Offshore Africa: Exploring the Continent’s growing oil Sector in the Wake of Market ebalancing

 

 By Jerome Onoja & Godspower Ike

The Organisation of Petroleum Exporting Country (OPEC)-led market rebalancing efforts are gradually beginning to yield positive results globally, and stalled oil and gas projects are currently being revived. In all these, the African oil and gas industry had been described by experts as a major destination for new investments and is expected to attract significant percentage of investible funds in the global oil and gas industry.

This article explores the renewed activities arising from this effort and the attractiveness of Africa to investors. It also explores the role oil-producing countries in Africa are playing to not only attract, but also retain these investments for a longer period of time.

 

The African oil and gas industry is currently on the path of growth and development and is already attracting greater interests from investors across the world.

The rising interests in the African oil and gas industry is coming on the heels of efforts at market rebalancing by stakeholders, championed mainly by the Organisation of the Petroleum Exporting Countries (OPEC).

With the efforts at rebalancing the crude oil market, hope is rising on the return of stability in the market and attractiveness of crude oil and gas. With this optimism, investors are beginning to strategise; suspended projects are gradually returning, while funds are already flowing into the industry. Africa appears as a lucrative destination in this equation.

Africa has been described as the last true oil and gas frontier with more than 4,200 oil and gas blocks identified, while almost half of these blocks are open, subject to force majeure or in the application phase.

Africa, reports said, has proven natural gas reserves of 513 trillion cubic feet (TCF) with 91 per cent of the annual natural gas production of 7.1TCF coming from Nigeria, Libya, Algeria and Egypt.

The continent currently supplies about 15 per cent of the world’s oil and boasts significant untapped reserves estimated at 8% of the world’s proven reserves. These reserves have increased in the last two decades from 5.8% in 1991 and 7.6% in 2001 and this trend is anticipated to continue.

According to Abiodun Adesanya, President of the Nigerian Association of Petroleum Explorationists (NAPE), Offshore West Africa sub region is one of the ‘fastest growing and most attractive’ oil and gas provinces in the world today. He said, “Within the last decade, statistics indicate that there had been some recent world-class discoveries in Senegal, Ghana, Nigeria, Sierra Leone, Liberia, all the way to Angola. Also, there are some similar finds in East Africa offshore from Mozambique to Kenya”.

He added, “It is not surprising at all that the attention of some of the IOCs is being drawn to the region, therefore making it a preferred destination for investment in comparison to Europe and America where exploration works have long attained maturity.

PriceWaterHouse Coopers, PwC, in one of its report identified the crown jewels, who are the new players on the east coast, particularly Mozambique and Tanzania. With this, it said East Africa is merging as a new source of gas and oil.

Particularly, the report disclosed that significant gas finds in excess of 127 TCF in Mozambique had created the potential for another African super player, adding that with further exploration and development it is expected that Mozambique could overtake Nigeria and Algeria as the African country with the largest gas reserves.

It noted that Mozambique is expected to become the second-largest exporter of Liquefied Natural Gas (LNG) by 2025, as the country steps up production from 10 million tonnes per annum (Mtpa) in 2017 to an envisaged 50Mtpa.

“Access to the lucrative Asian LNG market has significant economic benefits for the East African region and could act as a catalyst for meaningful economic development. Developments in Ghana have demonstrated the possibilities within Africa to the world,” the report explained.

The report added that more than 80 per cent of the 1,300 blocks in North Africa are licensed, while in sub-Saharan Africa it is estimated that only about 30 per cent of 2,900 blocks are licensed.

“In the sub-Saharan regions it is evident that many new opportunities still exist, especially for exploration and production (E&P) companies that are willing to take risks,” the report pointed out.

Furthermore, in its analysis of the West African oil and gas industry, Infield Systems Limited, in a report presented by its analyst, Catarina Podevyn, said the previous year has been a challenging period for the global oil and gas industry, adding that West Africa certainly has not been immune to the repercussions of oil price decline.

