Africa’s oil and gas are fast los­ing their lus­tre

Few com­pa­nies are ready to in­vest in ex­plo­ration ac­tiv­i­ties as oth­ers cut down on their cap­i­tal ex­pen­di­ture

The East African - - FRONT PAGE - By NJIRAINI MUCHIRA Spe­cial Correspondent

Few com­pa­nies a≥e ≥eady to in­vest in ex­plo≥ation ac­tiv­i­ties

Reg­u­la­tory un­cer­tain­ties, cor­rup­tion, high tax­a­tion, for­eign cur­rency volatil­ity and low crude prices on the in­ter­na­tional mar­ket are mak­ing it dif­fi­cult for com­pa­nies and in­vestors to op­er­ate in Africa’s oil and gas sec­tor.

Few in­ter­na­tional com­pa­nies are will­ing to com­mit re­sources to ex­plo­ration ac­tiv­i­ties while those al­ready op­er­at­ing on the con­ti­nent are cut­ting down on their cap­i­tal ex­pen­di­ture. This is de­spite the con­ti­nent be­ing touted as the next fron­tier for hy­dro­car­bons.

This ex­plains why there were only three ma­jor dis­cov­er­ies in 2016 and the first half of 2017, down from 11 in 2015. Notably, there were a to­tal of 174 dis­cov­er­ies glob­ally.

In East Africa, for ex­am­ple, cap­i­tal spend­ing by ex­plo­ration com­pa­nies has been on the de­cline from $4.7 bil­lion in 2013 to $2.5 bil­lion in 2015, ac­cord­ing to data from Os­lobased con­sult­ing firm Rys­tad En­ergy.

A new re­port by au­dit firm Price­wa­ter­house­coop­ers reck­ons that Africa’s oil and gas sec­tor is in a state of up­heaval that is ham­per­ing the ex­ploita­tion of its vast re­sources.

The re­port, dubbed Learn­ing to Leapfrog, how­ever adds that the fo­cus on Africa is quite wide, with in­dus­try play­ers pre­fer­ring to in­vest in coun­tries where the ge­ol­ogy looks promis­ing and where the fis­cal terms are more at­trac­tive.

“The oil and gas in­dus­try in Africa is rid­dled with com­plex chal­lenges and ad­ver­sity, but with the chal­lenges comes op­por­tu­ni­ties. It is clear that African oil play­ers must ‘learn to leapfrog’ to re­main com­pet­i­tive in the new en­ergy fu­ture,” said PWC Africa oil and gas ad­vi­sory leader Chris Bre­den­hann.

An un­cer­tain reg­u­la­tory frame­work on the con­ti­nent con­tin­ues to be a pri­mary chal­lenge for for­eign com­pa­nies eye­ing op­por­tu­ni­ties in Africa.

“It is dis­heart­en­ing that gov­ern­ments are not heed­ing calls from oil and gas com­pa­nies to en­sure reg­u­la­tory cer­tainty for play­ers who are look­ing to in­vest in hy­dro­car­bons,” says the re­port.

It adds that reg­u­la­tory un­cer­tainty con­tin­ues to de­lay de­vel­op­ment of the in­dus­try in a num­ber of re­gions, with com­pa­nies hold­ing on to their in­vest­ments un­til they can plan ac­cord­ingly while oth­ers are opt­ing to exit.

In Tan­za­nia, for ex­am­ple, the pass­ing of two laws that al­lows the govern­ment to forcibly rene­go­ti­ate con­tracts with min­ing and en­ergy com­pa­nies has the po­ten­tial to sig­nif­i­cantly un­der­mine in­vestor con­fi­dence.

Tan­za­nia has 57 tril­lion cu­bic feet of largely un­de­vel­oped and proven nat­u­ral gas re­serves, from which it ex­pects to earn close to $5 bil­lion an­nu­ally in gas ex­ports.

Petroleum Bill

In Uganda, a coun­try with 7.5 bil­lion in proven de­posits, the Petroleum Bill (2012) that aimed to de­fine the reg­u­la­tory bod­ies lacks clar­ity as to whether in­sti­tu­tions will be cre­ated from scratch or from ex­ist­ing bod­ies. The leg­is­la­tion has also been crit­i­cised for grant­ing too much au­thor­ity to the En­ergy Min­istry.

An­other chal­lenge fac­ing Africa’s oil and gas sec­tor is cor­rup­tion, which has been on the rise de­spite the ex­is­tence of anti-graft pro­grammes.

In­vestors in the in­dus­try are also grap­pling with the chal­lenges of af­ford­able fi­nanc­ing and ex­change rate volatil­ity. The lack of skills de­vel­op­ment also con­tin­ues to be a prob­lem.

The sig­nif­i­cant de­cline in crude oil prices on the in­ter­na­tional mar­ket has also had an ad­verse im­pact on Africa’s oil and gas in­dus­try. The de­cline has forced com­pa­nies to ad­just to the new nor­mal of lower oil prices, which have been rel­a­tively sta­ble through 2017. Hav­ing re­cov­ered since its Jan­uary 2016 low, the price of crude has av­er­aged $50 to $60 per bar­rel this year.

“The de­mand for oil is pick­ing up and sup­ply is eas­ing off, sug­gest­ing a mar­ket re­bal­anc­ing is un­der­way. How­ever, as we have of­ten seen with global oil prices, noth­ing is ever cer­tain,” notes the re­port.

Of im­por­tance is that while there has been a re­duc­tion in up­stream ac­tiv­i­ties, mid­stream and down­stream ac­tiv­i­ties are pick­ing up with sev­eral coun­tries look­ing at op­por­tu­ni­ties to de­velop stor­age or trans­port fa­cil­i­ties in or­der to take ad­van­tage of mar­ket needs.

It is clear that African oil play­ers must ‘learn to leapfrog’ to re­main com­pet­i­tive in the new en­ergy fu­ture.” Chris Bre­den­hann, PWC Africa oil and gas ad­vi­sory leader

Pic­ture: File

Oil ex­plo­ration site in Nakuku­las vil­lage in Turkana County in north­ern Kenya.

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