West Africa: Will $50 oil optimism drive sector?

Oil and gas remains the bedrock of many economies in Africa. A recent report by KPMG paints the picture: “Oil and gas is of critical importance to the African economy. In fact, it is estimated that 57% of Africa’s export earnings are derived from hydrocarbons. Within the continent, north and west Africa are host to the most renowned producers; some of the countries in those regions are also among the most dependent on oil and gas revenues in the world. As onshore oil production costs in west Africa are generally low, oil companies are expected to continue to invest significantly in the region.” The report details other oil facts on the continent. According to the BP Statistical Review of Energy, Africa’s proven oil reserves have grown by almost 150% since 1980 – increasing from 53.4 billion barrels at that stage to 130.3 billion barrels at the end of 2013. Oil reserves have grown particularly quickly since the mid-1990s, as improved political environments have made it more attractive for foreign oil companies to explore. This also resulted in Africa’s share in global reserves rising from 5.9% in 1993 to as high as 8.6% in 2006. According to some estimates, there are at least 100 billion barrels of oil in offshore Africa still waiting to be discovered.hideAfrica’s proven oil reserves are concentrated in the four members of the Organisation of the Petroleum Exporting Countries (OPEC). These are Libya (which has 48.5 billion barrels worth of reserves), Nigeria (37.1 billion barrels), Angola (12.7 billion barrels) and Algeria (12.2 billion barrels). In fact, these four countries held 84.8% of Africa’s reserves at the end of 2013. Other countries with notable proven oil resources are Egypt (3.9 billion barrels), South Sudan (3.5 billion barrels) and the franc zone countries of Gabon, Equatorial Guinea, Republic of Congo and Chad. A number of other countries are emerging, with some of the most exciting prospects being Ghana, Uganda and Kenya. According to data from the US Energy Information Administration, 12 African countries had proven oil reserves of more than 500 million barrels at the start of 2014. Oil dependence The overdependence on crude oil and natural gas for a large percentage of foreign exchange earnings has been both a blessing and curse to Africa – and west Africa in particular. It represents a blessing in the sense of billions of dollars accruing to the governments of the region for development. But as the slump in prices persists, leading to dwindling resources and even economic recession in a country like Nigeria, it largely becomes a curse given the neglect of other sources of revenue. Indeed, the 170th extraordinary meeting of OPEC, held in Algiers, Algeria on 28 September, painted a perfect scenario of the current state of the industry: “In the last two years, the global oil market has witnessed many challenges, originating mainly from the supply side. As a result, prices have more than halved, while volatility has increased. Oil-exporting countries’ and oil companies’ revenues have dramatically declined, putting strains on their fiscal position and hindering their economic growth. The oil industry faced deep cuts in investment and massive layoffs, leading to a potential risk that oil supply may not meet demand in the future, with a detrimental effect on security of supply.” To return a semblance of stability to the market, the conference adopted what it called the OPEC-14 production target of between 32.5 and 33 million barrels per day to rein in current oversupply and rebalance the market. Global politics The rout in global oil prices came naturally as a result of oversupply by major oil producers, either to maintain their national quota within the OPEC club or to rake in as much revenue as possible even as the prices continue to slip. And for non-OPEC members, the lure of maximum production could point to both revenue raking and strategic global politics. In this context, it is also important to note the return of the Islamic Republic of Iran to the global oil market in January 2016, after the signing of the Iran nuclear deal. While it could be said that oil prices began to nosedive from mid-2014, the return of Iran to the oil market brought more supply into the market and helped to sustain the price slump as more oil was invariably chasing less buyers, who are more than glad to enjoy the prevailing low prices. The Iran question becomes even more pronounced given the longstanding rivalry between Iran and Saudi Arabia, based not only on religious grounds but also a regional power struggle anchored on financial and military power that is largely dependent on oil revenue. And when you add the US-Russia-Venezuela mix, the picture of global political impact on oil prices, real or imagined, becomes more worrisome. As oil prices began their descent in mid-2014, allegations were made that the US and Saudi Arabia had a deal for the Saudis to oversupply the market, to force down prices and hammer the Russian economy over that country’s annexation of Crimea and alleged support for rebels in eastern Ukraine. Both the US and Saudi Arabia dismissed the allegations. However, the impact of global politics on the current parlous state of oil prices in the international market cannot be ruled out completely. West Africa picture For west Africa, it has been a not-so-robust picture of dwindling revenue, tightening economic (monetary/fiscal) indices, scaled back investments by oil and gas operators, loss of jobs in oil firms and a descent into full-blown recession in Nigeria, the region’s oil and gas leader. However, despite the negative market scenario, the KPMG report states that one of the major operators in the region, Tullow, plans to continue investing in west Africa. According to the company: “Cash operating costs for west Africa operations remain low, averaging around $13/bbl in 2014. The Jubilee field (in Ghana) operating costs averaged around $10/bbl in 2014, with potential to drive down costs further in the current market ahead