The report noted that delayed projects include Shell’s Bonga South West, where Final Investment Decision (FID) had been postponed, while Maersk’s Chissonga had gone back to the drawing board.

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It however, stated that going forward, West African development is expected to remain strong, buoyed by a handful of giant projects sanctioned prior to the oil price collapse, and supported by increasing investment in new areas of production.

It added that with several capital intensive field developments sanctioned prior to the oil price decline, West Africa is anticipated to see robust demand growth through to 2018, noting that over the 2016-2020 timeframe, a capital expenditure (CAPEX) demand compound annual growth rate (CAGR) of 4% is forecast.

On a country-by-country basis, Infield explained that Angola is expected to dominate demand in West Africa, driven by Total’s activities; while the highest growth rates are anticipated for emerging countries of hydrocarbon production, in particular Côte d’Ivoire and the more established Equatorial Guinea.

Specifically, it said Angola is expected to continue to drive capex demand within the West African region, with a 47% market share of demand between 2016 and 2020.

It said after a decline in capex investment between 2014 and 2015, predominately as a result of giant projects such as N’Goma and CLOV seeing the majority of its development spend during the previous period, it expects Angola’s demand to increase year-on-year through to a peak spend in 2018.

According to the report, projects expected to drive this peak include Kaombo 2 and the presaltCameia Mound, with the majority of installation capex forecast to take place in 2018.

Again, the report said Nigeria is expected to hold a 22% share of offshore expenditure demand over the 2016-2020 timeframe, a slight increase from the 18% market share seen over the previous five years.

Altogether, Infield Systems projected that 54 potential fields offshore Nigeria would require capex spend over the forecast timeframe, with Total-led developments anticipated to form 38% of demand during the period.

The report said the giant Egina project is expected to remain key to Total’s investment, with 60% of the French international oil company’s forecast demand offshore Nigeria expected to be attributable to the development.

In the case of Ghana, the report projected that the country would remain the third-largest destination for operator capex offshore West Africa going toward 2020, driven by the TEN (DeepwaterTano) developments.

It noted that Tullow’s Mahogany East and the Eni-operated Sankofa OTCP are also anticipated to require substantial investment during the next five years.

Equatorial Guinea, the report said, is expected to undergo a capex demand Compound Average Growth Rate (CAGR) of 13% over the next five years to 202, adding that a total of 28 fields may require capex during the period; an increase from the 15 fields invested in over the previous five years.

Key to Equatorial Guinea’s demand growth, it said, is expected to be Ophir’s Fortuna FLNG project, which is forecast to comprise 28% of the country’s offshore capex demand during the 2016-2020 period.

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Furthermore, the report said the previous five years has witnessed significant capex growth offshore Congo (Brazzaville) noting that a CAGR of some 154% from 2011 to 2015.

This, Infield Systems said, had been predominately driven by investment on the Moho Nord Marine project, which has comprised 52% of the country’s offshore expenditure.

For Côte d’Ivoire, Infield said Total’s Saphir discovery in April 2014 highlighted the potential of the ultra-deepwater blocks to the west of the country’s offshore zone and the under-explored San Pedro basin.

The country projected that up to 11 potential fields offshore Côte d’Ivoire would require capex during the next five years to 2020, while the highest demand is expected on Saphir.

It also stated that the country’s eastern offshore zone, where prospects such as Eland and Kudu neighbor Ghana’s TEN fields, would also see investment during the period, while over the upcoming five years the country is likely to see increasing exploration, as a number of new operators have entered the country’s market over recent years.

In addition, Infield Systems forecast a number of possible developments offshore Cameroon to require expenditure over the 2016-2020 timeframe.

It said while the majority of these are in the very early stages of planning, the Golar Cameroon FLNG is expected to see completion in 2017, with the FID reached by Golar and its partners in September 2015.

