Low oil prices may hinder development of Africa’s new discoveries

Data from the US Energy Information Administration (EIA) in 2010 reveal that 16 of the 54 countries in Africa are exporters of oil, namely Nigeria, Angola, Libya, Algeria, Sudan, South Sudan, Equatorial Guinea, Congo (Brazzaville), Gabon, Chad, Egypt, Tunisia, Cameroon, Ivory Coast, Democratic Republic of Congo (DRC), and Mauritania. Ghana has since joined the list.

There have been further hydrocarbon discoveries in Africa. In 2013 alone, six of the top 10 global discoveries by size were made in Africa, including some of the largest reserves discovered in the last decade in East Africa.

The discoveries are Lontra oil and gas discovery, Angola with 900mmboe; Ogo oil and gas discovery in Nigeria with 775mmboe; Nene Marine oil and gas discovery, Congo Brazzaville with 700mmboe; Salamat gas discovery, Egypt with 500mmboe; Agulha/Coral gas discoveries, Mozambique with 700mmboe each and Tangawizi gas discovery, Tanzania with 575mmboe. However, low oil prices may hinder the development of these discoveries.

Africa has one of the highest average finding costs in the world at a massive $35.01 per barrel in 2009, surpassed only by the US offshore fields which came in at $41.51 per barrel. Africa holds a number of technically challenging (and therefore expensive) hydrocarbon prospects. Examples include deepwater sub-salt exploration activity in West Africa, waxy oil in Uganda as well as offshore exploration leases in South Africa.

According to figures from the US EIA, Africa’s proven oil reserves have grown by nearly 120 percent in the past 30 years or so, from 57 billion barrels in 1980 to 124 billion barrels in 2012. In addition, it is estimated that at least another 100 billion barrels are offshore Africa, only waiting to be discovered. In turn, Africa’s proven reserves of natural gas have grown from 210 trillion cubic feet (tcf) in 1980 to 509 tcf in 2012, representing growth of over 140 percent. Furthermore, recent further discoveries of sizable natural gas reserves in Tanzania and Mozambique point to significant upward potential for these figures

The playing field

Oil revenues make up a large portion of the GDP for many African countries and if the current price environment persists, this could result in slowed development. A common denominator for most African countries with hydrocarbon resources is that their economies are not well diversified will be hardest hit by the low oil prices. Some of them may have to consider austerity measures and a revision of the government’s budget.

According to a recent report by PwC, in Nigeria, additional exploration may be put on hold while development projects are expected to continue as planned. Algeria’s current account became negative in 2014; fiscal reforms are expected but could be slow to happen. For Egypt, government has cut subsidies. As a net importer, the lower oil price is expected to be favourable to its balance of payments. Ghana’s Jubilee is unlikely to be delayed as costs are sunk and production is underway.  In addition, Tullow’s TEN project is on-track for a 2016 production start.

For Congo and Angola, their joint Deepwater subsalt exploration will likely to be delayed or cancelled. Kenya’s onshore seen to be a cost-friendly area for exploration and likely to see increased activity in 2015. In Mozambique, LNG projects are likely to carry on though requisite infrastructure needed may cause severe delays.

Angola will likely face austerity measures. Angola, the second largest oil producer in Africa, is heavily dependent on the oil sector, making it vulnerable to oil price fluctuations. Additionally, with drilling costs offshore Angola being very high, forecasts are that there will be a resultant drop in deepwater completions in Angola in 2016.

In South Africa, offshore exploration will likely be delayed due to costs, price and regulatory uncertainty, but shale gas plans could continue to progress.

The watch list

According to the PwC report, the players in the following categories on the continent are likely to be most at risk; frontier areas; major gas projects, host governments; and Oilfield service (OFS) companies.

“Frontier areas around the world will potentially suffer from delayed development in the near term. These include technically difficult projects that require more spend than conventional production, such as deepwater, sub-salt, shale gas and enhanced oil recovery ventures”, said PwC.

Countries that may see frontier project delays include offshore South Africa, sub-salt Congo and Angola, offshore Tanzania and shale gas in South Africa. Shale gas, in particular, could move forward if the gas price were not 100 percent linked to oil.

Major African gas projects will also be under increased scrutiny, as oil-linked LNG prices have also dropped significantly. We don’t envision that the major LNG projects in Mozambique and Tanzania will be cancelled outright, but costs are a major concern for investors.

Total CAPEX needed to build a 2-train LNG project in Mozambique is a massive $2.14 million per bcf of net gas volume. That’s a total investment of USD$26.1 billion. With such high stakes, investors may wait for some rebound in the oil/gas price. Another other option would be to modify contract prices for LNG to de-link them from oil. London-based Tullow Oil has reduced its global 2015 exploration budget to $200 million, an 80 percent reduction in what it spent in 2014.

Oilfield service (OFS) companies are also operating in unchartered waters, and worse, they have very little control over the circumstances. OFS companies will be hit hard globally, but Africa may be an especially vulnerable portion of their portfolios. Overall, there will be extreme pressure on them from upstream operators to reduce costs.

Africa could pose further complication due to difficult logistics and lack of infrastructure to respond quickly to demand. OFS company margins will be suffering. Schlumberger came to this realisation early, which is what prompted its announcement of 9 000 lay-offs globally.

In many of the countries that have recently become burgeoning hydrocarbon provinces, unclear legislation and regulation have inhibited development in the sector. Potential investors regard the fiscal terms to be overly onerous and unattractive.

Demand from Asia could be the silver lining

Africa has for years been seen by western and Asian markets as a means to diversify away from too deep a dependence on Middle Eastern oil. Robust demand from especially India and China over the past decade, fuelled by strong economic growth in these countries, has started to change not only Africa’s export profile, but also the continent’s economic landscape. Although Saudi Arabia is the principal supplier of oil to China, Angola occupies second place, with China receiving nearly 9 percent of its oil from Luanda, according to Trade Map figures.

Other African countries that export to China include Congo (Brazzaville), Libya, Algeria, Equatorial Guinea, Nigeria, South Africa, Egypt, with the Asian powerhouse also an important trade partner of Sudan and South Sudan. Africa’s oil exports to China are expected to increase over the medium- to the long-term, with the International Energy Agency projecting that China will become the world’s largest net-importer of oil by 2020.

China and India’s prominence has grown as key destinations of Africa’s oil exports especially when considering the past few years like in 2007, only 10 percent of Africa’s oil was shipped to China, and 5 percent to India, by 2011.

FRANK UZUEGBUNAM