Mapping a sustainable future for West Africa’s oil, gas sector
Most forecasts for oil prices in recent times have been long on the irrationality of expecting a quick oil price rebound and short on optimism.
RBC Capital Markets, a leading investment bank providing services for institutional investors and governments calculated that projects capable of producing more than a half million barrels per day of oil were cancelled, delayed or shelved by OPEC countries alone in 2015 and prospects for 2016 does not look promising either.
The dip in profits reported by oil majors in their second-quarter 2016 reports released recently only confirms this bleak picture. Chevron Corporation reported a loss of $1.5bn for second quarter 2016, compared with earnings of $571 million in the second quarter of 2015, while Exxon’s profit fell 59 percent to $1.7 billion in comparison to the same period.
Also, Royal Dutch Shell reported that its second quarter 2016 earnings attributable to shareholders were $0.2 billion, compared with $3.4 billion for the same quarter a year ago. Second quarter 2016 earnings attributed to shareholders, excluding identified items were $1.0 billion. Compared with $3.8 billion for the second quarter 2015 is a decrease of 72 percent.
ExxonMobil’s revenue sank 22.2 percent to $57.7 billion, missing S&P Global Market Intelligence analyst estimates of $64 billion. Chevron’s revenue fell 24.4 percent to $27.8 billion, missing estimates of $29.6 billion.
“The second quarter results reflected lower oil prices and our ongoing adjustment to a lower oil price world,” said John Watson, Chairman and CEO of Chevron Corporation.
Already West African countries that depend on taxes and royalties from these IOCs are already feeling a squeeze. Dip in oil prices created an $11bn hole in Nigeria’s 2016 budget and government revenue fell by 46 percent last year.
Path to sustainable future
The 40th edition of the Society of Petroleum Engineers, Nigeria Annual International Conference & Exhibition (NAICE 2016), held in Lagos, from August 2 -4, devoted a session to the future of oil and gas for Nigeria nay Sub-Saharan African region. Panel discussion onthe topic recommended critical steps that will ensure energy security for the region.
Improve production efficiency
Experts who were on the panel called for efficiencies in producing wells to reduce cost of production and maximise the output from producing fields.
“In a low oil price environment, the future belongs to countries that can reduce the cost of services, both operating expenditure and capital expenditure and remove bureaucratic and operational bottlenecks,” said Jude Amaefule, vice chairman and CEO of Emerald Energy Resources Limited.
While Angola’s cost of production is $36 per barrel, Nigeria’s production cost hovers around $32 per barrel calculated to include risks such as political interference, militancy, policy summersaults, weak governance and fiscal systems.
Enhanced fiscal terms
The petroleum fiscal regime of some Sub-Saharan countries limits economic benefits for the majority of their citizens. They help to create “rentier” states were economic value is captured by the elite leaving the poor despondent.
“Given the current level of inactivity on Ghana’s exploration map, we are worried about the future of the oil industry. We are currently depleting reserves without replacing them at the same level, as oil companies hold inactive petroleum licences,” said Mohammed Amin, executive director of the Africa Centre for Policy (ACEP).
Nigeria is confronted with the same situation as reserves are being fast depleted and no new investments are made to increase reserves. Poor fiscal regimes compound the problem as petroleum sector legislations conflict with regulations from Department of Petroleum Resources, the regulator.
“Nigeria need clarity in the law that empowers the minister to allocate oil blocks, clarity as to what the applicant’s track record before approvals are given and clarity in the existing fiscal regime and governance systems,” said Sena Anthony, legal expert and former company secretary of the Nigerian National Petroleum Corporation (NNPC)
Shift from oil as export commodity to their derivatives
According to data from McKinsey, the whole of Africa has a total of 42 refineries, with a name-place capacity of 3.2million barrels per day. More than half Africa’s refining capacity is in North Africa and most of the refineries are state-owned (59 percent), 29 percent are joint ownerships with government while 12 percent are joint-venture arrangements between IOCs.
West Africa with 16 countries has 7 refineries according to the data accessed from
the world refinery list. There are three in Nigeria while Cote d’Ivoire, Mauritania, Senegal, and Ghana have one major refinery each. These refineries have a combined capacity of close to 800,000 barrels per day.
The implication of this situation is that much of West Africa’s energy needs are met through imports of refined products. A low oil price environment reduces attraction for crude oil as commodity but the price and rate of consumption of its derivatives frequently remain constant.
“The way out of low oil price environment is effective utilisation of crude oil derivates,” said Jude Amaefule.
He also stated that abundant refined petroleum products will earn huge foreign exchange from the export of the processed crude oil and gas. It will also have implications for gas utilisation and the petrochemicals industry
Value creation through technology
Geologists are employing various simulation technologies to increase the flow of oil and gas from wells drilled. There is a growing difficulty and complexity of producing new reserves and oil is non-renewable.
Also the complexities and costs of well designs have increased even as Exploration Companies cut CAPEX on account of low oil prices. To meet the challenges of deep wells exceeding over 20,000 feet, high pressure, high-temperature wells, E&P companies are employing technologies to de-risk their operations. Tools such as non-linear finite element analysis, computational fluid dynamics, and multi-physics software are being used.
West Africa countries engaged in E&P will need to develop technical competence in these areas to remain profitable. Experts say it should begin at bidding process for even marginal fields stressing that technical expertise and financial ability should be the prime determinants of who is allowed to operate in the sector.
“Due diligence should go beyond paper exercise” said Mutiu Sumonu, chairman of Julius Berger Nigeria.
Market driven economy
A presentation made by Tim Okon, chairman, International Institute of Petroleum Energy and Policy, at the conference stressed the need for a market driven economy that should drive fiscal policies and governance systems.
While calling for a market driven economy, he said that a political solution to the distorted governance system will not work because it will mean taking power away from those who have benefited from the current arrangement.
The picture is not far different in many sub-Saharan African countries. Bureaucracy and political interference in the economy slows progress. Nevertheless, markets play critical roles in encouraging investment, promoting economic freedom and growth.
“Private capital will seek the most value for it, it will require no slogan or jingle, if the fiscal and political system is right, investments will come,” Okon said.
ISAAC ANYAOGU