This article is an executive summary of PwC’s review of developments in the oil and gas industry in response to the plunge in global oil prices. The review considers how the industry will go from “fragile to agile” as it re-sets, re-strategises and plans for the upturn in prices which will inevitably come.
This extract has been published with permission. The full report may be downloaded here.
Africa’s share of global oil production has dropped marginally since last year, moving from 10,1% to 9,6% of the world’s total. Untapped proven oil reserves on the continent are estimated to be around 8% of the global total, which is nearly the same as the previous year, and these reserves are projected to increase as appraisal of new discoveries ensues. New discoveries have been fewer as exploration activity globally has slowed due to the reduced oil price environment.
From a proven oil reserve totalling 129,2-billion barrels, Africa produced 8,2-million barrels of crude oil per day (bbl/d) in 2014. Over 76% of this production came from Nigeria, Algeria, Egypt and Angola.
The fragile political situation in North Africa continues to have an impact on production levels, which saw another year-on-year decline in oil production in the region of 22%. Libya alone, in the throes of civil war, saw production decline by almost 50% Despite continued insurgency in South Sudan, production has increased by just over 60% compared to 2013. At 159 000 bbl/d, this is still a far cry from pre-2013 production levels of 240 000 bbl/d. This is largely due to the damage that has been sustained by the local infrastructure, and analysts expect a full rebound only by 2020.
As of the end of 2014, Africa has proven natural gas reserves of just fewer than 500-trillion cubic feet (Tcf) with 90% of the continent’s annual natural gas production still coming from Nigeria, Libya, Algeria and Egypt. This is a slight drop in reserves compared to 2013, and production also decreased slightly over the period. Consequently, the continent still has nearly 70 years of natural gas production available given current production rates.
The gas reserves indicated in this publication are as of the end of 2014 and do not include the recently upgraded reserves for Mozambique, which are estimated by the US Energy Information Administration (EIA) to be 100 Tcf on their own. By the end of 2015, we are likely to see a significant amount added to the overall proven gas reserves total for the region. Nigeria has plans to quintuple natural gas production by 2020, so the gas economy in Africa could be well-poised for an uptick in activity.
Growth and development
Overall, industry activity on the continent has slowed given the reduced oil price. Exploration activity has been the hardest hit, though Kenya has seen marginal onshore success over the past year. The focus still seems to be on East Africa and developing its significant gas projects, while some players are turning to South Africa as hopes for favourable legislation are renewed.
Despite a slack off in activity, Africa continues to grow as governments and players alike plan their next moves. It is clear through our interactions that many companies are taking a different perspective on the challenges they face. They are being looked at as realities that can and must be dealt with if they wish to enter African markets. Strategies are therefore being implemented to handle the new African reality. This lull in activity is giving the industry a moment to make plans for the execution of large scale projects while also formulating a strategy that will make them more competitive for the future in the new African market. While the industry is in a fragile state, PwC envisions that the players who survive the downturn in prices the best will emerge as agile machines with well thought-out plans to execute in this dynamic and exciting market.
In this time of reduced exploration spend, many companies have decided to focus their effort on seismic surveys and seismic interpretation. To do so, some have had to negotiate extensions to existing licences, but governments seem to be willing to do so in most cases given current circumstances. Another focus area that seems to be gaining momentum is the development of infrastructure. Studies are underway in various parts of the continent to determine environmental impact and economic viability for everything from pipeline construction to port development and even building new roads.
There are many prerequisites which must be met in order to achieve the growth that we hope to see across Africa. While dealing with corruption is a reality, progress seems to be happening. The Democratic Republic of the Congo (DRC) becoming EITI (Extractive Industries Transparency Initiative) compliant in 2014 is one example of such advancement. People skills and skills retention is another focus area that countries and companies alike are working to improve as we gear up for growth in Africa.
There are still exciting opportunities within the African oil and gas industry including:
New exploration blocks on offer through competitive bidding rounds – driven by governments’ desires to encourage exploration and production (E&P) activity.
