Growing pressure on African oil producers
Output is on a clear downwards trend across Africa as fossil fuels come under the spotlight. Gregory Kronsten opens our 12-page special report on Africa’s oil and gas sector with an overview of how things stand
Global proved reserves of crude oil including condensates amounted to 1,732bn barrels at end-2020 according to BP’s statistical yearbooks, equivalent to 53.5 years’ production. For Africa's top nine oil producers (see the tables reproduced on this page), the reserves/production ratio is less than 60 years except for Libya, where the on-off civil war has led to a slump in output. For seven of the nine, output is on a clear downward trend on the basis of the averages for 200611 and 2016-21. The exceptions are the Republic of Congo, which posted a modest rise, and South Sudan, where commercial production only dates from 2012.
Proved reserves
How viable are the proved reserves? BP defines them as “quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reservoirs under existing economic and operating conditions”.
The figures provided by BP appear questionable, although its global total is not very different to OPEC’s 1,545bn barrels excluding condensates at end-2021. However, the yearbooks, which depend on national sources for their information, show unchanged reserves over several years for countries such as Algeria, Equatorial Guinea and Gabon. It is hard to believe that exploration did not uncover reserves that would have produced a different figure, even bearing in mind current production. Even where extraction costs are high, average spot prices for Brent of more than $80/barrel in 2006-11 and close to $60/barrel in 2016-2021 would have supported new exploration.
Declining output and proved reserves for the nine
African producers make for depressing reading, contrasting with a positive outlook on the same metrics for the US, Canada, Iraq and Saudi Arabia. The poster child among global operators must be Saudi Aramco, which reported its highest ever net income in Q2 22 ($48.4bn) and now has the highest market capitalisation of any listed company anywhere. Admittedly, Aramco has listed less than 2% of its capital but is generating the revenue for the sovereign wealth fund and the government to help fund the planned diversification of the economy.
The move to net zero
Any examination of the future of Africa's oil and gas sector must now incorporate the debate over climate change. If we think that the world can make a seamless transition from fossil fuels to clean energy such as renewables, then we can be relaxed. If we think otherwise, then we must ask what energy sources will meet needs in the interim, what organisations, if any, will finance them and how much consumers will push the move to clean energy.
In the near term, the war in Ukraine has made the transition longer. Coal production is staging a recov
ery in Europe due to the sharp decline in supplies of Russian gas, generating huge profits for mining houses and commodity traders.
The listed oil majors in Europe and the US have set targets for their net zero moment, for their spending on renewables, for their total expenditure and for the limits to their investment in new oil acreage. They are under pressure to varying degrees from institutional investors with an ESG agenda.
Saudi Aramco and the state-owned corporations that predominate in all OPEC member countries (Sonatrach in Algeria, Sonangol in Angola and the Nigerian National Petroleum Corporation among others) are under no such pressure. Because their economies are not diversified, their governments are dependent upon oil revenue to fund the process. As they look to maximise that revenue, they need financing and insurance for existing and new projects.
In reality, this means that they may run into obstacles from Western companies under investor pressures. The signals are not always clear. We see in the financial media that a household name in international insurance broking will cover the 1,450km oil pipeline from Uganda to the Tanzanian coast but not cover a huge Australian coal mine (Carmichael) under development. As for financing, the stance of the World Bank on fossil fuels is negative.
Uncertain future
The trends in output and reserves notwithstanding, a number of high-visibility projects in African jurisdictions require financing. These include LNG in Mozambique, where TotalEnergies has a 26.5% stake, and in Tanzania, in which Shell and Norway’s Equinor are players. A new gas project straddles the Senegal/Mauritania border. BP and Kosmos Energy of the US are the international investors. Reports suggest first gas by end-2023 and first exports to Europe in 2024. The talk is fuelled by the search of continental European governments for new (and non-Russian) energy supplies.
Gas has its advocates as a good energy source during the transition and as cleaner than crude oil. Most of the new African projects are gas but we should mention the Baleine oilfield in Côte d’Ivoire. Italy’s Eni is the foreign party with a 90% stake, and reserves could reach 2.5bn barrels. (By way of comparison, BP has Gabon’s total proved reserves at 2bn barrels.)
Existing developments and new projects in fossil fuels in Africa and elsewhere have an uncertain future. Their prospects can be described as piecemeal. Some will secure the financing and insurance, albeit at a higher cost than previously. Others will wither away in the transition. The aggregate decline in output and reserves in Africa will probably continue. ■
Declining output and proved reserves for the nine African producers make for depressing reading, contrasting with a positive outlook on the same metrics for the US, Canada, Iraq and Saudi Arabia