Global Arab Network – – Ayman Khalil
As Morocco remains heavily dependent on fossil fuel imports, which is then provided at below-market rates to local consumers, the state is working to minimise the energy sector’s impact on public finances by stimulating local production and reducing fuel subsidies.
While Morocco has very little proven oil and gas reserves, it is also one of the most under-explored countries, and as deepwater deposits become increasingly accessible thanks to improved drilling techniques, growing interest from foreign oil companies highlights the potential for the sector, Global Arab Network reports according to (OBG)
The state has moved to encourage exploration and amended the Hydrocarbons Law to offer more attractive terms for new market entrants, including an initial 10-year tax exemption and oil and gas royalty rates that do not exceed 10% or 5%, respectively. Around 30 foreign firms, including the US-based Anadarko Petroleum and Spain-based Repsol, began conducting surveys in on- and offshore blocks earlier this year. In addition, a handful of companies looking to expand their portfolios have bought into offshore licences in recent months.
In late August, British oil company Cairn Energy bought a second stake in offshore oil and gas exploration. Company officials indicated that Cairn would contribute $60m for a 50% stake in the Foum Draa block and farm-in as an operator.
Cairn will become the majority stakeholder, sharing the licence with the National Office of Hydrocarbons and Mines (ONHYM, 25%), and smaller explorers San Leon Energy (14.2%), Serica Energy (8.3%), and Longreach Oil and Gas (2.5%). Exploratory drilling on one or more deepwater wells is slated to begin in the fourth quarter of 2013, pending regulatory approval.
London-listed company Genel Energy also assumed ownership of the offshore Sidi Moussa licence in August by purchasing a 60% stake at a maximum estimated cost of $50m. Until recently, Genel’s operations have been focused in the Kurdistan region of northern Iraq; the Morocco purchase and a simultaneous purchase off the coast of Malta represent the company’s first foray into offshore exploration.
Morocco is also working to increase downstream operations, with the aim of becoming an exporter in refined products. Its sole oil refinery, operated by the Société Anonyme Marocaine de l’Industry de Raffinage (SAMIR), is located in the port city of Mohammedia and has a processing capacity of roughly 6.5m tonnes per year.
In August, SAMIR launched commercial use of a new crude distillation unit with the capacity to process 80,000 barrels per day, boosting total capacity to 200,000 barrels per day. Executives reported to Reuters that the new unit is expected to add an additional 4m tonnes of refined oil per year. SAMIR also announced the launch of a Jet A-1 fuel refinery unit with a capacity of 600,000 tonnes per year. The company issued a tender in early August for the sale of 60,000 tonnes of jet fuel, which is expected to be delivered in late September.
Public and private sector officials have expressed optimism that deepwater exploratory drilling will yield results in the coming years, and an increased refinery capacity should help to bring in revenue. Nonetheless, Morocco remains heavily dependent on imports of fossil fuels; the country imported 93% of its energy needs in 2010, and fossil fuels represented 87% of total energy consumption. As local energy demand increases rapidly, the energy sector will continue to weigh heavily on public finances in the medium term.
In its effort to decrease the energy sector’s impact on the economy, renewables have been made an increasingly important component of the consumption mix but in June the state also introduced a reform package that will gradually dismantle fuel subsidies. Government spending on these subsidies skyrocketed from Dh7.07bn (€635.77m) in 2009 to Dh22bn (€1.98bn) in 2010, placing a major strain on public finances.
Subsidies on food staples such as flour and sugar will also be reduced under the reform package, and the state will provide direct assistance to poorer segments of the population to make up for higher food and fuel prices. The first change was implemented on June 2, which raised the price of fuel by up to 27%, the sharpest single increase in several years.
As a result, inflation nearly doubled in June to reach an annual rate of 1.9%. In monthly terms, inflation rose by 0.5% from May to June, driven largely by a 4% increase in transport costs. To combat this rapid increase, the government slowed the implementation of the reform package, which brought annual inflation forecasts down by one percentage point to 1.5%.
While rising energy demand and limited domestic resources mean that Morocco will remain an energy importer in the long term, fiscal reform should help to decrease public spending. New exploratory drilling projects may open the door for higher domestic production and processing, thus reducing lower import bills, though considerable investment will be needed to equip the sector with the adequate infrastructure to do so. (OBG)