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Across Africa, crude’s Covid crunch sends many projects into turmoil

By Christophe Le Bec, Djamila Ould Khettab
Posted on Tuesday, 13 October 2020 22:43

Tullow Oil
Workers walk past storage tanks at Tullow Oil's Ngamia 8 drilling site in Lokichar, Turkana County, Kenya, February 8, 2018. REUTERS/Baz Ratner

Many oil and gas projects across the continent have been delayed or cancelled due to the challenges of low prices and restrained demand caused by the global health crisis

The oil industry is expected to be in turmoil for a long while to come, particularly on the continent. Siva Prasad, a senior analyst at research firm Rystad Energy, says: “Sub-Saharan Africa, a perceived high-potential but also high-risk zone, is more in the crosshairs than other regions of the world.” This is due to the precipitous drop in demand caused by the spread of the novel coronavirus across the globe.

The price of Brent crude hit a low of $16.51 per barrel in April 2020, after starting the year at about $65 per barrel. Analysts predict that this period of low prices will delay the start date of most major hydrocarbon projects currently in the works by one to three years. To help cushion the damage in the short term, oil companies are trying to reduce their production rates and look for storage capacity.

READ MORE Coronavirus: Pandemic puts strain 30 major African oil and gas projects

However, in the longer term, firms are reviewing their project development plans to reevaluate their viability – in both oil and gas. ExxonMobil has postponed its Area 4 gas megaproject in Mozambique until further notice. The BP-led Greater Tortue gas development, which was initially planned to begin production in 2022, is now set to come on stream a year later.

Other projects face longer delays. French oil major Total has said that the Tilenga project on Lake Albert in Uganda, which it has taken full control of, will start production in 2022 instead of the originally planned late 2019. Total has also chosen to suspend short-cycle projects in satellite fields close to its large offshore operations in Angola.

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Total, and the other significant presence on the continent, Italy’s Eni, have said they plan to cut their investment in exploration and production projects by 25% in 2020. This represents a reduction in spending of $4bn for Total and $2bn for Eni.

For 2021, Eni’s CEO, Claudio Descalzi, is forecasting a $2.5bn-$3bn cut in investments – a third of what Eni had been forecast to spend. Eni’s decisions will impact the continent negatively, as the company is the leading hydrocarbon producer, with some 1.1m barrels of oil per day (bpd) produced in the third quarter of 2019.

The general shift in starting dates for energy projects is bad news for countries like Senegal, Mauritania, Uganda and Mozambique, which were looking forward to becoming substantial producers in the near future. But it also affects longstanding producers such as Nigeria, Angola and Algeria.

There is a further risk of outright cancellation for certain large projects whose operating costs would be incompatible with sustained oil prices below $40 per barrel. These include Shell’s Bonga Southwest project in Nigeria, Tullow Oil’s South Lokichar project in Kenya, Phase 3 of Sonatrach’s Hassi R’Mel development in Algeria and Woodside’s Sangomar 1 field in Senegal.

The COVID-19 crisis has come at a particularly bad time for Algeria. The country depends on oil and gas revenue to finance the national budget, and revenue was down almost 30% from the previous year in the first quarter of 2020. The public oil company Sonatrach contributes nearly 60% to the national budget and more than 95% of the country’s foreign-exchange revenue.

The Algiers regime is calling on Sonatrach to slash its expenses in light of the pandemic. The goal is to reduce its 2020 budget from $14bn to $7bn.

Sonatrach shoulders Algeria’s problems

“The Algerian state, which is the sole owner of Sonatrach, is in great difficulty and has no choice but to tighten its belt,” says Mourad Preure, a former director of strategy at Sonatrach. But, according to him, the group has savings that are strong enough to handle this new oil shock. “The hydrocarbons industry is cyclical. In situations of depression, oil companies have to be able to establish cost-cutting plans to maintain the balance while resisting the depression. It’s a sport that Sonatrach masters perfectly,” he says.

