The Importance of Production Sharing Agreements (PSAs) in Oil and Gas Drilling: A Case Study of Zimbabwe’s Cabbora Bassa Basin

Zimbabwe is new to the field of oil and gas extraction, hence many, including government officials, should be excused for their lack of familiarity with a crucial enabling tool called the Production Sharing Agreement (PSA).

We hope that this brief article will help not just the man and woman on the street, but also government officials and Members of Parliament, all of whom have a role to play in ensuring that Zimbabwe can exploit and benefit from its newly discovered wealth in the Cabora Bassa Basin. Members of the 4th Estate too, the Press, need to know more!

 

Understanding Production Sharing Agreements (PSAs)

Joined at the hip: Invictus Energy and the Government of Zimbabwe!

A PSA is a contract between a government and a resource extraction company (or consortium) that details how much of the resource extracted will be allocated to each party.Typically, the agreement specifies the percentage of production that will go towards covering the company’s exploration and development costs, with the remaining production being split between the government and the company based on negotiated terms. PSAs are crucial for:

a) Risk Management: They distribute financial risks between the government and the investor, encouraging foreign investment in potentially high-risk regions.

b) Revenue Sharing: They ensure the host country receives a fair share of the resources, contributing to national revenue.

c) Operational Clarity: They provide a clear framework for operational responsibilities, timelines, and procedures, facilitating smoother project execution.

 

The Muzarabani Gas Discovery and the Role of PSAs

The discovery of significant gas reserves in Zimbabwe’s Cabora Bassa Basin by Invictus Energy has generated substantial excitement and potential for economic growth. This find represents a transformative opportunity for Zimbabwe, potentially reducing energy imports, creating jobs, and boosting local industries. However, the progress towards drilling and eventual production is heavily contingent upon the finalization of a robust PSA.

Extract from March 2024 quarterly activities report: Commercial update

 

Impediments Due to Delayed PSAs

That there have been delays in getting the Invictus Energy and Government of Zimbabwe PSA signed is not a secret! The signing has been promised for what looks like eternity now!

Perhaps unrecognized, particularly by officials representing the Government officials, is the detrimental impact that such a delay has, not only on investors in this project, but on Zimbabwe as an investment destination overall.

Several critical aspects of the project that have been affected by these delays as as follows:

The Oil Rig standing Tall and Proud – at a cost!

a) Financial Investment: Investors require the certainty that comes with a signed PSA to commit substantial financial resources. Without this agreement, securing necessary capital becomes challenging, slowing down the entire project lifecycle. As it happens, Invictus Energy have a piece of equipment (an oil rig) on long-term hire, stationed in Muzarabani, waiting to be deployed, but can not do so, until additional funding, which mostly depends on having a signed PSA, is secured. Several millions of dollars will be wasted due to costs related to this item alone!

b) Operational Planning: Drilling operations depend on detailed planning and scheduling, which are outlined in the PSA. Delays in the agreement mean delays in operational timelines, affecting everything from workforce mobilization to equipment procurement. Again, that oil rig, which we like to see in pictures as evidence of work, is sitting there, doing nothing!

c) Regulatory Approvals: A signed PSA is often a prerequisite for obtaining various regulatory approvals. Without it, the project cannot proceed to the drilling phase, leading to further postponements and increased costs.

d) Market Confidence: The international investment community closely watches how resource-rich countries manage their agreements. Delays can erode market confidence, potentially leading to a reluctance to invest in future projects within the country. Claiming to be Open for Business means nothing, if business is then unable to proceed.

Extract from March 2024 quarterly activities report: Regulatory framework

 

The Way Forward

To capitalize on the Muzarabani gas discovery, it is imperative for the Zimbabwe government and Invictus Energy to expedite the PSA finalization process. This will not only unlock immediate project activities but also signal to the global market that Zimbabwe is a viable and reliable destination for energy investments. Clear and swift action in this regard can set a positive precedent, encouraging further exploration and development in the region.

 

In conclusion, Production Sharing Agreements are foundational to the successful development of oil and gas projects. In Zimbabwe’s Cabora Bassa Basin, the timely signing of the PSA with Invictus Energy is crucial for turning the promising gas discovery into tangible economic benefits. By addressing the delays and fostering a collaborative environment, Zimbabwe can pave the way for a prosperous future in its energy sector.

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