It added that prospects offshore Senegal may also see capex begin before the end of the decade, noting that it exects for operator Cairn Energy to lead development on the FAN-1 and SNE-1 Sangomar Deep discoveries, which were amongst the largest global discoveries of 2014.

It also projected that the two prospects to be developed via an FPSO, which would have the capacity for future tie-ins of neighboring prospects, although the operator and its partners have yet to announce when a FID will be due on the development.

PwC declared that there are many key opportunities within Africa due to new exploration blocks being opened for competitive bidding; port development and management; pipeline engineering and construction (both subsea and onshore); onshore and offshore maintenance.

It also identified some more factors that would open the opportunities to include LNG plant engineering and construction;  CO2 reduction and gas-powered electricity generation;  other gas monetisation projects for local use, such as methanol, fertilisers, urea;  stability of supply and security of supply with a reduction in exports;

Others are foreign exchange inflows; distribution of wealth – for the benefit for all citizens; infrastructure development mega projects; and new refinery development or upgrades.

Also, in its own report, Ernst and Young (EY) stated that African countries are increasing their production of oil and gas, addi ng that revenues from higher prices and the investment that new discoveries are attracting, have made a key contribution to growth and developmental initiatives.

It noted that while the majority of reserves and production remain concentrated in six countries — Nigeria, Libya, Algeria, Angola (oil), Sudan (oil) and Egypt (gas) — there have been ever-increasing discoveries of new oil and gas, for example, in Ghana, Tanzania, Mozambique and Uganda, and prospected fields in many countries, including Sierra Leone, Mali and Kenya.

EY added that despite current levels of concentration, 23 African countries were producers of oil and gas in 2012 and still rising, noting that oil and gas would be a key driver of growth across much of Africa going forward.

The report noted that there are ever-increasing discoveries of new oil and gas, for example, in Ghana, Tanzania, Mozambique, Kenya and Uganda, while bright prospects are seen for many other countries, including Sierra Leone, Morocco, Gabon, Côte d’Ivoire, Liberia, Mali and Kenya.

It said, “Before the Libyan production curtailments, African oil production had been growing steadily over the past decade. Conventional forecasts see African oil supply growth continuing over the next 25 years, albeit more slowly than it had recently — with forecast ranges of growth over the period of between 0.5 and 2.0 million barrels per day.

“African natural gas supply has similarly grown strongly in the recent decade, and forecasts of supply growth are dramatically stronger than for oil, with supply expected to double by 2035.”

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Furthermore, it is also argued that with growing interest and investment from India, China and international oil companies operating in Africa, there had been increased competition for exploration acreage in recent years.

Reports are rife that as some of the traditional multinationals divest from areas in Africa, opportunities for new independents will emerge, causing the trading mix and diversity of the companies trading in Africa to change.

This, experts said, would cause established energy companies to become more agile in order to respond to greater competition and emerging trends.

They said that apart from Mozambique joining Egypt, Nigeria Libya, Algeria and Angola as major upstream power houses in Africa, it unlikely that Ghana or the other East African countries would disturb the equilibrium that had existed in Africa for the last two decades.

Analysts at Ernst and Young also argued that refining capacity in Africa would continue to increase, in contrast to what is happening in the developing world, as countries strive to have a greater security of supply and increase export earnings from the sale of refined products.

Already, African countries have started to witness large inflow of foreign investment, with Nigeria, a major oil producing country in Africa, signing agreements with multinational oil companies valued at over $4 billion over a period of 18 months.

Similar scenarios are recorded in Libya, Algeria, Morocco, Ghana, Sudan, and Egypt, as well as in almost all the oil-producing countries in the continent.

 

Highlighting investment opportunities in Africa, Olivier Mussat, Chief Investment Officer, International Finance Corporation, IFC, said half of the estimated financing needs for infrastructure in Africa is unmet.

