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Exploring at the frontier: Africa taking centre stage again

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Sub-Saharan Africa’s frontier exploration acreage is squarely back on the radar of international oil companies as a healthier outlook for oil and gas prices fuels a resurgence in risk appetite. The last three years have seen a collapse in investment in exploration as most companies have sought to cut costs, streamline operations and reduce risk. This has brought many positive changes to the industry including more efficient operations and the introduction of new cost-saving technologies. But with analysts now predicting a chokepoint in global supply against a continual rise in demand come the mid-2020s (notwithstanding gradual transformation in energy and transport markets to increased renewables usage), companies are now actively competing to secure prospective acreage, particularly in the under-explored regions of Africa’s transform margin in the Gulf of Guinea, and new frontiers in the Indian Ocean beyond the existing gas finds in Mozambique and Tanzania.

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In the last decade, Sub-Saharan Africa has witnessed some remarkable discoveries, most notably Mozambique’s offshore Rovuma basin and West Africa’s MSGBC basin, with Cairn Energy and Kosmos’s Senegal finds standing out in this regard. But by and large, many countries failed to seize the opportunity presented by the commodity price super-cycle to advance projects and draw further investment. This has either been down to prolonged uncertainties around the fiscal regime as governments have sought to increase local benefit from resource extraction; institutional capacity shortfalls to advance complex and technical projects; or political intrigue and instability stalling progress. Nigeria stands out in this regard with uncertainties over its policy outlook and challenges in its operating environment suppressing activity in what is undoubtedly Africa’s most prospective oil and gas zone. But efforts in the 2000s and early 2010s by other oil-producing countries like Gabon and Equatorial Guinea to hike fiscal terms have also stymied interest in exploration, while other producers like Angola and Congo-Brazzaville have also seen production stagnate or decline as governments focused more on short-term revenue raising than providing an enabling environment for investment.

 

The oil price collapse in 2014 and its major impact on the oil industry seems to have changed the narrative around fiscal reform, even if local content remains a core priority for governments across the region. In the latest of signs that African governments are looking at ways to attract greater investment, Gabon last week announced that it had revised its petroleum code, bringing in more favourable terms for investors – a decision that was widely welcomed at the Africa Oil Week conference in Cape Town. Angola has already introduced more favourable fiscal terms to encourage investment in its marginal fields, while even Nigeria has placed plans for fiscal revisions on the back burner. Meanwhile, a host of countries like Liberia, Ghana, Madagascar and Sierra Leone are planning new licensing rounds to try and attract new investment. And the interest is palpable. From the supermajors down to the small independents, we are seeing a new drive to acquire acreage and explore beyond the frontiers of established oil-producing areas. This trend is drawing interest to frontier markets like Guinea, Liberia, Madagascar and even the Comoros, Guinea-Bissau and Sao Tomé and Principe, which were previously beyond the bounds of most companies’ risk appetite.

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The more bullish approach being adopted by industry bodes well for many oil-producing countries on the continent as well as providing opportunities to others seeking to develop their frontier fields, even if an elevated oil price hits the importers hard in the short-term. However, the failure of many African governments to seize the opportunities presented by the previous commodity super-cycle is a reminder of the challenges faced in balancing interests to support industry development by finding Shared Advantage. Above all, the need for a stable and balanced fiscal framework, and a conducive environment for advancing projects remains critical. The raft of legislative reform witnessed over the last decade in many countries provides a positive foundation from which this can happen, though the application of the law will be equally important if Africa is to seize the opportunity now presented.

 

Markets outlook

We anticipate significant interest in upcoming license rounds and a rise in M&A activity as Africa’s upstream market heats up again. But political risk will remain at the forefront of the debate. Scanning across some of the regions of interest, the outlook is mixed in this regard:

MSGBC: Senegal is leading the charge in the development of the MSGBC basin, which is showing huge potential. Despite controversies surrounding some of the initial license awards, the government is making notable progress towards strengthening its legal and institutional frameworks and the advancement of the Cairn/Woodside and BP/Kosmos assets is set on a strong path, boding well for the industry’s development. Even negotiations with Mauritania around co-development of infrastructure have proved largely constructive in a positive sign for this nascent industry. Off the back of the finds, there is also rising interest in Guinea-Bissau’s offshore potential. However, despite the constructive approach adopted by Petroguin, continual cycles of government collapse will complicate legislative approvals processes and raise the risk of political interference should commercial finds be made. Meanwhile, both Guinea-Bissau and Gambia have a long way to go to build the institutions and legal framework needed to support development of the oil and gas sector on a more significant scale.

Nigeria: Nigeria is a paradox market, holding huge potential but battling with its own intricacies. The current government has managed to keep the restive oil-producing Niger delta largely at peace, helping to boost production figures. But like its predecessors, it has failed to advance the critical passage of the Petroleum Industry Bill, even after breaking it down into component parts. This underlines the enormity of its heavily politicised task, and we believe the fiscal components of the Bill will not be addressed for at least another 3-4 years, perpetuating uncertainties. The looming threat of PSC revisions will also remain a feature of the operating environment. But as the current administration has discovered, this is laced with legal intricacies which have somewhat curtailed the strident rhetoric on this priority. One area of progress has been the renegotiation of financing arrangements on some of the NNPC’s joint ventures, reducing cash call requirements to unblock investments. Meanwhile, we anticipate a continued trend of divestment to indigenous players in the onshore and shallow water territory while the IOCs focus on the highly prospective deep offshore. Under all political scenarios however, Nigeria will continue to underperform its potential due to the complexities of it political and operating environment. With elections set for February 2019, the short-term outlook will also be closely aligned to the conduct and outcome of this vote.

