Africa’s oil and gas companies can weather the downturns of COVID19

Africa’s oil and gas companies can weather the downturns of COVID19

The impact of the COVID19 pandemic has taken a huge toll on the oil industry and especially on the African continent. In addition to this, the Oil price war and low demand from the top oil-importing countries has caused major disruption in the industry.

Brent crude prices – the leading benchmark in Africa – fell to around $25 per barrel on 30 April, even after it was announced that output would be reduced by 9.7 million barrels a day to help bring prices up.

As a result, in trying to salvage the damage most companies are taking the short term route by slowing down production, expanding storage capacity, the use of financial hedging instruments to shed oil inventory.

Part of the long term plans will mean reviewing project development plans which are in the billions margin to assess the credibility during a post-pandemic era.

Sub-Saharan Africa, a region simultaneously viewed as high-potential and high-risk, is going to be impacted more negatively than other regions of the world, like Northern Europe, Asia, and North Africa”, said Siva Prasad, Senior Upstream Analyst for Africa at Rystad Energy.

Eni and Total, the two international oil and gas majors with the largest presence in Africa, have already signaled 25% cuts to their investment in exploration and production projects in 2020, which works out to a €4bn reduction for the French giant and a $2bn reduction for its Italian rival.
For 2021, Eni boss Claudio Descalzi is forecasting a $2.5bn to $3bn drop in investment, i.e., one-third of its planned investment. The impact on the continent is inevitable, as Eni is Africa’s leading hydrocarbon producer with some 1.13 million barrels of oil equivalent per day extracted in the third quarter of 2019.

Of all the regions across the globe, Africa was arguably the hardest hit by the oil price crash in 2014/15. Tough operating and economic conditions, coupled with regulatory uncertainty, political instability, and a lack of infrastructure meant that many large-scale oil and gas projects were either halted or canceled.

Africa’s oil and gas industry holds huge potential. At the end of 2017, Africa was estimated to have 487.7 tcf of proven gas reserves (7.1% of global proven reserves), whilst Africa’s proven reserves of oil are in the region of 125 billion bbl. Africa’s downstream sector has been fairly static in recent years with total refinery throughput hovering around 2.1 million bbl/d, however as we’ll see a wealth of new refinery upgrades or new builds is set to change this.

To stem the tide it is prerogative that “Africa’s oil and gas companies focus their efforts on new ways of working, reducing costs and utilising new ways of working, reducing costs and utilising new technology”, says Chris Bredenhann, PwC’s Africa Oil & Gas Advisory Leader.

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Top Oil & Gas projects in Africa to watch

 Tanzania LNG Liquefaction Plant

The Tanzania Liquefied Natural Gas Project (TLNGP), also known as Likong’o-Mchinga Liquefied Natural Gas Project (LMLNGP) has been since the country’s first gas discovery in 2010, with an estimated cost of $30 billion.

The project has been delayed several times due to governmental complications, but the owners Equinor, Shell, ExxonMobil, Ophir Energy, and Pavilion Energy continue to make development plans. In May last year, the government announced plans to begin construction in 2022, with the facility coming online in 2028. 

Rovuma LNG Liquefaction Plant

Africa’s largest-ever private project is being operated by ExxonMobil and is part of a series of major projects set to transform the country’s natural gas industry over the next five years. 

The Rovuma LNG facility will have an initial cost of $500 million for construction of the initial two liquefaction trains and associated onshore facilities, with further construction due after. It’s expected that each train will output 8.2 million tonnes of LNG per year, with the facility due to operate for at least 30 years. A final investment decision on the project is expected later this year, with production due to begin in 2025.

Ogidigben Gas Revolution Industrial Park (GRIP) estimated to cost $20 billion

The project has seen a series of delays, with “security challenges” given as a primary reason by the Nigerian government. However, State Minister for Petroleum Resources, Chief Timipre Sylva has given fresh assurances in recent months that the project will go ahead as planned. 

Mozambique LNG Project

Like the Rovuma project, Mozambique LNG is a massive undertaking that will shape the country’s economic future and create thousands of jobs over several years. The estimated cost is $15 Billion.

A final investment decision was reached in June 2019 and it’s hoped the project will come online by 2024. The initial construction, operation, and maintenance stages are expected to create 15,000 jobs.

Etan & Zabazaba Oil Fields

The Etan & Zabazaba fields- estimated cost is $13.5 billion is located in the deepwater OPL 245 block in the Gulf of Guinea, off the coast of Nigeria. 

The Etan field was the first discovery, back in 2005 when the Etan-1X discovery well was drilled to a total depth of 4,575m in 1,720m of water and logged 120m of hydrocarbon-bearing sands.

Zabazaba was discovered in 2007, 40km from Etan on the other side of a subsea canyon.

An integrated development project is being jointly launched by Eni and Shell, with plans to use the ZabaZaba FPSO to tap both fields in a phased development. The FPSO will be spread-moored with a capacity of 120,000 barrels per day.

Namibe Refinery Complex
An investment vehicle set up by two Russian groups (75% investment by Rail Standard Service and 25% by Fortland Consulting Company) and local partners proposed in 2017 a new 400,000 barrel per day refinery to be built in Namibe, Angola.

The first phase will include the production of 28,000 barrels of refined oil within three and a half years and 364,000 barrels per day in the final phase within 11 years. 

The project is expected to start up in 2028.

Dangote Refinery and Polypropylene Plant

Nigerian based Dangote Group, Africa’s largest industrial conglomerate, is developing a major downstream facility in Nigeria’s Lekki Free Trade Zone. The 650,000 barrels per day oil refinery will produce 153,000 barrels per day of gasoline, 104,000 barrels per day of diesel, 73,000 barrels per day of jet fuel, 4,109 barrels per day of LPG and 12,300 barrels per day of fuel oil.

It will be able to process different grades of crude including shale oil. The estimated cost is $11 Billion

Lessons from Oil price Crisis 2014/2015

The price of oil halved from June 2014 to March 2015, owing mainly to increased oil supply in the US and elsewhere and to reductions in global demand. An oil price drop has both direct effects through trade and indirect effects through growth and investment and changes in inflation.

For example, a 30% drop in oil prices (IMF and WB forecast this as the approximate drop between 2014 and 2015) directly reduced the value of oil exports in sub-Saharan Africa by $63 billion (major losers include Nigeria, Angola, Equatorial Guinea, Congo, Gabon, Sudan).

The value of Nigeria’s oil exports fell by 14% in the half year to the last quarter of 2014. On the other hand, the value of Tanzania’s oil imports dropped by 20% over the year to January 2015.

Furthermore, between June 2014 and February 2015, inflation dropped by 2 percentage points in Tanzania, South Africa and Kenya.

What policies can mitigate the impact of CONVID 19 in the Oil and Gas Industry in Africa

In terms of policy implications, countries can enhance the positive effects of oil prices in;

  • Reducing inflation by speeding up price and put in place instruments to smooth the effects of price changes
  • Reduce oil price subsidies or increase taxes – which is good in economic and environmental terms:
  • Reduce fiscal deficits: introduce less monetary tightening than would have been the case without the oil price decline.
  • Reduce energy intensity or diversify trade and production to reduce the economy’s dependence on volatile oil prices.