Energy- Sub-Sahara Africa Key Themes 2018


Wednesday, March 28, 2018 /11:42 AM/BMI Research 

Exploration to Be Leaner, More Targeted
As oil prices strengthen over the course of 2018 we expect to see a renewed focus on high-risk, high-reward exploratory activity in the Sub-Saharan Africa (SSA) region. Globally, we expect that 2018 is unlikely to see significantly more exploration drilling than 2017. 

However, companies will increasingly cherry-pick projects that offer the highest potential returns. A basin we have previously highlighted as one to watch is the Mauritania-Senegal- Gambia-Bissau-Conakry (MSGBC) basin off West Africa. The basin remains a relatively under-explored region of the Atlantic margin but boasts strong prospectivity. The MSGBC has yielded a number of major discoveries in recent years, including the Ahmeyim gas discovery in Mauritania and the SNE-1 oil discovery in Senegal. Further drilling work this year from
BP, Kosmos and FAR will target similar high-impact discoveries. 

We also highlight
Total's renewed interest in deepwater prospects off the coast of South Africa. Most recently, Qatar Petroleum has bought a 25% stake in the Block 11B/12B, where the French major plans to drill towards the end of this year. A well is also planned for Namibia, with Tullow Oil set to tap the high-impact Cormorant prospect in H218. 

Production Gains Hide Longer-Term Problems
Over the short term, we are positive on SSA's oil output forecast, with production rebounding from several years of decline to record strong growth over 2018. We expect overall regional output will grow by 5.0% this year. This is primarily due to the realisation of the current project pipeline, driven by investment committed when global oil prices were at their previous highs. Several large greenfield projects will be brought online and ramped up before 2019, including fields in Ghana, Congo-Brazzaville and Angola. 

However, 2018 marks an inflection point for output growth in SSA, with growth slipping into a structural decline from 2019 onwards.

Decline rates at mature fields will put significant downward pressure on headline production figures, with a sparse project pipeline unable to counter the losses. With oil prices strengthening, there is scope for companies to re-examine the pre-final investment decision (FID) potential in a number of markets in SSA, particularly in countries such as Angola, Nigeria and Ghana. However, high breakeven costs within these basins, alongside ongoing uncertainty regarding fiscal and regulatory environments, will limit the scope for significant investment.

Long-Awaited Fiscal Reform to Disappoint
Through 2018 we remain cautious on the progress of long-awaited fiscal and regulatory reform in several key markets in the region. SSA markets in general have been slow to adapt legacy fiscal regimes in reaction to significantly lower oil prices. Consequently, countries have seen a lack of investment over the past three years. We believe the risk of failure in passing tangible industry reform in a number of SSA markets continues to pose one of the greatest risks to investment into upstream sectors. 

In 2018, we expect ongoing discussions in Nigeria and Angola to remain bogged down. Recent developments – the passing of the Petroleum Industry Governance Bill (PIGB) in Nigeria and prioritisation of IOC debt repayment and personnel change at the state oil company in Angola – suggest a modicum of progress and this is a small but positive step. However, we expect that passing reform in both countries will continue to be challenging due to bureaucratic inefficiencies and the number of players with contrasting priorities in the decision-making process.

LNG Potential to Be Re-Examined
In line with rising oil prices, we believe a strengthening in operators' finances will renew momentum behind smaller-scale LNG developments in SSA. Small-scale projects, which demand less upfront capital, can offer smaller offtake volumes and more flexible contracting. This will be an important dynamic in order for these projects to reach FID, as the global LNG market will be inundated over the next three years with a wave of new supply from larger projects. 

We highlight four projects within the SSA region with the potential to reach an FID over 2018:

• BP and partner Kosmos are assessing a floating liquefied natural gas development for the cross-border Greater Tortue development between Mauritania and Senegal. Front End Engineering Design and contract awards are ongoing, with the potential for an FID late in Q4. 

• Nigeria LNG is thought to be making progress towards an FID for the seventh liquefaction train at its Bonny Island plant. 

• NewAge Energy is targeting a 2018 FID for its proposed 1.0mn tpa project in Congo-Brazzaville, tapping gas associated with an Eni-operated upstream oil project, also involving SNPC. 

• A long-awaited FID for Ophir's Fortuna LNG development in Equatorial Guinea may finally manifest in 2018. The proposed 2.2mn tpa facility was initially slated for FID at the end of 2016. However, problems around financing delayed the project.

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