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Investment woes in Africa’s oil


Africa prides itself on a history of producing oil for over 70 years and its output is still important to the world. Currently, African countries account for nearly 9 percent of the total global crude oil output, which is lower compared to the share of over 12 percent recorded at the end of the last decade. It is found that crude is produced in 20 African countries, but a concentrated output is recorded in Algeria, Angola, Nigeria, Egypt and Libya, accounting for more than 80 percent of the continent’s oil production.

As the months roll by, the industry has recorded significant declines in prices—stoking panic. In late April, international benchmark for Brent crude dropped from over $60 per barrel to approximately $20 per barrel—pointing to a two-decade low. Even worse, an agreement established with Opec+ countries had forced African oil-rich countries to slash global output by an average of 24 percent. The easing of lockdown restrictions has caused a rebound of sorts in demand leading to recovery in oil prices to currently around $40 per barrel.

Some of the African countries which are heavily reliant on oil revenues are expected to see a continuous decline in income. Nigeria’s 2020 budget was decided on the basis of oil price at $57 per barrel and Angola at $55 per barrel. Statistics show that both countries record approximately 90 percent of their export earnings from oil sale. “The oil price collapse is anticipated to impact ‘government investment and financing needed for capital and social projects’—and if the decline in prices continue to remain, it will present an extremely ‘challenging situation for these African oil exporting countries,’ ” Pedro Omontuemhen, partner at PwC, told International Finance.

Will underexploited resources protect investor interest for long?
Although 16 African countries have refineries in the downstream sector, most of the produced crude oil is exported while petroleum products are imported. The fact is that the continent accounts for around 7 percent of the world’s reported crude oil and natural gas reserves—and as it remains largely underexploited will bring huge investor opportunities for the industry. This has made the continent a hotspot for foreign investment in oil and gas. The untapped potential of resources has reinforced investor interest in Africa’s oil and gas despite structural and commercial barriers.

What is even more impressive is that the continent’s hydrocarbon-harbouring countries collectively hold 125 billion barrels of oil and 13.8 billion cubic metres of gas, according to BP’s Statistical Review 2018. “In recent times, some of the largest oil and gas discoveries have been found in African acreages,” Pedro explained, pointing to the giant Zohr field which is an offshore natural gas located in Egyptian waters off the North African coast. Even the recently found Brulpadda field in deepwater South Africa holds a billion-barrel potential, while Senegal’s Yakaar field operated by Kosmos Energy has been ranked by PwC as one of the top ten largest discoveries in 2017. It is anticipated that Phase I and II of the Yakaar field project holds more than 1.5 billion equivalent barrels of gas. This means the continent is rich in onshore and offshore fields which are still in nascent stages of development, implying that the abundance of resources are seeking to attract foreign investment. Africa’s oil and gas fields are being currently explored and developed, with multinational giants like Total and Eni injecting cash into the continent. This is a positive indicator of the continent’s growing potential in hydrocarbons investment.

Decline in investment is observed
What determines the degree of investment in Africa’s oil and gas is the coronavirus pandemic. Its oil and gas companies are facing the downside effects of the pandemic—which has in many ways impacted investor confidence and stability in operations. The United Nations Conference on Trade and Development published its World Investment Report 2020 which observed that foreign direct investment to the continent will be affected by low prices of commodities, mainly oil—seen as a result of the pandemic. National oil companies have in fact planned cost containment programmes to mitigate these effects. For example, Aker Energy in Ghana has postponed the development of its Pecan field until further notice because of the protracted pandemic. In another example, Total in Nigeria has stalled development of the Preowei field which also includes seismic surveys on Preowei and Egina fields.

“Slump in foreign direct investment to Africa is observed, which is expected to be worsened by the contagion effects of the pandemic and low oil prices,” Pedro said. According to the International Monetary Fund, investors withdrew $83 billion from developing countries on the continent since the onset of the coronavirus crisis, marking the largest capital outflow ever. Another reason for decline in investment in the industry can be attributed to new investment regulations introduced for multinational oil companies—which saw foreign direct investment to West Africa lowered by 21 percent to $11 billion last year.

