Thursday, August 25, 2016 1:00pm / PwC
First and foremost, the biggest challenge is for oil dependent countries to diversify their economies.
Reserves and production
Africa’s share of global oil production dropped again slightly since last year, moving it from 9.3% to 9.1% of global output. Proven oil reserves on the continent are still estimated to be 7.6% of the global total, which is the same as the previous year. This comes as no surprise as much of the exploration and appraisal activity has been put on hold with the global oil price downturn. Despite this, Africa boasts eight of the top-20 discoveries in 2015 and already 9 out of the top-20 discoveries at the time of writing in 2016. That said, average discovery sizes are on the decline worldwide.
From a proven oil reserve totalling 129.1 billion barrels, Africa produced 8.4 million barrels of crude oil per day (bbl/d) in 2015 with over 77% of this oil production coming from Nigeria, Algeria, Egypt and Angola.
Despite what may seem like a time to shut-in producing assets to wait out the oil prices storm, many oil & gas companies see production to be their only route to a continuous stream of income. In many cases, production has actually increased!
The emergence of ISIS as well as the civil war in Libya has meant that production levels in North Africa continue to be low, though they have increased slightly due to increased production in Egypt.
Libya saw another decline of 13.4%, though there is speculation that production levels there will soon be on the rise. After the newly formed national oil company of the east failed to export crude (thus temporarily further slashing countrywide production), there has been an accord between the rival Tobruk-led Government and the Government of National Accord to combine the two national oil companies (NOCs) under the National Oil Company of Libya and relocate the headquarters to Benghazi in the east. This seems like a sign of positive things to come for Libya though it may flood the market with additional crude, which is the last thing needed for an oil price rebound.
As of the end of 2015, Africa has a proven natural gas reserve base of 496.7 trillion cubic feet (Tcf), down marginally from 2014. More than 90% of the continent’s natural gas production is being driven by Nigeria, Libya, Algeria and Egypt. This is a slight uptick in production (4.5%) compared to 2014.
Africa has dropped from nearly 70 years of natural gas production available down to 66.4 years, given higher current production rates and a slow rate of reserves replacement.
With six of the nine largest African discoveries being gas in 2016, we are likely to see growth in the continent’s overall proven natural gas reserves. Since gas is positioned to be a bridging fuel in the eventual transition to a lower-carbon economy, this could prove a lucrative natural resource to fuel the emerging economies on the continent.
Growth and development
Industry activity throughout Africa and the world has slowed greatly due to cost cutbacks across the board. Exploration and production (E&P) activities have suffered the most, though we have noted a few discoveries in countries like Angola and Mozambique, as well as some sizeable gas discoveries in Egypt.
There no longer seems to be as much focus on East Africa as there has been in recent years, and companies seem to be scrambling to spend their limited capital budgets in countries with proven resources and decent (if not favourable) fiscal terms. Despite the trend to avoid frontier areas, Kosmos Energy made a considerable gas discovery in Mauritania during the course of 2015.
Despite a slack in upstream activity, there are many investors with an eye on Africa when it comes to delivering power solutions. Many donor funds have projects under way to bring electricity to those in need throughout the continent.
Power Africa is an initiative being driven by USAid in an effort to increase access to electricity to Africans by adding over 60 million new electricity connections with 30 000 megawatts of new and cleaner power generation.
Natural gas-fired power stations are one option for providing cleaner energy in Africa. Africa currently flares 1.2 trillion cubic feet (Tcf) of gas per year. That equals nearly half the continent’s gas consumption, so there is no shortage of resources. Gas-topower solutions would be an excellent way to monetise the numerous gas discoveries made on the continent recently.
Given the high capital costs in this sector and the long-term investment cycle, oil & gas producers have little alternative but to relentlessly focus on cost. Layoffs, reduced capital expenditure budgets and aggressive discounting across the supply chain reflect a sector trying to adjust to a new reality. While the much-heralded wave of consolidation across the sector is yet to be realized, it is clear that more transactions may well follow a period of financial distress.
There are of course other trends shaping the oil & gas sector. With the ongoing emphasis on cost reduction, demand for innovation in technology will grow. Whether it is the more widespread application of the digital oilfield or the use of drones to undertake offshore inspections of pipelines, technology is key to reducing cost and improving operational efficiency.
While several oil & gas companies are focusing on resetting for the future, others have realised that the future will certainly look very different to the status quo to which they’re accustomed. The strategies likely to come will be adaptable to a number of possible future scenarios, meaning that the cyclical commodity prices will not impact them as drastically as in the past.
The African continent still offers significant opportunities in the oil & gas sector, albeit delayed by the low oil price environment. The current opportunity for host governments that want to attract oil & gas investors lies in offering an attractive environment by reforming their regulatory, fiscal and licensing systems. There seems to be an increased level of realization on the part of some governments and policymakers that they have to play their part in enabling projects to go ahead as soon as possible.
This can also be the time to introduce training programmes to up skills levels and company standards in order to give local players a chance to enter the industry when activity picks up again.
First and foremost, the biggest challenge is for oil-dependent countries to diversify their economies. Oil & gas will remain a commodity game driven by peaks and troughs. If nations are to survive the ups and downs, they must expand into other industries.
Exploration and production has and always will be a high-stakes, highrewards game, and oil & gas players will always be looking to minimize the risk and maximise value. For many, that means exploring proven hydrocarbon provinces with lower government take as a preference, but the fact of the matter is that those types of plays are few and far between.
Many companies are simply taking their chances to see what they can find. Various approaches are being taken to minimise risk, but the safest bet is to have a balanced portfolio. Just as governments should diversify their economies, oil & gas players must maintain diversified portfolios.
One new challenge on the horizon for oil & gas players will be competition in the form of renewable energy. In July 2016, the Rockefeller Brothers Fund announced that it will be backing a US$177.5 million wind and solar power programme in Africa. This will be its biggest move to a greener energy space since announcing its plans to withdraw from fossil fuels back in 2014.
Though 3.3% of the fund is still invested in oil & gas companies, this is down from 7% two years ago. Considering that John D. Rockefeller established his wealth through Standard Oil, this is certainly a sign of the times, and oil & gas companies will need to reinvent themselves to survive in the ‘new energy future’.
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