The dearth of options available to global investors in government debt may end up working in South Africa’s favour as Moody’s continues to delay action on the country’s last remaining investment-grade rating.
Waiting for the Rebound
African oil producers will have to weather difficult economic
times, but they still need to focus on harnessing energy resources for
undeveloped domestic markets as well as satisfying the needs of future
generations on other continents
Oil prices have collapsed, production is down, governments are reining in spending, companies are busily redrawing their investment plans and citizens in oil-producing countries are sharing the pain felt elsewhere. The global recession is forcing all those with a stake in Africa’s oil and gas industry to rethink their expectations and to adjust for leaner times ahead.
And yet, over the longer term, Africa remains one of the world’s key energy frontiers, where much more oil and gas is waiting to be found and exploited, especially to feed the ever-growing appetites of Asia’s consumers – who are still at the beginning of a 21st century boom in car ownership as income levels in China and India begin to rise. It seems that Africa’s own consumers will have to wait their turn.
Over the next 20 years, energy economists predict a rise in demand for oil of perhaps 20m barrels a day (b/d) to 104m b/d by 2030. To meet this demand “additional production will come from the Middle East, Africa and Latin America,” says Fatih Birol, chief economist of the International Energy Agency (IEA), “with the lion’s share from the Middle East.”?
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The challenge for African countries will be to position themselves as attractive for the large-scale investment that will once again be searching for access to oil and gas reserves. But the slump in prices to around $50 per barrel will slow the rate of new investment in the short term. If the price slump persists, even the larger, more expensive offshore projects in the Gulf of Guinea – including those in Angola, Nigeria and West Africa’s new producer, Ghana – could be cut back.
The BP Statistical Review for 2008 states that the continent has reserves of 117.5bn proven barrels of oil, equivalent to 9.5% of world reserves, and 14.6trn cubic metres of gas, 8.2% of world reserves. Without new investment, Africa’s share of global oil supply could fall back. Producers like Chad, Egypt, Gabon and Cameroon are already seeing their reserves decline and nearly a quarter of Sudan’s reserves have already been extracted.
Future additions to reserves are “most likely in the Gulf of Guinea deepwater area, with further potential along the east coast and in Mauritania”, according to Peter Jackson, senior director at Cambridge Energy Research Associates. Recent large discoveries in Ghana and Uganda are notable. “Ghana should get to around 150,000 b/d by 2015 – not bad from a standing start,” says Jackson. Discoveries in Uganda are on a similar scale to those in Ghana, amounting to hundreds of millions of barrels, although the current low oil price will make it hard to mobilise the massive investment needed to develop the oilfields under Lake Albert.
In terms of the largest future production increases, Jackson points to Algeria, Angola and Libya. “Angola pumps just under 2m b/d now but will be 2.25m by 2020. Algeria stands at about 2.25m b/d now and will be 2.7m by 2020. Libya is under 2m at present, and will produce about 2.7m by 2020,” he says.
Well-endowed despite delta woes
Among Africa’s large oil producers, Nigeria is the big exception to this ten-year expansionary trend. Militant attacks have brought output to as low as 1.6m b/d, a level not seen since the mid-1980s. The IEA’s latest World Energy Outlook declares that the long-term prospects for investment in Nigeria “remain extremely uncertain in view of the worsening conflict in the Niger Delta, which holds the bulk of the country’s remaining oil and gas resources”. Nevertheless, Nigeria is still home to Africa’s largest offshore project, the $8bn Usan field operated by France’s Total.
On the gas front, several African countries hold important assets to feed both North American and European demand over the long term. Angola will join the ranks of Liquified Natural Gas (LNG) producers in 2012, by which time expansions in Egypt, Equatorial Guinea and a new project in Algeria will be complete.
Africa currently accounts for 6.5% of world production, with Nigeria alone estimated to hold 5.3trn cubic metres or about one-third of Africa’s gas reserves. Nigeria’s LNG sales accounted for nearly 10% of the global total in 2007. If the country can restore a measure of calm to the Delta, and if it ever resolves its long-running internal debates about how much is needed for the domestic market, Nigeria could expand its gas output massively through transcontinental pipelines. The issues are integral to the overall challenge facing Nigeria in managing its enormous hydrocarbon endowment.
