The new Prime Minister of Ethiopia, Dr Abiy Ahmed, has said that Ethiopia will begin to extract oil. This news made Ethiopians to except bright future for the country and raised expectations. Most are hopeful that extraction of oil shows Ethiopia’s economic advancement, help to generate the much-needed foreign currency.

At this juncture, it is relevant to take a closer look at what the law says about oil extraction and exploration.

“From now until you finish this sentence, another 5,000 barrels of oil will have come out of the ground. Or 10,000 barrels by the end of this one, worth about a million dollars on world markets today…. This would surpass the GDP of Democratic Republic of Congo, a country of 70 million people in a day and half, and the entire annual aid budget to Africa in four days. It would, in fact, take about two weeks to eliminate absolute poverty among 1.3 Billion people…” says a research, entitled “Oil Contracts- How to Read and Understand Them”, published by OpenOil.

Everybody knows that oil generates a lot of money and demands billions of dollars. However, it is the law and oil contracts who articulate how this money is split, who gets what.

In Ethiopia, Petroleum Operation is governed by Proclamation 295/1986. As per article 2/9/ of the Proclamation, Petroleum Operations means that “operations related to the exploration, development, extraction, production, treatment (excluding refinement), storage, transportation up to the point of exportation or entry into a system for domestic consumption and marketing of petroleum…”

So, when the Prime Minister says Poly-GCL has completed exploration and is about to begin “extraction”, he was referring to the petroleum operation, which you read in the previous paragraph.

But what is petroleum? All of us have heard this word, yet few understand the actual meaning. I mean, without defining petroleum, taking about petroleum operation is meaningless.

The chemical composition or nomenclature does not matter. It is too technical. For the reader, petroleum simply is a fossil fuel. It is a fossil fuel because it was formed from the remains of tiny sea plants and animals that have died millions of years ago. The mixture was changed to hydrocarbon (the mixture of hydrogen and carbon atoms) over time. This is why the proclamation, in article 2/7/, defines petroleum as a “…crude oil and natural gas and includes hydrocarbons produced…”

In Ethiopia, the government owns petroleum, but retains the power to give it to oil companies, called Contractors, for the exploration and extraction.

There are two kinds of contracts: Petroleum Product Sharing Agreement (PPSA) and Modern Concession. Currently, Ministry of Mines, Petroleum and Energy (the Ministry) uses PPSA to sign an agreement with contractors. This is mainly because modern concession agreements assume private ownership of land. Under the concession agreement, the contractor can be the owner of the land and the petroleum underneath.

This is inapplicable in Petroleum Product Sharing Agreements. In the model PPSA, which is uploaded on the Ministry’s website, the government is entitled to negotiate royalty fee, bonus, how to share the profit or the petroleum itself, how to settle disputes (which is through arbitration, but discuss about the seat the applicable laws), etc.

Some say that natural resources can be a blessing and curse- when they refer to the Dutch Disease.

Well, I say that a responsible and accountable government can benefit a lot if it uses the resource wisely.

For detailed legal analysis and expert opinion, you can contact Michael Teshome, An Attorney and Legal Consultant based in Addis Ababa, Ethiopia.