The rest of West Africa: Abandoned during the downturn, frontier markets on the transform margin such as Guinea (Conakry) and Liberia are now back on the radar of interest, and even Sierra Leone which hasn’t seen as much activity in the past is planning a licensing round in 2019. This speaks volumes of the shift in dynamics within the industry to push exploration into new frontiers. Both Ghana and Côte d’Ivoire are also seeing interest in remaining blocks that are up for sale, while there has also been some M&A activity, notably with BP coming into the mix in Côte d’Ivoire through its partnership with Kosmos. The resolution of the border dispute between the two countries has eased conditions for development but while Ghana’s industry is developing robustly under the NPP administration of Nana Akufo-Addo, concerns are rising over how succession in Côte d’Ivoire will be managed as President Alassane Ouattara steps down in 2020, leaving a legacy of robust economic growth but limited progress on cementing national reconciliation and security sector reform following the crisis and stagnation that characterised the previous decade. The stakes are certainly high.

Central Africa: As a region suffering from dwindling production, the recent oil price downturn has injected much-needed urgency into oil sector reforms. These have seen Gabon revise its petroleum code, Angola introduce more favourable fiscal terms for its marginal fields and Cameroon concertedly support development of its LNG project. Licensing activity is also picking up in Gabon, Congo Brazzaville and even São Tomé and Princípe in a further sign of an industry uptick. However, this region remains characterised by some of the highest levels of political interference and mismanagement, which can cause continual headaches for the operators trying to advance projects. The Democratic Republic of Congo will be under particular scrutiny in this regard as it embarks on what is set to be a turbulent transition from President Joseph Kabila’s rule. Early signs suggest his appointed successor Emmanuel Shadary is in the front seat for the polls, with all the machinery of the state behind him against an opposition that is struggling to get its act together, even after belatedly announcing a unity candidate this week.

Southern Africa: Mozambique has world-class gas deposits but its fall from grace following a $2bn hidden debt scandal in 2016 has been sharp. The ensuing economic crisis has not stopped the advancement of the main offshore Rovuma projects. But it is a reminder of the governance challenges faced and the issues that will likely arise in state-owned SNH’s ambitions to fund its participation in certain ventures – even after a recent restructuring of its Eurobond with creditors, which will provide some breathing space. Elsewhere in the region, South Africa is set to separate out a petroleum bill from the MPRDA; likely a wise move if the sector is to attract investment in its frontier offshore and untangle itself from some of the politicised parametres of the well-established mining sector. Namibia is also seeing continued interest despite mixed results on drilling to date with its offshore still seen as prospective by many.

East Africa and the Indian Ocean: Tanzania is taking steps backward after the major gas find by the BG/Shell-ExxonMobil-Equinor consortium. As President Magufuli seeks to push a strident nationalist agenda, he has sought to introduce stringent terms into the host government negotiations around the development of the asset, which has unsettled existing investors and is deterring potential exploration interest. Negotiations around the construction of the East Africa pipeline from Uganda have also been complicated by some of the demands being made by the Tanzanian and indeed Ugandan governments, though we expect these ultimately to be smoothed over, allowing the development of an export route for the landlocked assets. Kenya’s challenges have been driven more at a local level by community resistance to Tullow Oil’s onshore activities. An agreement earlier in the year on the distribution of oil revenues between government tiers down to the community level goes some way to achieving progress. And although some uncertainties persist over the advancement of national legislation that can support further investment and growth, the national government appears committed to supporting its nascent industry and overcoming some of the political wrangles that form a feature of the country’s devolved political system. Lastly, interest in the frontier fields of the Indian Ocean, notably Madagascar and the Comoros where they border on Mozambique’s geological finds is picking up once again, even if political instability in both countries represents a real risk in the current climate.

 

Conclusion

Africa currently represents 8.7% of global oil output and 7.1% of proven gas reserves, with many fields yet to come to production. Major finds in the last decade in new territories like Mozambique, Ghana and Senegal as well as further development of its well-established markets continue to make it an appealing prospect for those with the risk appetite and capital to operate at the frontier, helped by generally favourable fiscal terms. We anticipate that competition will heat up considerably in the coming year as pressures on the oil and gas price and concerns over a looming supply shortfall spur further investment, particularly in the deep offshore. But as ever when operating at the frontier, understanding and managing above-ground risk will be critical to the success of projects, shaping the pace of advancement and the mutual benefit that different actors can draw from the development of natural resources.

 

 About the author: 

Roddy Barclay is the Head of Intelligence and Analysis at africapractice. He has advised clients across diverse sectors on managing political, reputational and security risks for over seven years, and has developed particular expertise in extractives and financial sector advisory. 

 

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