The coming months seem certain to bring new rounds of bargaining between African governments and the international oil and gas industries, with the potential for new long-term agreements. “We need to wait for the economy to get back on its feet, but after that projects in Africa should provide attractive terms,” the IEA’s Birol told The Africa Report. “The international oil companies’ own reserves are in sharp decline and they need new reserves. With the reserves in the Middle East under the control of the national oil companies, Africa can be a very good option – if the companies believe the terms are attractive enough.”?
One of the immediate effects of the low oil price has been the return of realism into the calculations of Africa’s own leading national oil companies, which only last year were confidently dictating very expensive terms to the international companies. “The terms are not as heavily influenced by African governments now”, says a banker close to the international industry, in reference to the size of signature bonuses and other indicators.
An announcement by Total in mid-February that two production and exploration contracts in Libya had given the company a substantial 37.5% stake – compared to the 10-15% offered in some recent licensing rounds – is a sign that Libya’s National Oil Corporation hopes to maintain its long-term relationships with the oil majors. Tripoli appeared to muscle out the China National Petroleum Corporation from purchasing Canadian company Verenex’s Libyan assets, but “China is still working on Verenex,” commented the banker. At present, Libya’s largest foreign oil company investors come from Spain, Italy and Canada.
Less hardball, more dialogue?
In March, Angola’s parliament passed measures to increase the number of Angolan nationals working in the oil sector. But Sonangol “is still a way off of having the technical capacity to be involved in exploration and production, so Luanda will continue to rely on foreign E&P [exploration and production] companies rather than look at a nationalisation of the industry”, according to Jonas Horner, an associate within the Eurasia Group’s Africa practice. “There seems to be more incentive than ever to cooperate. More moderate Angolan economic growth this year will return the burden of government revenue provision to the oil and gas industry”, Horner says.
Chevron, the leader of the Angola LNG project, has said that the sheer timespan, scale of investments and cooperation required to build an LNG plant, plus the balance-sheet risk, make the buy-in of international oil companies a necessity. “Chevron has to bring money and Exxon has to bring money, through thick and thin, and we have the capability to do that… the project management culture, ability to handle multiple governments on these things,” said Peter Robertson, who was until recently Chevron’s vice-chairman.
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Even Algeria, which has often proved a tough negotiator, appears to be softening its stance. It is now planning a new oil and gas licensing round, with the terms significantly improved after the last round in December 2008 failed to attract bids for most of the blocks on offer.
Algeria’s energy minister, Chakib Khelil, blamed the earlier lack of interest on the dramatic fall in oil prices at the time the bids were due, but analysts say terms obliging companies to undertake substantial work programmes have been a deterrent. The new licensing rounds are also the first to be held under a law passed in 2006 giving the state oil company Sonatrach a minimum 51% share in every exploration contract awarded to foreign companies. Currently, the leading foreign companies in Algeria by their levels of oil production are Anadarko, Eni, BHP Billiton and Amerada Hess.
Fuel for thought
Africa is all too often seen as a source of oil and gas for export, while the question of how the continent could harness its hydrocarbons for its own development has tended to be ignored, most notably by its own governments. There is at least some expectation that Africa’s oil consumption could now begin to rise. The IEA’s World Energy Outlook notes that oil output in Sub-Saharan Africa was 5.6m b/d in 2007, of which 5.1m b/d was exported. In the Outlook’s reference scenario, this will grow to 7.4m b/d by 2030, when some 6.4m b/d will be exported.
“Tackling energy poverty is well within these [African] countries’ means, but major institutional reforms are needed”, says the Outlook. “An improvement in the efficiency and transparency of revenue allocation and the accountability of governments in the use of public funds would improve the likelihood that oil and gas revenues are actually used to alleviate poverty generally and energy poverty specifically”. Let’s hope some governments are listening.