of realising synergies relating to the combined Jubilee and TEN operations.” Nigeria Turning to Nigeria, Bloomberg quoted a spokesperson from CAMAC Energy: “The majority of our current development and near-term exploration drilling is [in] offshore Nigeria, where typically the production costs are a little lower than other exploration areas. In this price environment, we’re not going to be expanding exploration drilling. We’re sticking to our development programme.” The KPMG report adds: “Even though production costs for Nigerian deep-water projects are among the lowest in the world, they still have a breakeven price of approximately $44/bbl. Therefore, while current operations are expected to continue, there will be little incentive to invest in new fields at the current oil price if one considers the high cost of exploration and infrastructure. An even greater constraint to investment in Nigeria is its operating environment. Apart from oil theft and corruption, Nigeria has also delayed the signing of the Petroleum Industry Bill for seven years. This creates a lot of uncertainty about the fiscal framework and has significantly reduced the incentive to invest in the sector. For this reason, we did not even expect much new investment in Nigeria’s oil and gas industry when oil prices were $100/bbl; under new low oil price assumptions, oil companies are therefore unlikely to expand exploration activity.” The future of the oil and gas market in Nigeria is dependent on a number of factors, some within the ambit of the government such as the Petroleum Industry Bill to create a better enabling environment for operators. And there are others outside the power of the government, especially oil theft and the destruction of oil pipelines by militants in the country’s oil-producing areas. How the Nigerian government responds to these internal and external challenges will largely determine the long-term fate of the industry. As for natural gas, at the start of 2014 five countries accounted for 94.4% of Africa’s total natural gas reserves. These are Nigeria (5.1 trillion m3), the north African trio of Algeria, Egypt and Libya (combined 8.1 trillion m3), and Mozambique, whose proven gas reserves increased from 126 billion m3 in 2013 to 2.8 trillion m3 in 2014. Africa’s main gas producers overall are Algeria, Egypt and Nigeria, with these three countries accounting for nearly 90% of Africa’s total. Although Nigeria holds the most natural gas reserves in Africa, it still lags behind Algeria in terms of output due to infrastructural and market environmental challenges. However, the KPMG report gives an overview of the country’s gas status: “Nigeria’s marketable natural gas production has risen strongly over the past 15 years, reaching a high of 43.3 billion m3 in 2012, although it fell back to 36.1 billion m3 in 2013. The country’s production potential is however significantly higher, as less than half of its gross gas output is marketable. “According to OPEC figures, Nigeria’s gross output averaged 82.8 billion m3 p.a. between 2011 and 2013, of which only 40.8 billion m3 p.a. was marketable. Another 21.5 billion m3 was reinjected into oil wells, 13.2 billion m3 was flared, and 7.4 billion m3 was lost during the removal of natural gas liquids (shrinkage).” Ghana Ghana’s status as an emerging oil producer has served the country well, especially in terms of learning hard lessons from the pitfalls of other oil-producing nations in Africa in terms of resource exploitation and investment of revenue. Accordingly, the country is beaming with optimism for the future despite current global price challenges. According to a recent report by the Oxford Business Group, Ghana is targeting a six-fold increase in oil production by 2018, with finance minister Seth Terkper saying he expects output to reach 242.3 million barrels in 2018 (up from 39.1 million barrels this year), while gas production is forecast to reach 37 billion cubic feet. The minister’s comments mirror those of Alex Mould, head of Ghana National Petroleum Corporation, who is predicting that the national oil firm will pump as much as 190,000 barrels per day (bpd) of crude oil by the end of 2016 – up from current total production of around 100,000 bpd. The Oxford Business Group report states: “Increasing oil production, even in a lower price environment, will be particularly valuable to the country at a time when Ghana is grappling with a budget deficit estimated at 7.5% of GDP, prompting the government to seek assistance from the IMF and plan for the sale of a $1bn eurobond – its second in as many years. Oil has been a major driver for Ghana’s economy in recent years, following the discovery of commercially viable deposits in the offshore Jubilee field in 2007. In the year following the start of production in 2010, the country notched up growth of more than 14%. A report published in March by the Ghana Institute of Governance and Security suggests that the oil industry has contributed $2.7bn to national coffers over just four years of operation.” As for gas, there is also a positive outlook considering that in January this year, Eni of Italy and Vital of Switzerland unveiled the Sankofa Gye-Nyame fields expected to produce enough gas to power the country’s thermal power plants for a period of more than 15 years. The five fields – known as the Offshore Cape Three Points (OCTP) Integrated Oil and Gas Project – are projected to access 1.5 trillion cubic feet of gas and 500 million barrels of oil. Looking ahead The oil and gas industry in west Africa is feeling the pinch of the current low oil price in the international market and the attendant slump in government revenue, yet the future looks promising. Such promise stems from existing and untapped oil and gas reserves, alongside ongoing efforts by the governments of Nigeria and Ghana to initiate and implement growth-based reforms for stability and sustainable growth of the sector in the long term.

West Africa: Will $50 oil optimism drive sector?

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