and Spain's Hispanica de Petroleos (Hispanoil, now Repsol). GEPSA was subsequently dissolved and there is now no fully owned national oil company in Equatorial Guinea.

Production sharing contracts

Contracts governing the exploration and exploitation of hydrocarbons are based on the Model Petroleum Production Sharing Contract, revised and updated in 1998.
This contract allows for an initial exploration term of 5 years followed by two terms of 3 and 2 years extendable on a yearly basis for up to a total of 8 years. It also allows for relinquishment of 40% after the first three years and a further 25% at the end of the five year term.

Production sharing is based upon the contractor's pre-tax return and is negotiable. The contractors can propose other forms of sharing. The signature, commercial discovery and production bonuses are negotiable. The production bonus and signature bonus are both recoverable. Annual surface rentals range between $1.00 per hectare for water depths less than 200 metres and $0.50 per hectare for water depths greater than 200m.

Output sharing and sectoral governance

Corruption and opacity in Equatorial Guinea exists on a breath-taking scale. At the September 2007 EITI conference on EG's candidacy, the committee refused to allow EG's accession on the grounds that the state had failed to meet the first four basic criteria. They are

• A public declaration committing to the principles on EITI.
• A commitment to work with civil society and companies.
• Appointing a high level official with the power to implement transparency initiatives.
• Publish a measurable strategy on reducing opacity.

The committee did however give Malabo a grace period of three months to meet these demands. Prospects of this happening seem remote indeed. Democracy and civil society barely exist in anything other than name in Equatorial Guinea. President Brig Gen (Ret) Teodore Obiang rules via a system of patronage and authoritarianism, locking up and torturing political dissidents in the notorious Black Beach prison. Indigenous pressure for transparency regarding where oil profits go is barely registering. At a recent conference held by the government on EITI only four independent NGOs were present – the rest are headed by pro-Obiang politicians.

Even in the face of such weak attempts to enforce accountability, the government still sought to ensure the conference generated as little public discourse as possible by announcing the conference 24 hours before it was due to take place and holding the event in a remote part of the country. The event was condemned by international transparency pressure groups as a mere rubber stamping exercise. One NGO spokesman pointed out that even states such as the Democratic Republic of Congo or Cameroon – not noted for their transparency records – at least allowed national resource networks of NGO's to interact.

Equatorial Guinea has implemented some policies that resemble successful sectoral governance approaches in other resource-rich countries. The relationship between public bodies, the national oil company (GEPetrol), and foreign investors is generally described as cooperative.

Virtually all the major IOC's operating in EG have been implicated in paying Obiang's family bribes. Exxon for example pays 15% of the revenues derived from its activities in EG to Abayak SA – a company essentially owned by the president but which apparently provides no service or goods to Exxon in return.

Other governance issues remain, particularly those related to a new decree on local ownership. The revision of the 2004 investment law may raise concerns among international investors. The law requires 35 percent local ownership in ventures related to hydrocarbon production and appears to be targeted at subcontractors. Oil companies fear that it may increase the difficulty of outsourcing certain activities that are central to the functioning of the hydrocarbon sector. Moreover, the law's retroactivity and scope are as yet to be clarified.

Since oil was discovered in Equatorial Guinea and the country opened up slightly change appears to have begun on a very small scale. Torture still takes place but is becoming less prevalent. Yet external pressure for effective institutional reform and transparency is not forth-coming. Secretary of State Condoleezza Rice welcomed Obiang to Washington in 2006 as "a good friend of the United States". Hence, as America seeks to reduce its dependence on Middle Eastern oil, prospects for concerted international pressure for reform of EG's oil industry look slim.