It is a known fact that the pandemic has brought unprecedented changes to the oil and gas industry. According to Pedro, the anticipated fall in demand for oil exporting African countries implies that exports of crude this year will be down by an average of 10 percent compared to recent years. He even restated that the value of African oil exports at $40 per barrel could further drop to levels last recorded two decades ago. It is a natural consequence. These low prices coupled with diminished output can force major oil producers on the continent to encounter loss of billions of dollars of value loss this year.

It is not the end for oil producers
Currently, the oil and gas companies operating in Africa are challenged on the back of the protracted pandemic, political chaos, lack of adequate infrastructure, regulatory uncertainty, delays in enforcing laws and local and regional insecurity. Because of these combined challenges, foreign direct investment to the continent had been affected even prior to the coronavirus epidemic. For example, foreign direct investment to sub-Saharan Africa decreased by 10 percent to $32 billion in 2019, while East Africa reported a decrease of 9 percent to $7.8 billion as a result of political tensions in some parts of the region. For that reason, long-term planning is essential to cope with uncertain events taking place globally. It is also important for oil and gas companies to exercise control costs while analysing risks and benefits of new projects and capital to invest. Such decisions will become responsible for regulatory, environmental and political considerations in the industry.

On the bright side, African oil and gas producers have an opportunity to bounce back from the current situation through four approaches. The first approach is to diversify the economy away from oil. The second approach is to invest in refining capacities whether they are conventional or modular. The third approach is to monetise gas. The fourth approach is to eliminate subsidies on petroleum products. “The oil and gas industry has been through the cycle of boom and bust before. I think in about a year or two we should be out of this pandemic. Investment in oil and gas should be at full throttle again,” Pedro said.

Policy reforms are needed
For that reason, many oil and gas countries are reviewing policies. The Nigerian government has signed the Deep Offshore and Inland Basin Production Sharing Contract Bill 2019 with an intent to apply price-based and field-based royalties to further increase treasury revenue. In this context, Pedro explained that there is an increasing pressure for E&P companies to supply gas for local power generation, industry and general consumption before starting export activities. Prioritising local beneficiation of hydrocarbon resources will ensure industry development in the best interest of the local population.

Another unaddressed challenge is the unpredictability of the industry. It seems that twelve sub-Saharan African countries made their first major discoveries during the period from 2001 to 2014—and each of those countries had fallen short in expectations to achieve their first oil and gas revenues within the stipulated time—despite strong support from governments, companies and international organisations. For real, Guinea Bissau, Liberia, São Tomé and Principe and Sierra Leone have considered their discoveries to be commercially unviable and the commercial discoveries made by other African countries are yet to reach production.

Pedro explained that the government revenue had fallen below the set expectations in Ghana, Niger and Mauritania, further resulting in reduced revenue forecasts. Extreme optimistic expectations have pointed out that in hindsight the policies did not seem realistic even during the pre-price collapse period. Another disappointing factor is that many African governments have made scarce investments in financial and human resources to manage the industry which is unfair considering the ratio of benefits generated from it.

Governments’ strategic initiatives for investors
To a great capacity, African governments have the power to attract foreign investors through strategic initiatives. It seems that the continent’s 30 National Oil Companies are involved at various points of value chain and at different maturity levels. The evolution of African Oil Companies from field operators to services providers shows a progressive transition in the industry. Many countries from West Africa have in fact sought regional expansion across the continent in an attempt to drive regionalisation. Even oil and gas ministries have legislated and implemented policies and regulations to establish Africa as an attractive destination for investors.

According to Pedro, some examples of policies to attract foreign investors are outstanding. An example of that is Mauritania’s tax and fiscal system which is aimed at easing exploration to generate massive returns to investors—if hydrocarbons are found. The system requires no royalty payments and corporate income tax floats around 25 percent. Even Egypt’s new oil and gas contract enables investors to gain control over their production shares instead of having to sell them to the government at pre-set prices. “On the security front, African governments and oil companies are protecting the security of energy infrastructure and assets,” he concluded.

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