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Coronavirus: Pandemic puts strain 30 major African oil and gas projects
To date, oil and gas majors have only officially announced delays and cancellations impacting minor projects, but the start-up dates of most major hydrocarbon projects are expected to be postponed by one to three years. Rystad Energy, an independent energy research and business intelligence company, helps us take stock of the situation.
The oil industry is going to be disrupted for a long time to come, especially on the African continent. Brent crude prices – the leading benchmark in Africa – fell to around $25 per barrel on 30 April, even after it was announced that output would be reduced by 9.7 million barrels a day to help bring prices up. As a result, every last oil industry company is getting to work to limit the damage.
In the short run, oil companies are moving to slow the pace of production, seeking to expand storage capacity and attempting to market their crude oil with the best sales and purchase agreements and financial hedging instruments possible.
However, to ensure their survival in the long run with prices below $35 per barrel – the target price set by Total – they will also have to review their project development plans, whether they have already been launched or are still pending approval.
Total suspends its ‘short-cycle’ projects
Eni and Total, the two international oil and gas majors with the largest presence in Africa, have already signalled 25% cuts to their investment in exploration and production projects in 2020, which works out to a €4bn reduction for the French giant and a $2bn reduction for its Italian rival.
For 2021, Eni boss Claudio Descalzi is forecasting a $2.5bn to $3bn drop in investment, i.e., one-third of its planned investment. The impact on the continent is inevitable, as Eni is Africa’s leading hydrocarbon producer with some 1.13 million barrels of oil equivalent per day extracted in the third quarter of 2019.
For the time being, only a few non-specific delays and cancellations of smaller-scale projects have been officially announced: ExxonMobil notified the public that it has indefinitely postponed the final investment decision (FID) on its Area 4 gas megaproject in Mozambique, despite the fact that it was set to reach a decision this year, while Total indicated that it is suspending until further notice its “short-cycle” satellite field projects located near its large offshore production operations in Angola.
However, most major companies have yet to finish reviewing their portfolios and decline to provide details about the impact the catastrophic economic downturn will have on their African projects. This is true of Eni, Total and ExxonMobil, as they did not respond to our requests for comment.
More bad news
“Sub-Saharan Africa, a region simultaneously viewed as high-potential and high-risk, is going to be impacted more negatively than other regions of the world, like Northern Europe, Asia and North Africa”, said Siva Prasad, Senior Upstream Analyst for Africa at Rystad Energy.
The specialised firm, recognised in the oil industry and based in Oslo, Norway, updated its projections for us on the investment and production start-up decisions regarding the 30 largest oil and gas projects on the continent*.
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According to Rystad, although nothing is official yet, timeline delays for project start dates – varying from one to three years depending on the case – will be across the board (see infographic below).
This is very bad news for countries such as Senegal, Mauritania, Uganda and Mozambique, which were hoping to quickly become part of the club of major oil and gas producing countries. Neither does the news bode well for long-standing producers like Nigeria, Angola and even Algeria, which were counting on new development projects to take up the slack of mature fields.
A risk of outright cancellation
According to Rystad, the Greater Tortue Ahmeyim gas megaproject, launched in 2018 and operated by BP on the maritime border between Senegal and Mauritania, will not come on stream before 2023, whereas its start-up was initially announced for 2022.
The FIDs regarding the satellite fields of the gas complex (Yakaar and Greater Tortue Ahmeyim Phase 2) will also likely have to wait until 2023.
In Uganda, the FID for the Tilenga project on Lake Albert, which was recently fully acquired by Total, was expected to be reached at the end of 2019, but has now been deferred until 2022.
The risk of outright cancellation is real, even for some major projects whose operating costs are incompatible with prices below $40 per barrel over the long term. The Bonga Southwest Aparo and South Lokichar projects, operated by Shell in Nigeria and Tullow Oil in Kenya, respectively, are on the chopping block, with a break-even point that can only be achieved at a price of $60 per barrel.
The math is just as complicated for projects in the development stage. Phase 3 of Sonatrach’s Hassi R’Mel gas field, in Algeria, with a break-even point estimated by Rystad at more than $65 per barrel, seems to be in a tight spot, even though its start-up date was scheduled for 2023. The same is true for Senegal’s Sangomar 1 oil field project, operated by Woodside, which could only make a profit at a price point exceeding $55 per barrel.
Ultimately, only a few rare large projects that have already been launched and are truly low cost, owing to the size of the fields involved, are expected to maintain their original timelines.
These exceptions include the Mozambique LNG project, taken over by Total from Anadarko and relaunched in record-breaking time, which should come on stream before 2025, as the French oil major announced in February.
* On 26 March, the firm published its projections for the largest projects in sub-Saharan Africa and, at our request, added projections for projects in North Africa, while also updating all information to reflect the situation as of 30 April.