Independent power producers (IPPs) in areas with a shortage of power supply.
Liquefied natural gas (LNG) plant engineering and construction for both export and import.
Port development, potential industrial development zones and management thereof.
Pipeline engineering and construction (helping to monetise discoveries).
Potential activity in unconventional gas plays, especially in South Africa where enabling legislation seems to be making progress.
An uptake of local skills and knowledge transfer.
Gas-fired electricity generation.
Other gas monetisation projects for local use (methanol, fertilisers, urea).
Stability of supply and security of supply with a reduction in exports.
Foreign direct investment inflows.
Focus on local content and supplier development.
Infrastructure development megaprojects.
The challenges
While no job is without its challenges, oil and gas companies operating in Africa are taking varied approaches to address the unique set of obstacles they encounter. In conversations with industry players, it has become evident that for many, “challenges” have moved into a category that would be better-named as “realities”. The one challenge that came through as a potential show stopper, however, is uncertain legislation.
While poor physical infrastructure, local content and skills shortages still feature in the top five hurdles for developing an African oil and gas business, companies feel that they can develop an approach to deal with these issues. Roads and pipelines can be constructed. Local content can be managed. People can be trained and developed. Clear and attractive legislation and regulation, however, can only be influenced. Without it, companies are willing to simply walk away in favour of working in other regions of the world that do offer this fundamental prerequisite. Opportunity costs must always be considered. Oil and gas is a long-term business after all. Almost every aspect of the business comes with uncertainty. Legislation cannot be one of them.
With activity reduced, this is a good time for companies to address challenges related to doing business in Africa. Strategic planning is necessary for continued, profitable presence on the continent. The players that emerge when the oil price rebounds are going to be agile engines which are ready to take on the market.
Getting costs under control is the first step to take. Once costs are under control, the strongest players will be looking at acquisition opportunities if their balance sheets can accommodate them. While mergers and acquisitions activity has not been as high as we expected, activity could still ramp up.
In addition, we expect that new licence and farm-in activity will likely increase. This would give the strongest players access to new acreage, which they could then begin to evaluate seismically while waiting for the oil price to improve before commencing with exploration drilling.
Natural gas continues to be high on the African agenda for both producers and consumers. In Angola, LNG came online, but production was forced to stop due to feedstock not meeting the engineering requirement. Production is expected to be back online at full capacity by early 2016.
For Mozambique, legislation has made progress for large-scale LNG projects. Both Anadarko and Eni are positive that they will be able to reach final investment decision soon, which will enable them to meet their target for first gas in 2020.
Africa oil and gas review
Tanzania also continues on the LNG path with hopes of achieving first production shortly after Mozambique. Continued electricity shortages around the continent have led policymakers to gas as a viable power feedstock. Many of these programmes have progressed, and various studies have been commissioned or completed, especially in South Africa.
Oil and gas skills shortages continue to pose a challenge in Africa, but this is one area that companies feel they have a good grasp of at this stage. Many of them are no longer investing heavily in skills development as they have already established programmes and are now simply operating them.
Retention of skilled resources will soon become the main theme dominating the operating environment in many countries. Donor funding continues to flow into the continent, while skills and knowledge transfer continue to flavour initiatives from entities such as the World Bank. In addition to donor funding, governments are establishing training programmes, and many of the private players are also working to educate in the sector. GE has an oil and gas university based in Florence, Italy and has recently started work in Africa. The company recently conducted a number of training sessions in Maputo, for example.
No list of oil and gas challenges would be complete without mention of the commodity price given the current environment. Over 70% of our respondents believe that the oil price will have a significant impact on their businesses over the next three years. This is especially the case for companies that focus their activities on exploration, including the oilfield services companies. While we see that the sudden price drop has left many companies in a fragile state, we believe that with the right activity and strategic planning, these players will be poised and agile for consistent performance throughout the market’s cycle.
Acknowledgement
This extract has been published with permission. The full report may be downloaded here.
Contact Chris Bredenhann, PwC, Tel 021 529-2000, chris.bredenhann@za.pwc.com
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