The oil industry is one of the industries that has already been hit hard due to the coronavirus pandemic. With oil prices hovering around $25 per barrel, experts say West Africa will be the region that will suffer more due to the “fact that most of its oil developments are in deep waters, which by themselves drive costs”.
Rystad Energy says it expects the number of sanctioned oil projects offshore to fall by 60% to 10% in 2020 as compared to 2019. “Global oil demand is forecast to decline by 4.9% in 2020, as compared to 2019”, Rystad Energy said in a statement.
Rystad also suggested that due to high oil price sensitivity driven by the high breakeven rates, the percentage of scaled-back investments in Africa could be higher, therefore, may face delays.
Why are West African oil fields more expensive to develop and run?
The subsea equipment used to extract oil, are very expensive because they have to be designed to withstand extreme pressures and temperature in 2,000 to 3,000m water depth.
Fiscal regimes are also a contributor. For instance, in Ghana, at an oil price where the oil companies are not making much profits or no profits at all, taxes still have to be paid to the state. “Another example is the carried interest of GNPC. This interest means that the state company gets a stake in the field, but is sponsored for all the development costs and doesn’t have to pay back to the oil company.”
Again, the technical and safety standards in the oil industry in West Africa are among the strictest industry standards around. Under these strict local content requirements in countries like Ghana, suppliers are forced to set up shop with local suppliers and support the local industry.
Here’s what can be done to improve the chances of projects being developed after the coronavirus pandemic.
Royalties to improve the chances of projects being developed after should be moved from a fixed percentage to a percentage linked to the movement of current oil prices.
There should be a move from Carried GNPC’s interest to financed GNPC interest so that investors get paid back the costs they sponsor GNPC with.
Meanwhile, UNCTAD predicts that the downward pressure on global foreign direct investment (FDI) “flows could range from 30 to 40 percent during 2020 to 2021, much higher than previous projections of -5 to -15 percent.”
Hence the secretary-general of UNCTAD, Mukhisa Kituyi has made “a call by the maritime industry to all governments to keep maritime trade moving by allowing commercial ships continued access to ports worldwide and by facilitating the rapid changeover of ships’ crews.”