AFRICA: HUGE OIL AND GAS OPPORTUNITY IN THE CONTINENT
Despite a slowdown, growth in Africa is set to return in 2018 and 2019, according to the World Bank. **
By Atique Naqvi, aka Syed Atique Hussain, Boston, United States
As the population increases in Africa’s 54 countries coupled with strong economic growth, the energy demand is set to rise as well for the next few decades. Major oil and gas producers in Africa such as Nigeria and Angola, and smaller producers such as South Sudan, Niger, Ghana, Uganda, and Kenya will witness the big shift in terms of energy exports.
One of the biggest future trends in the oil and gas sector is expected to affect exports of African energy. British Petroleum in its latest research says that Africa is experiencing the fastest demand growth owing to urbanization, rising population, improved infrastructure and strong economic growth.
At the same time, one of the biggest domestic challenges is the per capita energy consumption in Africa, which currently remains below global averages owing to the accessibility of energy for African consumers.
On the economic front, growth looks positive for 2018 and 2019. The World Bank in its latest note on Africa says following a sharp slowdown over the past two years, a recovery is underway in Sub-Saharan Africa.
“Gross domestic product (GDP) growth in the region is expected to strengthen to 2.4 percent in 2017 from 1.3 percent in 2016, slightly below the pace previously projected. The rebound is being led by the region’s largest economies.
“In the second quarter of 2017, Nigeria exited a five-quarter recession and South Africa emerged from two successive quarters of negative growth. Economic activity has also picked up in Angola. Elsewhere, an increase in mining output along with a pickup in the agriculture sector is boosting economic activity in metals exporters. GDP growth is stable in non-resource intensive countries, supported by domestic demand. But the recovery is weak in several important dimensions,” says the World Bank note, adding: “Regional per capita output growth is forecast to be negative for the second consecutive year, while investment growth remains low, and productivity growth is falling.”
On the financial sector, the World Bank says: “Higher commodity prices are helping to narrow current account deficits in the region, especially of oil exporters. International bond and equity inflows in the region are rising, helping to finance the current account deficits and cushion foreign reserves. Sovereign bond issuance has rebounded in 2017, with Nigeria, Senegal, and Côte d’Ivoire selling bonds on international capital markets, indicating improving global sentiment toward emerging and frontier markets.
“Looking ahead, Sub-Saharan Africa is projected to see a moderate pickup in activity, with growth rising to 3.2 percent in 2018 and 3.5 percent in 2019.”
AFRICAN OIL RECOVERY
A recovery in the oil sector, partly due to a decline in militants’ attacks on oil pipelines, helped Nigeria pull out of five consecutive quarters of negative growth but the rebound was softer than expected, says the World Bank report on the continent.
However, the increase in oil production was below projections, due to maintenance work, and growth in the non-oil sector has remained subdued, it says, it says adding that in Angola, higher oil prices offset slightly lower oil production, and the completion of two hydropower plants is supporting activity with an increase in electricity supply.
Though the oil and gas sector is growing, the global accounting, research and consulting firm PwC has identified some uncomfortable challenges. It says the challenges for the oil and gas companies operating in Africa continue to be diverse and numerous fueled by fraud, corruption, theft, poor infrastructure and a lack of skilled resources, among others.
Regulatory uncertainty and delays in passing laws are severely inhibiting sector development in many countries around the continent. Chris Bredenhann, PwC Africa Oil & Gas Advisory Leader, says: “Some key players have delayed or canceled projects until further clarity can be sought in their respective jurisdictions as they cannot move forward with doubts given the long-term nature of the needed investments.”
The African Oil & Gas Review by PwC shows that the industry in Africa continues to show substantial growth, with new hydrocarbon provinces developing at a significant pace. “Large gas finds in Mozambique and Tanzania have caused the world to take note of East Africa as an emerging player in the global industry,” says Bredenhann.
Africa has proven natural gas reserves of 502 trillion cubic feet (Tcf) with 90% of the continent’s annual natural gas production of 6.5Tcf coming from Nigeria, Libya, Algeria, and Egypt.
