West Africa: riding wave of $50 oil for growth
The rise in the price of oil to $50 per barrel and above did not come overnight for the global oil and gas industry. Rather, it was the culmination of three strategic meetings to rein in production and stabilise the market.
First was the ‘Algiers Accord’ of the 170th Extraordinary OPEC Conference in Algiers, Algeria on 28 September 2016.
Then came the ‘Vienna Agreement’ of 30 November 2016 and a Joint Ministerial-Level Meeting of 10 December in Vienna, Austria, where Organization of the Petroleum Exporting Countries (OPEC) members and non-OPEC members made a firm commitment to slash production to boost prices.
West Africa
What does $50 oil price portend for producers in West Africa?
In a report titled Fit For $50 Oil in Africa, PwC South Africa states: “Players in the African market must act now to plan for the upturn to ensure that the potential boom does not go bust. The reality is that this is a chance to review strategy, reduce costs, optimise portfolios, assess talent and improve access to capital.”
A positive implication of the $50 oil price for west African producers is the opportunity for more state revenue, leading to socioeconomic development, and opening of new businesses from other regions such as Asia.
Indeed, Bloomberg reports that west African oil producers will this month send the most crude to Asia in a period of at least five years, as the region seeks to expand and diversify its oil supply mechanism to replace supplies cut by OPEC’s Middle East producers.
Data compiled by Bloomberg indicates that shipments to Asia are set to soar to 2.19 million barrels a day in February, the highest level since at least August 2011, with China and India the biggest buyers.
“The 2.19 million barrels a day that west African nations, led by Nigeria and Angola, will send to Asia in February compares with about 1.79 million barrels a day in January. China is set to import 1.3 million barrels a day in crude oil from west Africa in February, a 14% increase from January. India’s monthly imports from west Africa are poised to increase by 39%, to about 692,000 barrels a day – the most since August,” explains Bloomberg.
Nigeria
When President Muhammadu Buhari presented his 2017 budget of N7.2trn on 14 December 2016 to a joint session of the National Assembly in Abuja, the budget as usual was predicated on an oil revenue benchmark of $42.5 per barrel and output of 2.2 million barrels per day.
The rise in oil price is particularly good for Nigeria, given that the country officially went into recession in the middle of 2016 as oil revenue – which forms the bulk of government foreign exchange earnings – dwindled on the back of low prices.
But with oil prices at $50 and above, the future looks rosier in 2017 than was the situation in 2015 and 2016.
The optimistic picture was confirmed in the December 2016 monthly Financial and Operations Report of the Nigerian National Petroleum Corporation (NNPC), which reveals that Nigeria recorded crude export of $2.45bn in 2016 and a 13.4% increase in oil and gas production in December last year, compared to the previous month of November.
Indeed, such a positive scenario could have prompted the various reports earlier in the year by the International Monetary Fund, the World Bank and African Development Bank that Nigeria will exit recession this year and grow by a modest 1.1%.
However, the mildly optimistic future for Nigeria in 2017 has a question mark against it.
Olusegun Omosehin, managing director, Mutual Benefits Assurance, says the optimism hinges entirely on two issues: oil prices remaining at $50 and above; and settlement of militant activities in the oil-producing Niger-Delta region of the country.
The militancy issue is corroborated by Ibe Kachikwu, Nigerian minister of state for petroleum resources, who says the industry lost more than $7bn to militancy from January to October 2016, and between $50bn to $100bn in unearned income in the past ten years.
Gas
While oil continues to generate greater state revenue and drive economic growth in oil-producing nations in the region, natural gas is quietly emerging as a second economic opportunity in the business mix.
For instance, Wood Mackenzie states in its report, Global Gas Markets Long-Term Outlook-West Africa, that west Africa is an established gas supply region with around 31 million metric tonne per annum (mmtpa) of available liquefied natural gas (LNG) and pipeline export capacity. It states that Nigeria leads the region, contributing 20 mmtpa of LNG supply.
- The Nigerian gas masterplan
The NNPC defines the Nigerian gas masterplan: “As part of Nigeria’s resolve to become a major international player in the international gas market, as well as to lay a solid framework for gas infrastructure expansion within the domestic market, the Nigerian gas masterplan was approved on 13 February 2008.
“It is a guide for the commercial exploitation and management of Nigeria’s gas sector. It aims at growing the Nigerian economy with gas by pursuing three key strategies: 1) Stimulate the multiplier effect of gas in the domestic economy; 2) Position Nigeria competitively in high value export markets; and 3) Guarantee the long-term energy security of Nigeria.”
