Oil and gas companies fixed on African bankable projects to cut costs

December 14, 2018 in Business, Companies, Finance, Hydrocarbons, Infrastructure, Investment, Policy by Editor

December 14, 2018—Regulatory uncertainty, political instability, corruption and fraud together with a lack of infrastructure rank as major challenges for oil and gas companies investing in sub-Saharan Africa according to latest findings by Pwc South Africa.

Africa experienced a massive drop in exploration spend of 71 pc between 2014 and 2017. However, a slow and then robust recovery at an average 18 pc year-on-year over the next 12 years is projected. The major driver of the expected growth is from the East African region.

Capital expenditure (capex) spend in Africa experienced a 42 pc drop between 2014 and 2018 but is expected to more than double between now and 2030.

Standard Bank Group is a major player in supporting oil and gas investments in several African countries and Paul Eardley-Taylor, a Director with oversight in the Group says, “For the oil sector, where there are unique emerging plays (example Uganda and Kenya) it is important that host governments ensure that the fiscal interests of International Oil Companies (IOCs) are looked after so they keep (and/or others) drilling and ensure that the development pipeline remains full.”

Africa’s proven reserves stand at 126.5 billion barrels, 7.5 percent of the world’s proven reserves with no changes since prior year. Currently Uganda’s share is 6.5 billion barrels of which just under two billion barrels is recoverable crude, but commercial production is still another four years off.

Total production across Africa during 2017 was 8.1 million barrels per day (bbl/d), 8.7 percent of global production and up 0.3 percent from prior year. Africa’s proven reserves of gas are at 487.8 tcf, 7.1 percent of the world’s proven reserves, only marginal changes since prior year. Production was 7.95 tcf, 6.1 percent of global production, up 0.3% from the previous year.

A continued rise of prices on the international market during much of 2018 is sustaining optimism, but amidst tighter planning and project management, coupled with avoiding unnecessary spend on new infrastructure. To save money after the drastic investment cut-backs  four years ago,  many companies now prefer using fit-for-purpose equipment standardisation, simplification and eliminating customised designs.

According to the latest Africa oil and gas review published by pwc, the financial services consultancy, ‘New finds are much smaller and leaner than they were in 2016 or 2015. In Africa, the recovery rate of capex (7 percent year-on-year growth) is expected to surpass global growth (5 percent year-on-year growth). But one must remember that while there are plenty of project sanctions waiting to happen in Africa, some of them are dependent on regulatory certainty as a prerequisite’.

Pwc says in its 40-page report, during financial year 2017/18, there has been a significant increase in the number and size of final investment decisions (FIDs), demonstrating a renewed confidence in the sector.

However this comes with a caution. ‘Looking at the location and nature of these FIDs, it is fair to say that the renewed focus is more concentrated and targeted at high-quality, bankable projects, rather than the free-for-all approach we saw during the growth-at-all-costs phase preceding the 2014 price collapse’.

Amid all of these developments is the need for African countries to support their growing economies through building skills and local value chains in support of the oil and gas industry and other sectors. Local content therefore continues to be a key discussion point on the African agenda.

Africa’s almost 30 national Oil Companies (NOCs) have a crucial role to play in building this local content capacity. They are involved at various points of the value chain and at different levels of maturity. They are commonly the resource holders mandated to participate in the oil and gas market at different stages, or even all stages, of the value chain.

Dr. Josephine Wapakabulo, CEO of the Uganda National Oil Company (UNOC) says, “UNOC has a critical role in building, empowering and supporting the local supply chain beyond the core oil and gas sector, so that even if UNOC is not there, they should continue to operate successfully across other sectors.”

She says, “UNOC needs to find the right balance to gain as much value as possible from the sector on behalf of the state, ensuring that enough supporting sectors beyond the very core high barrier to entry are left to Ugandans to develop. This will fulfill the strategy of country at large.”

PwC thinks incoming companies have to partner with NOCs, which hold the key to unlocking access to the market. It is therefore important to understand where NOCs might be going and how companies in the industry need to position themselves.

Jon Harris, an Executive Vice President at South Africa’s Sasol said, “An NOC should satisfy itself that it does the best for the country. It can do that as a regulator and understand the business. But there is the feeling “if you can make money out of it, so should the NOC”. An NOC should add as much value in country as it can, so the country benefits the most. This is enabled by a NOC that is partnering and exploring eventually, but getting in somebody to find hydrocarbons first also bearing the initial risk.”

Adding to this, James Josling, Head of Oil Trading in Africa for commodities company, Trafigura,  says, “Deregulating as much as possible and allowing the private sector to invest and efficiently supply downstream markets is much more successful and results in a lot more inward investment. NOCs have a much stronger role to play in upstream than downstream.”