3 March 2016
Plenty of Gas, but Little Power – Africa's New Energy Challenge
While Africa has come to play an ever more significant role in the global oil and gas sector, developments across the continent have been hampered by conflicts and a lack of co-operation between governments and the private sector.
Africa is now playing an increasingly significant role in the global oil and gas industry. For decades, the continent's oil production was concentrated in North Africa and Nigeria, but this began to change at the beginning of the 21st century, a time when a number of international oil companies started to expand their exploration and production portfolios in sub-Saharan Africa.
Consequently, in 2014 alone, 11 of the 20 major new hydrocarbon finds were in Africa, including significant new gas discoveries off the east coast. There have also been a series of bidding rounds in several African countries that appear to have untapped oil resources.
Unsurprisingly, this has spurred intense global interest in Africa's oil and gas opportunities, with many international companies now looking to invest heavily in the continent. Africa's oil sector has also long enjoyed a high level of trade cooperation with Asia, with some 20% of sub-Saharan oil exports currently destined for China.
Despite this, according to many of the petroleum industry chiefs and ministerial delegates gathered for Africa Oil Week, the world's leading event dedicated to Africa's upstream hydrocarbon industry, the development of the oil sector in Africa has been far from a smooth ride. The story of Africa's oil mirrors developments in many other aspects of Africa's economy – there is a huge and underdeveloped resource, representing real financial and investor opportunities, but a number of massive market challenges and barriers remain.
Summing up the current state of play, Tony Hayward, chairman of Genel Energy and Glencore Xstrata, two global commodity giants, said: "Lots of money has been invested in frontier exploration, but there has not a been a lot to show for it."
Generally, the sentiment at Africa Oil Week was that a new type of thinking was required – both on the part of corporate investors and the state – if the enormous potential of Africa's hydrocarbon sector was ever to be realised, In terms of the corporate players, greater agility was seen as required to set the oil industry on a pathway to profitability in today's challenging market environment. It was also widely felt that the state needed to play a more flexible, transparent and supportive role in its dealings with the commercial sector.
This need for a more agile, less reactive strategy for Africa's oil industry has been corroborated by research by PwC, published in their 2015 report Africa Oil and Gas Review. According to the company's findings: "The key to surviving the fragile ups and downs of the oil/gas market cycle is learning how to adapt quickly – to become more agile."
In terms of Africa's reserves and production, the report found that Africa's share of global oil production was 9.6% of the world's total. At the same time, the continent's untapped proven oil reserves – equivalent to 129.2 billion barrels – were estimated to represent some 8% of the global total.
The picture is similarly positive for natural gas. Africa's potential capacity of liquefied natural gas (LNG), according to the PwC report, is about 25% of global capacity. Gas, then, is clearly set to play an increasingly important role in Africa's energy economy.
Throughout the event, it was emphasised that the current global price of oil is the most significant of the challenges facing the African oil sector. Following a 15-year upward trend, the collapse of oil prices in 2014 sent shockwaves through the industry globally – with Africa proving no exception. With a number of countries – notably Libya, Nigeria and Angola – heavily dependent on the revenue from oil exports, the impact across the continent has been dramatic.
The drop in oil prices, for instance, wiped off 2.1% of Nigeria's entire GDP, a testament to how resource-dependent African economies can suddenly become very fragile in the face of a market downturn. For Angola, Africa's second largest oil producer – a nation that had pinned its post-conflict economic recovery hopes on its main commodity – the oil price crash has been devastating, forcing the country to reduce its 2015 budget by 25%, while its inflation is at a three-year high.
Despite the global downturn in oil prices, the African petroleum industry is still preparing for longer-term growth. The issue, though, is just how it can adjust to the low-revenue cycle. Tim O'Hanlon, Tullow Oil's Vice President of African Business, believes that the current environment demands smarter value creation and cost control. He said: "Resetting the business approach is needed in this commodity-price train crash environment."