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This is not the first time that the company has had to take such measures: “The company has been forced to make major budget cuts in the past, as in the 1990s, when the country was struggling under its external debt burden,” Preure says.

The challenge, however, is enormous. Algeria is emerging from a difficult year, hard hit by political instability. The automotive and construction sectors are at a standstill, and the country’s foreign-exchange reserves are drying up. Having dropped by one-third in three years, they could fall to less than $50bn by the end of the year.

To make matters worse, the Algerian oil and gas sector continues to be shunned by oil majors. “Sonatrach is isolated in this new crisis, because its international partnership strategy has been severely hurt by manipulation of oil legislation over the past 20 years. This has damaged the image of the country and caused the failures of the last licensing rounds. This is why the government is more worried than it would be if Sonatrach had several major partners with whom to share the risk,” explains Preure. A new oil law passed in December 2019 has brought in lower taxes and more flexibility on hydrocarbon development projects.

Some smaller independent players are also having a tough time of it. Tullow Oil, the Irish oil and gas exploration company that operates across Africa and South America, reported a net loss before tax of $1.7bn in 2019. Tullow recorded a 70% drop in its share price on the London Stock Exchange, returning to the levels last seen 16 years ago. In December 2019, the drastic reduction in its production forecasts in Ghana and Kenya, and the tax and contractual setbacks it faced in Uganda, led to the departure of its managing director, Paul McDade, and exploration director, Angus McCoss.

The oil price collapse has not helped matters. Tullow’s management, led by Dorothy Thomson, will let go of some 30% of its workforce. Eight African countries –  Ghana, Kenya, Uganda, Côte d’Ivoire, Gabon, Equatorial Guinea, the Comoros and Mauritania – will feel the effects of this.

Total’s light at the end of the tunnel

But some projects will go on as planned, including a few large projects. The most significant is Mozambique’s liquefied natural gas (LNG) project, which Total took over from US exploration firm Anadarko and restarted in record time. This should begin production before 2025.

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Africa accounts for nearly a quarter of Total’s hydrocarbon production – 705,000 bpd in 2019 – as well as 35% of its exploration budget planned for 2020 – about $405m. The oil giant’s acquisition of Anadarko’s African assets for $8.8bn in 2019 is another major commitment to activity on the continent. The sub-Saharan assets bought, particularly those in Mozambique, are due to boost Total’s gas production.

According to the president of Total’s exploration and production department for sub-Saharan Africa, Nicolas Terraz: “Mozambique LNG is fully aligned with two of our strategic priorities: strengthening our positions in gas, which we see as an energy of the future, and in deep offshore, which we believe we are technically well-equipped for.” Before this project, the group had only had a modest fuel-distribution subsidiary in Mozambique, but no exploration and production base.

According to Terraz, the resumption of the project under Total “will consist in developing discovered gas reserves of 65tcf [trillion cubic feet] over 30 years, which will eventually produce nearly 40m tonnes of LNG per year for Total and its partners.” Total is also looking to expand in South Africa, after its discovery of the Brulpadda field announced in February 2019. And this year, the oil major is due to complete exploration projects in Nigeria, Namibia and Angola.

Many eyes in the oil and gas industry are currently on Mozambique, as it is on its way to being the world’s fourth-largest gas exporter. The government is encouraging companies to employ citizens at all levels of their organisations, and there has been a push in the development and implementation of effective training programmes for local employees.

Additionally, the Maputo administration is pushing operators to buy local goods and services. Such policies should hopefully ensure that local workers and businesses benefit from oil and gas activity.

Total’s Nicolas Terraz says the French firm is making a major promise to Mozambique in this area: “We are going to spend $2.5bn locally with suppliers based in Mozambique. This is the commitment we have made to President Filipe Nyusi and energy minister Max Tonela.” Other African countries with natural resources that attract global companies are now more likely to implement local-content policies such as these to ensure they are benefiting from what investor interest remains in these trying times for the sector.

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