Africa oil discoveries ‘too tempting to be shunned over renewables’

Viktor Katona, the lead crude analyst at Kpler, a provider of intelligence solutions for commodity markets, shrugged off widespread fears that funding for African oil discoveries will subside in the coming years.

“You no longer have oil and gas companies, you have energy companies. These energy companies will have the renewable energy in Europe and they will have the up-and-coming upstream projects in other parts of the world,” he tells The Africa Report.

Equatorial Guinea’s Hydrocarbons Minister, Gabriel Mbaga Obiang Lima, recently voiced his concerns that developed nations will no longer need Africa’s oil and gas by 2030 as fossil fuel is making way for renewable energy. This, Katona says, will be the case in North America and Europe, but not in Africa.

“For European majors […] Africa still had that mentality that ‘we want to produce the spoils’, whilst across the Atlantic basin, basically in North America or in Europe, you have the ESG [environmental, social, and corporate governance] lobby being so strong,” Katona says.

“Western majors will make oil and gas disappear from their domestic coal regions, and focus on where it doesn’t hurt politically.”

European energy firms spearheaded Africa’s major oil discoveries over the past two years, including in Ghana, Namibia, and Côte d’Ivoire.

“This year’s biggest discovery will be [Namibia’s] Venus, the Total one, but last year’s biggest discovery was ENI’s Baleine in Côte d’Ivoire,” the country’s biggest hydrocarbon discovery in two decades with estimated two billion barrels of oil.

High profitability

The war in Ukraine has sent energy prices soaring worldwide, which makes oil discovery investments lucrative.

For several months after Russia invaded its Eastern Europe neighbour on 24 February, oil remained above the $100 per barrel mark.

Recession fears saw the prices slide more recently, but only to a limited extent as oil producers group OPEC+ resorted to production cuts in response to the grim economic outlook.

With the current dynamics, investment in oil discoveries comprise a much sounder route to profitability than in 2014 to 2016, when prices plunged due several factors, including the US rising oil production, Katona points out.

“Unless we have a debilitating recession in 2023, all prices will be very, very good […] even for African deep-water,” he says. “The breakeven price is […] $40-$45 per barrel. Highly unlikely that we’re going to get below that in the upcoming years.

“The incentives are there, the oil is there […] even the African governments want them to drill. It’s like a triple whammy of happiness. Everyone is satisfied.”

Will China be lured?

Chinese President Xi Jinping, who has just secured his third stint, has remarkably bolstered ties with African nations over the past years, with the Belt and Road Initiative (BRI) significantly increasing China’s influence in Africa.

Yet China’s recent growth rates have been the weakest in decades, which casts doubt on the keenness of the world’s second-largest economy to keep financing massive infrastructure projects through BRI, let alone furthering its oil investments on the continent, which do not match those of the West.

But Katona does not rule out the possibility that China might still be tempted by the potential of  African oil discoveries.

“China is a perennially positive country in terms of trade surpluses. It needs to put the money somewhere […] because sitting on it idly, would be tantamount to losing [it],” he says.

“Considering how weird Chinese development has been since 2020, I don’t know to what extent this will happen.”

Gulf may also want a piece

Namibia’s Venus, which might turn out to be the world’s largest deep-water oil field, was discovered early this year by TotalEnergies in partnership with QatarEnergy, which is headed by Qatar’s Energy Minister Saad al-Kaabi.

Qatar, whose QatarEnergy owns 30% interest in Venus, as well as energy-rich Gulf neighbours Saudi Arabia and UAE have been ramping up investments in different sectors across Africa, but not so much in hydrocarbons.

Western majors will make oil and gas disappear from their domestic coal regions.

Katona reckons that investing in African oil offshore discoveries similar to Venus, which reportedly contains more than one billion barrels of oil, would make sense for the wealthy Gulf for two reasons: gaining experience and avoiding geopolitical risks.

“Venus is an ultra deep-water experience,” he says. “QatarEnergy is not the operator. Total is the operator because Total has West African deep-water experience. If you want to have that exposure, invest, gain traction, gain exposure, and it’s a win-win on all sides, for the likes of QatarEnergy or anyone else.

“Arguably, deep-water projects are the best because they cannot be terrorised or there cannot be an Islamic State attack[s], there cannot be anything of the of the kind of difficulties that Africa has been facing.”

Potential lies along the coast

Katona says Somalia might be one of the best cases of a place which has a high potential for hydrocarbon discoveries. “But because it’s so insecure […] we’re just waiting until it gets safe,” he adds.

With African nations lacking financial muscle and oil discovery expertise, the potential lies in many other parts of the continent, says Katona. “The entire west of Africa barring Nigeria […] and also potentially barring Angola, all of that is up for grabs.”

Oil theft in Nigeria has caused Africa’s largest economy to lose its status as the continent’s biggest crude producer to Angola.

“The offshore countries are the best place to have any kind of traction. Effectively, if we just go along the coast, starting from Senegal, Gambia, and Mauritania […] all the way down to Côte d’Ivoire, you don’t have strong national oil companies.”

“These companies have zero previous exposure of large-scale […] projects. They cannot plan, design and operate them […] Not only do they require help, they also require money.”