He argued that currently, developing countries spend $1 trillion annually on infrastructure, noting, however, that the need for investment was estimated to double annually over the next decade.

According to him, East Asia including China would require the majority of investment, sub-Saharan Africa’s needs seem smaller at about $50 billion to $150 billion compared to other regions, but they are substantial relative to the region’s GDP.

Mussat stated that more than half of the investment requirement would be in the energy sector, especially in the electricity sector, including generation, capacity, transmission and distribution networks, adding that preparation costs, including costs of design and arranging financial support, can constitute up to 10% of overall costs.

Also speaking on the opportunities in Africa, Partner in charge of Energy & Project Finance Group at ACAS-Law (Adepetun, Caxton-Martins, Agbor and Segun), Donna Obaseki-Ogunnaike identified opportunities both in the Nigerian and African oil and gas sector to include investment in LNG, independent power plants, gas to liquid conversion, natural gas liquids (NGL) and methanol.

Adding her voice to the preparedness of the African countries, MsDamilolaOwolabi, Managing Director of Dreg Waters Petroleum & Logistics Ltd believes the Nigerian government is ready to receive potential Oil and Gas investors and have put the necessary infrastructure in place. She explains, “There are currently no challenges encountered in processing automated permits at the Department of Petroleum Resources as a high-speed processing measure has been put in place by the agency. This ensures a 48-hour turn-around time for issuance of licenses.

Speaking as an Oil and Gas consultant on logistics, also to new firms; she emphasizes the easy access to statutory registrations, viz: Corporate Affairs Commission; Federal Inland Revenue Service; and License for Operators or Permit for Contractors. “Most of these processes have been automated and made accessible to remove unnecessary bottleneck and improve the ease of doing business index in Nigeria”

However, as Africa awaits a further rush in investment, even with the current efforts at market rebalancing, the African Development Bank and the African Union in a report titled, ‘Oil and Gas in Africa,’ averred that a key concern regarding the governance of oil and gas resources is that the governments of African oil and gas-producing countries receive an inadequate share of the large rents from production.

The report, which is a supplement to the African Development Report, said this might stem from a number of reasons, including contracts and regimes that are not designed to extract maximum rents; and oil and gas policies that are designed primarily to promote and attract investments and have not evolved with changing global dynamics and national interests.

The report noted that the sustainable development of oil and gas resources requires policies, principles, and practices that support the utilization of resources in a manner that does not prevent future generations from benefiting from the resources.

It also added that a great challenge, particularly for oil-producing African countries, is to ensure sufficient, reliable, and environmentally responsible supplies of oil, at prices that reflect market fundamentals.

To achieve this important goal, the report noted that several challenges had to be addressed, including high and volatile oil prices; growing external and internal demand for oil; increasing import dependence of many African countries; and, most importantly, sustainable management of the continent’s oil and gas resources for the benefit of all.

“The regional nature of these challenges and the growing interdependence between net importing and net exporting African countries require a strengthened partnership among all stakeholders to enhance regional energy security,” it added.

Despite the challenges and issues involved, the report however, agreed that an oil and gas resource boom can, under the right circumstances, be an important catalyst for growth and development, adding that the often-referred-to ‘natural resource curse’ can be avoided with the right institutions and policies.

It said, “Several countries in Africa have demonstrated this and there is some reason for cautious optimism that more countries have learned hard lessons from past resource booms, and, in future, will pursue strategies and policies that would allow them to fully reap the benefits of their natural resource wealth.”

To this end, to forestall a negative side to the attractiveness of Africa oil and gas industry, the AfDB and the AU said it is important for continental bodies, to become more engaged in helping African countries manage their oil and gas resources.

The report also argued that it is likewise very important that these continental bodies, together with other international donors and stakeholders, provide technical and financial assistance to help new oil and gas producers negotiate fair and pro-development contracts where environmental, social, and revenue distribution are an integral part of the management of oil and gas.

