Hopes for Africa oil and gas yet to be realised

Cost-cutting has streamlined SA’s oil and gas companies to take advantage of rising commodity prices, according to a report by PwC.

When the oil price crashed from $110 a barrel in mid-2014 to $35 in early 2012, it brought on tough times for the oil and gas sectors, particularly in Africa. Companies were forced to become lean and mean to turn their fortunes around.

PwC’s advisory leader on Africa oil and gas, Chris Bredenhann, released the Africa oil and gas review on the sidelines of the Africa Oil Week conference in Cape Town on Tuesday.

The report found that “great expectations” for African oil and gas are yet to be realised — new discoveries and mergers and acquisitions are few and far between, and production numbers are fairly flat. But Bredenhann said the industry is on the verge of a turnaround with a positive outlook.

That is good news, not just for oil and gas companies, but also for African countries that rely on revenues generated by these sectors to meet countless social needs, as well as bolstering economic development.

Although Africa’s oil and gas production numbers remain largely unchanged, Bredenhann said these will soon lift when final investment decisions are taken in Mozambique, which holds Africa s largest gas resource. It is’ clear that Africa will become a large player in gas in particular, Bredenhann said.

Moreover, discoveries have not been forthcoming and are as a direct result of reduced expenditure after the oil price crashed. In fact, the rate of new discoveries in Africa — measured by a “reserve replacement ratio ”— was 11% in 2017. By way of comparison, “2006 was the last time we saw a reserve replacement ratio of 100%”, Bredenhann said.

Although a drop in such exploration expenditure has been a global phenomenon, Africa experienced a 71% drop in spend between 2014 and 2017, significantly higher than the globe’s 58% drop.

Now spending is expected to recover at an average 18% year on year over the next 12 years, with the major driver of the expected growth to come from the East African region, PwC said.

However, Bredenhann said the low rate of reserve replacement could mean an oil supply crunch will hit the market in coming years.

The review found oil companies on the continent have largely adapted to a low-cost environment and this is expected to be even more beneficial now that the oil price is recovering.

However, Bredenhann said, cost-cutting in Africa has not been as aggressive as elsewhere in the world.

In fact, PwC’s review shows that between 2015 and 2018, West African producers brought their break-even price per barrel of oil down 17%, with other producing areas far exceeding that. In the Middle East, the break-even price was brought down by 44%.

Industry experts interviewed by PwC confirmed that challenges in Africa persist around regulatory uncertainty, political instability, corruption and fraud, and lack of infrastructure.

“We see challenges but also a continent full of opportunity,” Bredenhann said. Such opportunities take the form of unexplored acreage and everincreasing hydrocarbon demand fuelled by population growth, urbanisation, and the emergence of a growing middle class, the review said.

While positive about the outlook, Bredenhann warned that oil and gas industries are volatile. “It’s very unpredictable and very difficult to make any form of accurate predictions about the future.”