The gas sector holds significant potential. Nigeria has the seventh largest reserves in the world, with significant scope for growth. The current demand boom is driven by three mutually reinforcing factors – rising gas prices, power sector reform and investor confidence in Nigeria.
An analysis by the US Energy Information Administration states: “Nigeria is currently the largest oil producer in Africa and was the world’s fourth-largest exporter of LNG in 2015. Nigeria’s oil production is hampered by instability and supply disruptions, while its natural gas sector is restricted by the lack of infrastructure to commercialise natural gas that is currently flared (burned off).
“The Petroleum Industry Bill (PIB), which was initially proposed in 2008, is expected to change the organisational structure and fiscal terms governing the oil and natural gas industry if it becomes law. International oil companies are concerned that proposed changes to fiscal terms may make some projects commercially unviable, particularly deepwater projects that involve greater capital spending.
“Nigeria has the second-largest amount of proved crude oil reserves in Africa, but exploration activity has slowed. Rising security problems, coupled with regulatory uncertainty, have contributed to decreased exploration.”
On the contentious PIB, Dr Emmanuel Egbogah, former presidential adviser on petroleum, laments that non-passage of the policy is hurting growth of the nation’s oil and gas industry.
Similarly, Kenneth Erikume, director, tax and regulatory services at PwC, expresses regret that indigenous firms in the industry lack capacity in oil and gas exploration, despite the Local Content Act of 2010.
“With necessary expertise, the country would be able to create entities that could help other African countries in their oil and gas sector. This is the direction a country such as Nigeria, which started oil and gas operations in the 1950s, should be taking.”
Ghana
According to Wikipedia, commercial quantities of offshore oil reserves in Ghana were discovered in the 1970s but it was not until 1983 that the government established the 100% state-owned state oil company, Ghana National Petroleum Corporation (GNPC), to promote hydrocarbon exploration and production of Ghana’s entire petroleum and natural gas reserves.
At its first ever annual general meeting, held on 21 December 2016 at Labadi Beach Hotel in Accra, Alexander Mould, acting chief executive, said the GNPC improved its asset base considerably, leveraged strategic partnerships and signed four Memoranda of Understanding to achieve its strategic pillar of replacing and growing reserves.
The GNPC has embarked on a transformational agenda and strategic initiatives to transform into a high performance organization, with the goal of becoming a world-class oil and gas operator by 2027.
“The TEN fields will drive economic growth in Ghana through the marketing of crude oil and [also] boost gas supply to generate power for industrial and domestic use. The fact that the TEN Project has come on stream just six years after the Jubilee Fields, goes a long way to demonstrate GNPC’s commitment to ensuring that Ghana benefits from its oil and gas resources,” Mr Mould says.
The GNPC is also targeting average production of 30 million standard cubic feet of gas per day (MMSCF/D) during the next five years and 100 MMSCF/D by 2032.
Ghana is believed to have up to five to seven billion barrels of petroleum in reserves, which is the sixth largest in Africa and the 25th largest proven reserves in the world. The country also has up to six trillion cubic feet of natural gas in reserves.
The downside
Rising oil prices could be good news for some countries in Africa, especially oil producers in west Africa. But as the report by PwC South Africa shows, it could also become a financial albatross for others, including those in west Africa.
PwC states: “High oil prices do not benefit all African countries. Only a quarter of African countries produce oil and have run financial surplus. In contrast, African oil importers have to pay substantial amounts when oil prices increase. Thus, 15% of the income of countries such as Liberia, Seychelles and Sierra Leone is used to pay for imported oil. High oil prices may affect economic growth; agricultural and manufacturing sectors; exploration and production activities; social and political stability; as well as fostering the creation of sovereign wealth funds. Due to persistent high oil prices and large discoveries of oil and gas reserves, resource-rich African countries may face the Dutch Disease phenomenon.
“In fact, large exploitation of oil, gas and minerals may lead to the decline in productive sectors such as manufacturing and agriculture. In Ghana, for instance, where large commercial production of oil has begun in the past two years, the economy started showing signs of Dutch Disease. In fact, recent evidence indicated that the growth of the country’s agricultural sector declined. Persistent high oil prices will further worsen the situation of the poorest as food represents the bulk of their consumption basket.”