At the regional level, the report stated that regional economic blocs in Africa can play a key supporting and coordinating role and can be instrumental in advancing a number of initiatives.

According to the report, these initiatives can be in the area of promoting regional integration in oil and gas exploitation; building regional infrastructure, such as oil and gas pipelines, for sustainable exploitation of oil and gas; and promoting regional economies of scale in the sector, focusing especially on downstream industries, such as refineries.

Others, the report said, are encouraging countries to adhere to principles of good governance and transparency initiatives for revenue management; promoting regional sharing of experiences; promote intra-regional trade in the oil and gas sector and support and promote the African Petroleum Fund.

The rest are:“establish regional mechanisms for sharing experiences on oil and gas issues, especially those related to contract negotiations and technology transfer; and encourage the sharing of regional expertise in the sector.

In the same vein, African Petroleum Producers Organisation, APPO, the umbrella body for oil–producing countries in Africa, in one of their reports, stated that for member countries to position themselves for the expected investments, they should focus on value addition rather than volume of production.

The group added that governments of these countries needed to work harder for investments under the current economic circumstance, while ensuring that partnerships focus on flexibility rather than contractual commitments.

The group said regulatory frameworks should be fit for purpose, while efforts should be made to control and limit ineffective bureaucratic procedures including permits and consents.

It also said oil-producing countries in the continent should implement anti-corruption initiatives and ensure transparency; implement better management of production cost elements; co- integrate upstream and downstream activities; embed and establish linkages and the rest of economy to make it more resilient to shocks such as the current one.

Others, it said, are, “Strive towards joint collaboration between infrastructure developers; Promote private sector investment incentives; work towards a more balance economy rather than current emphasis on export of crude oil; entrench sincerity of purpose and remain consistent with project development programmes so as to attract and retain participation of partners.

“Repeal and/or discard arrogant and dissenting laws; invest in human capital development to foster security with APPO member counties; promote local content management and pursue community development as a shared responsibility between stakeholders; implement continuous learning and knowledge sharing; safeguard the safety, environment and social development in producing communities.

“Implement gas monetisation and flare out programmes to protect the environment and mitigate climate change; see petroleum as source of energy and growth enabler instead of emphasis on crude export; develop medium-long term strategies to anticipate developments in the oil market.

“There should be clarity on role/powers of ministers and regulatory agencies to reduce approval cycle time and operational bottlenecks; regulatory certainty, clarity and flexibility for changes overtime to reflect circumstances; promotion of regional synergy and cross border investment in infrastructure; establishment of a robust information databank on challenges and opportunities for existing and potential investors in the sector.”

Considering the capacity of indigenous companies to take advantage of the new finds, MrAbiodunAdesanya said, “Collaboration is the name of the game for operating companies wanting to work in the deep offshore as the cost is very high and prohibitive. This is evident in medium-sized international companies who are seen collaborating to get the best from the industry. Indigenous companies simply do not have the required funding except through collaboration with IOCs to operate in the deep offshore else they run the risk of over-exposure”.

Speaking on ways to attract and sustain investments in the African oil and gas industry, Donna Obaseki-Ogunnaike of ACAS-Law said efforts should be geared towards harmonising laws, regulations and policies on gas into a single piece of legislation in order to achieve clarity in the legal/regulatory regime for gas.

She also noted that the continent should encourage the increase of gas reserves and extraction of available reserves through the grant of licences/permits for gas exploration and extraction, distinct from the approvals for crude oil.

She said tax holidays should be granted to investors engaging in gas activities as gas projects, adding that pioneer industries status should also be extended to include activities for gas exploration, extraction and processing.

In conclusion, as Africa awaits the rush of investments into the oil and gas sector, it is important that oil-producing countries take steps to forestall the ‘resource-curse syndrome’ and make sure that efforts are geared towards ensuring that the investments are sustained and used for the growth and development of the countries and the continent in general.

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