Maintaining that, in some regards, a period of a low oil price can be a good thing, Hayward said: "It resets the industry and government expectations and demands. At the same time, it creates an opportunity for a more collaborative approach between government and industry."
Among the other challenges cited by delegates were the regulatory uncertainties in many African countries; the poor infrastructure along the supply chain; fraud; a shortage of skilled workers; and over-burdensome tax regimes.
Addressing these and other issues, Duncan Clarke, President of the African Oil Institute and Chairman of Global Pacific and Partners (the organisers of Africa Oil Week), proposed a number of ways forward, particularly for national oil companies.
He said: "There has been a global retreat in capex and investment and there are serious issues that state companies and government need to address if this is to be reversed. Some state oil companies abroad, including China's, have a larger portfolio and growth rate in Africa than its own state oil companies. It's like the foreign state companies are eating Africa's lunch.
"We need the state and private sector to work out a consolidated strategy, one that will stand up competitively against the world's best players. This will require the structural and financial reform of the national oil companies in order to address their weak upstream performance and uncompetitive exploration and production landscapes. Government and state companies need to break away from their policy of resource nationalism, which is uncompetitive and unsustainable.
"These oil companies need to slim down their portfolios, sell off non-core assets, offload fallow acreage, improve their public record of reporting and auditing, and usher in greater corporate transparency. Meanwhile, government needs to provide state companies with investment autonomy and look to stamp out corruption. All of these things have happened in the oil industry everywhere else in the world and this needs to be the way forward for Africa".
Summarising Africa's oil licensing game, Babette van Gessel, President of the International Licensing Association, said that the last couple of years have seen an increase in exploration licensing across Africa. Highlighting the way that several governments are encouraging exploration activity by offering new blocks through competitive bidding rounds, she said: "Regulatory frameworks are becoming more favourable and settled, but there is a trend across the continent to toughen fiscal terms and enforce higher state take.
"In recent years, East Africa has become increasingly significant as an exploration region, following discoveries in Kenya, Mozambique and Tanzania.
Van Gessel also had strong opinions on Nigeria, Africa's largest oil producer, where the recently-elected Buhari government has promised to reform of its historically conflicted oil industry. She said: "Overall, Nigeria has great potential, but security concerns, corruption and an uncertain regulatory environment have all been damaging investor confidence."
Turning her attention to South Africa, she said the country had seen considerable interest in its offshore basins in recent years, with its future level gas of production, potentially, highly significant for the region. She said: "The country's shale gas potential is also large, but as yet unproven. While a shale-gas licensing round is expected, there is a lot of public debate and resistance to fracking for shale gas, something likely to delay exploration.
"Over the past decade, Africa has seen an oil exploration licensing boom. There has been a high level of oil and gas discoveries. Much acreage, however, remains underexplored. Africa has also seen significant corporate entries in its oil exploration sector, although a slowdown is expected in the coming year.
"Africa has the resources and the potential for both corporates and the state to further develop their oil and gas futures. Many governments, though, have been promising resource nationalism, higher state take and tougher licensing terms to oil companies. These conditions are not in sync with today's market. Governments will therefore need to open up and become more competitive. They need to revise their terms and liberalise their markets in order to retain and re-engage upstream players."
The overall sentiment of the conference was that the future of world energy usage may well hinge on the ability to successfully develop and create value from untapped reserves of natural gas. There are exciting opportunities in LNG production and moves for gas to play a greater role in electricity generation across the continent. In a declining oil-price regime, there is a compelling argument for focusing more on gas reserves and development, with gas offering greater long-term economic potential as a preferred industrial fuel – one that can fire Africa's future power stations in a continent whose energy demand is expected to double between 2010 and 2030.
Gas is well suited for domestic demand as it is locally available resource for generating power – yet it is significantly underdeveloped. Summarising this particular conundrum, Paddy du Toit, a Director of Oando, a Nigerian oil company, said: "In Africa there is so much gas, so little power."
Africa Oil Week 2015 took place in South Africa's Cape Town International Convention Centre from 26-30 October.
Mark Ronan, Special Correspondent, Cape Town