Sustainable model for Sub-Saharan Africa NOC’s in a low oil price environment

National Oil Companies (NOCs) directly or indirectly control the majority of oil and gas reserves in the world. According to the US Energy Information Agency, government-owned national oil companies (NOCs) control most of the world’s proved oil reserves (75 percent in 2014) and oil production (58 percent in 2014).

The agency also states that International oil companies (IOCs), which are often stockholder-owned corporations, make up the balance of global oil reserves and production. Proved oil reserves consist of the amount of oil in a given area, known with reasonable certainty, that current technology can recover cost effectively.

Worldwide proved oil reserves in 2014 were almost 1.7 trillion barrels, and global oil production averaged roughly 93.2 million barrels a day. This will mean that NOCs have serious stake in world oil production definitely how they are managed have serious impact.

Sub-Saharan Africa has its fair share of NOCs, prominent ones are Sonangol Group established in 1976 with headquarters in Luanda, Angola. Nigeria’s state-owned Nigerian National Petroleum Corporation established in 1977 is ranked the 24th biggest oil company in the world by Forbes.

Sasol, South Africa’s energy and chemical company founded in 1950 based in Johannesburg, even with limited oil reserves, Sasol is a major oil company with exploration development, production, marketing and sales operations in the region employing over 34,000 people and generates $22billion in revenue.

Sudan National Petroleum Corporation (Sudapet) founded in 1997 is fully owned by the Sudanese Ministry for Energy and Miniing, though not engaged directly in oil exploration the country but nonetheless oversees the Sudanese Government’s profits from concessions to foreign operators. The 2010 estimates put Sudan’s reserves at about 5billion barrels, one of the top ten in Africa.

While these are the major ones, there are also smaller NOC’s like Congo’s National Petroleum Company, Madagascar Oil, Petro Gabon and Ghana’s National Petroleum Corporation and National Oil Corporation of Kenya.

Petroleum Intelligence Weekly ranks 18 NOCs among the top 25 oil and gas reserves holders and producers. In addition, an estimated 60 percent of the world’s undiscovered reserves lie in countries where NOCs have privileged access to reserves. Therefore NOCs are of great consequence to their country’s economy, to importing countries’ energy security, and to the stability of oil and gas markets.

NOCs and value creation

A 2011 World Bank research on NOC’s and value creation concluded that the regulatory context, policy thrust and national purpose all contribute to how NOCs add value to their countries.

It noted that NOCs are often used to achieving a wide array of objectives, as primary tool or in combination with other policy tools. The choice of policy tools; NOC, regulation, or a combination of both, depends on the type of objectives that policy makers wish to achieve and their relative priorities.

These in turn depend on the country specific context. Exogenous factors, including oil and gas prices, economic cycles, and the existence of international sanctions, also affect government policies. This helps to explain the diversity of policies pursued by governments over time. Whatever the objectives and their mix, governments’ primary concern should be to maximize economic efficiency and the generation of social welfare.

However poor governance and weak fiscal systems have militated against increased value addition to West African countries from their natural resources. Also, lack of market driven economy and deeply entrenched command and control regulatory regimes adopted by some governments combine to drive some investors away.

Adding value in a low oil price environment

Crude oil prices have slumped to around $30 per barrel in the first quarter of 2016 over what the IEA termed a supply glut following lifting of restrictions on Iranian production slump in global demand growth.

National oil and gas companies in the sub-region have benefited from partnerships with investor-owned oil and gas companies to consolidate global size, industrial scope and technical expertise required to manage the energy industry rising risks. Nigeria has production sharing contracts and joint venture developments with her partners. Consolidating on these kinds of ventures and respecting the sanctity of contract terms will ensure continued investments.

“These transnational agreements are being triggered by the fact that drilling for oil and gas is becoming an exponentially higher-cost, hyper competitive, technology-intensive business,” states Francois Austin & Volker Weber, analysts at Oliver Wyman.

“We estimate that by 2015, more than 70 percent of the world’s hydrocarbon supply growth will come from complex resources such as deepwater shelves, tight oil reservoirs, biofuels, Canadian sands and potentially the Arctic. Most oil exploration projects will have budgets of more than $5 billion; currently, only about one-third of exploration

projects have budgets in excess of $5 billion.”

NOCs in Sub-Saharan Africa can thrive even in a low oil price environment by increasing refining capacity to harness crude derivate. Much of Africa’s energy needs are met with 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.

“National oil companies must hedge their bets by developing all-encompassing global footprints in businesses ranging from offshore oil and gas exploration projects to gasoline stations,”

Research development and application of technology are increasingly becoming a necessity to run a profitable enterprise. NOCs in West Africa can partner with investor-owned oil companies to reach the level of efficiency and returns on research that are needed to deliver on multibillion dollar projects globally.

There is also a need for robust governance structures that can manage risks as leaders strive to set up diversified business across the oil and gas value chain. Global integration and investments across the value chain are key requirements.

“At the same time, national oil companies will have to apply greater discipline to each of their individual projects’ risk management. National operational and safety management systems will have to become global, while risk management systems will need to cross the silos that presently exist in many organizations. Only then will national oil companies pursuing multiple initiatives grasp how much risk they are assuming overall,” states Francois Austin & Volker Weber, analysts at Oliver Wyman.

Regulations in oil producing countries in Sub-Saharan Africa are crafted to create a big role for government. Through local content laws aimed at increasing national participation, some hoops are created on the path of investment. Many NOCs would have to reduce government involvement in the oil and gas business and a quasi privatisation model similar to Statoil may just help them to deliver greater value and ensure sustainable development.

ISAAC ANYAOGU