Africa’s New Extraction Maths: Less Oil, More Gas

Foreign investors are dropping crude production and betting on LNG developments.

Summary
• Oil majors have been pulling out of crude projects in Africa, engendering caution about foreign direct investment (FDI) on the continent.
• On the other hand, gas production across the continent could double by the mid-2030s, according to energy consultancy Wood Mackenzie.
• Proponents say LNG could also help solve Africa’s cost of living crisis, because its by-products can be used for large-scale fertilizer production.

Unnerved by regional insecurity, crude oil theft and sitting on fast-maturing assets, oil majors have been pulling out of crude projects in Africa, engendering caution about foreign direct investment (FDI) on the continent.

Africa’s share of global oil production has fallen steadily over the years, going from 12.3% in 2010 to 8.1% in 2021, according to data from the BP Statistical Review of World Energy.

From ExxonMobil leaving Equatorial Guinea, the Organization of the Petroleum Exporting Countries’ (OPEC’s) smallest member, to Chevron and Shell retreating from Nigeria, the exodus of foreign oil majors gathered pace in 2022. On top of this, African producers again fell short of their OPEC quotas for a second successive year, with international oil corporations turning to alternatives in the Americas.

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All is not lost, however. Experts say oil divestment could be good news for Africa’s gas-rich nations, who might be in for an investment windfall this year. If they set in motion the right mix of reforms, gas production across the continent could double by the mid-2030s, according to energy consultancy Wood Mackenzie.

Divestment wave
Last year saw crude oil projects in West Africa particularly fall one after the other. ExxonMobil announced plans to wind down oil production in Equatorial Guinea and depart altogether in 2026 after its license expires.

The US company had already cut its output in the tiny West African nation to fewer than 15,000 barrels per day (bpd) in late 2022. The country produced 93,000bpd in 2021, according to OPEC, down from 300,000bpd in 2012.

Oil giants Chevron, Shell and Exxon exited Nigeria, Africa’s biggest producer, due to rampant oil theft by the Niger Delta gangs that for years have crippled production in the region. They all sold their assets to independents with lower costs who can run more nimble operations.
In July, Shell’s Nigeria director said rising levels of theft in the Niger Delta pose an existential threat to the country’s oil industry, while a recent investigation by Nigeria’s senate found that the country had lost more than $2billion to oil theft in the first eight months of 2022.
Nigeria’s output fell below one million bpd in late 2022 — a 32-year low and well below its OPEC quota of 1.8 million bpd. Even Angola has not been spared, despite its oil sector enjoying a renaissance under President João Lourenço.

TotalEnergies quit the country last year amid plans to focus on low-emission projects elsewhere. Only Algeria and Libya, which produce oil at a lower cost, are likely to keep attracting serious investment, according to a recent study by the consultancy McKinsey, as long as they commit to carbon emissions reduction.

Gail Anderson, research director for sub-Saharan Africa at Wood Mackenzie, says the divestment decisions — some of which were likely made several years ago before the pandemic — were based on maturing assets, environmental targets and insecurity, rather than a conscious shift away from oil.

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“The oil companies will still continue to pursue oil projects, but it’s got to be the right project,” she says. “They are being a lot more choosey.”

For now, investment is shifting to the Americas, chiefly the US, Canada, Guyana and Brazil. With investment falling short, Ms Anderson says: “The [African] OPEC producers have really struggled to meet their quotas and that’s likely to continue into 2023.” Experts say African governments are partly culpable. “African countries themselves have not done a good job at creating an enabling environment,” says NJ Ayuk, head of the African Energy Chamber, with resource nationalism and slow permit issuance proving perennial challenges.

Carole Nakhle, CEO of Crystol Energy, adds: “In many African countries, the Achilles heel has been unattractive government terms and unstable policy, including fiscal policy, and an overall weak institutional framework which increase the cost of doing business for investors.”
The African divestments came, paradoxically, against a backdrop of high oil prices and rising demand in European markets thirsty for alternatives to Russian oil and gas, not to mention sky-high demand in Africa, where 600 million people still lack access to electricity.
Harbinger of the boom

Yet analysts say crude sell-offs could herald a boom for liquefied natural gas (LNG), a less polluting hydrocarbon that is a growing component of Europe’s energy mix. So strong is the business case for African LNG that stalled or abandoned gas projects are expected to proceed in 2023, boosting FDI flows. Proponents say LNG could also help solve Africa’s cost of living crisis, because its by-products can be used for large-scale fertiliser production.

TotalEnergies and ExxonMobile are awaiting the green light on two huge LNG facilities in Mozambique, while — in a major milestone — Eni shipped its first cargo from the country’s Coral South floating LNG project in November.

Shell and Equinor plan to build a $30bn LNG export terminal in Tanzania. Investment, including from BP, is pouring into Senegal and Mauritania, where huge gas discoveries could transform the regional economy. Gas fields are also being eyed in Nigeria, Angola, Congo and the Democratic Republic of Congo.

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Meanwhile, gigantic reserves of oil and gas have been discovered in Namibia, where drilling will pick up this year. “Namibia could be, and I say this carefully, another Guyana,” says Ms Anderson. The South American nation recorded the past decade’s biggest oil find, with more than 11 billion of barrels discovered since 2015 (see page 32).

As a result, “upstream capital investment in sub-Saharan Africa is expected to increase to over $22bn in 2023, compared to around $18bn in 2022,” says Ms Anderson. “That’s an increase of over 20%.”

While Africa’s potential is clear, Mozambique has been a cautionary tale. For years, Islamist militants have carried out a campaign of looting and violence in the gas-rich Cabo Delgado region, impeding gas development. As a result, analysts expect FDI to focus on floating LNG projects, which are less affected by insecurity and can be brought on-stream quicker than traditional greenfield projects, pleasing energy companies that want quick payouts due to uncertainty over future demand.

Research by Wood Mackenzie suggests African LNG has the potential to grow from 40 million to 50 million tonnes per annum today to nearly 100 million tonnes by the mid-2030s, but notes the high level of risk. In Algeria and Egypt, where projects are more secure, strong domestic demand has constrained gas exports. “We don’t think that Africa can be relied upon to fill any gaps in Europe,” says Ms Anderson.
Mr Ayuk is more bullish. “Non-traditional players are going to be the sources of Africa’s oil and gas growth in the next two to three years,” he says, pointing to Senegal, Mauritania, Uganda and Namibia. “The only thing that holds Africa back from closing the gap with Russian gas is the investment.”

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Between 2010 and 2020, Africa accounted for 40% of natural gas discovered worldwide. But the continent has struggled to exploit more than a small fraction. As European countries cast around for alternatives to Russian energy, that could be about to change.
“China and India will [invest in African LNG] if the Europeans don’t,” says Mr. Ayuk. “The crazy thing about it is that the Asian countries will end up selling African gas to Europe.”

Charlie Mitchell [FDi Intelligence]