BUSINESS DEVELOPMENT ON THE ROLL
In the PwC survey, one of the major challenges identified by organizations in the oil and gas industry has remained largely unchanged with the top three issues of an uncertain regulatory framework, corruption, and poor physical infrastructure also identified as the biggest challenges in 2010 and 2012.
While uncertain regulatory frameworks remain a concern across the industry, Nigeria was one of the few countries where respondents did not consider it to be of the top-three challenges to developing the industry. According to the Review, this suggests that companies have accepted the lack of ratification of the Petroleum Industry Bill (PIB), which has been in the process of implementation for six years.
In other countries where uncertainty exists concerning the development or revision of energy policies, such as South Africa, DR of Congo and Tanzania, respondents indicated that the uncertain regulatory framework was a significant impediment to developing an African oil and gas business.
The inadequacy of basic infrastructure also ranked much higher in the current Review than in prior years. Respondents are concerned about the lack of infrastructure in developing countries and the negative consequences this may have for their businesses, especially those operating in Nigeria, Namibia, Madagascar and South Africa, says a media statement from PwC. Taxation issues have also become a concern to companies across Africa as uncertain taxation as well as new tax laws have created an additional financial burden for companies.
Also, respondents to the PwC African survey indicated that their companies will largely be relying on their own cash flows to fund their own businesses over the next 12 months. Exploration & Production (E&P) companies are funding their operations differently from the other industry players with less than 40 percent of funding coming from cash flow. This can largely be attributed to blocks and regions yet to come into production.
For E&P companies, farm-outs are the second-most common form of financing in Africa, with around 100 farm-out deals being made across the continent during 2013.
A company may decide to enter into a farm-out agreement, subject to government approval in some cases, with a third party if it wants to maintain its interest but wants to reduce its risk or doesn't have the money to undertake the operations that are desirable for that interest.
Also, oil and gas companies in Africa have identified safety, health, environment, and quality as the most significant factor that would affect their companies’ businesses over the next three years. “This is not a surprise as companies recognize the environment and human health and security as a pressing issue which, when viewed in conjunction with regulatory changes and poor infrastructure, will have resulted in their carefully assessing the risk and financial burden of working in certain areas,” says PwC’s Bredenhann.
SUSTAINABLE GROWTH
Governments and national oil companies play a significant role in sustaining growth and development in Africa’s oil & gas sector, says media statement from PwC. Many African countries have a host of stringent laws and regulations that create challenges for companies and international investors to overcome.
“Operational planning, therefore, needs to be carefully thought out, taking into account demand growth, infrastructure requirements, investment needs and potential, long-term strategies and the role of government if companies and countries want to sustain growth and development in Africa,” adds Bredenhann.
HARNESSING HUMAN CAPITAL
African oil and gas companies are looking at their strategies in an effort to make themselves more resilient. “Whereas in previous downturns, we might have witnessed mass layoffs followed by a hiring surge in the upswing, now players are realizing that they must design their organizations in order to be dynamic and nimble,” write PwC analysts in Learning to Leapfrog report on Africa.
From a human resource aspect, this means that more individuals need to have broad knowledge across the business so that they can be deployed in areas where they are needed, which may vary from cycle to cycle. Specialist individuals who can only fulfill specialist roles will likely become less attractive as companies reinvent themselves.
Technology and innovation obviously present a great growth opportunity for industry players in Africa, says PwC. “Because of the frontier nature of the territory, companies working here feel as though the region needs to catch up with the rest of the world when it comes to the energy sector. We believe, instead, that the industry should be ‘learning to leapfrog’ in order to jump past the competition by harnessing innovation and technology.
“Other industries in Africa have done just the same – the telecommunications sector in Africa, for example, is very advanced. Instead of rolling out copper wire for communications, many African countries went straight to mobile solutions. This was borne out of the challenges that the African market faced. Instead of simply trying to go through the challenge, they innovatively went around it, offering cutting-edge products to the market.
“The African people must embrace these opportunities while also demonstrating patience and resilience to weather the storm and come through the turbulence to create a strong and prosperous future—and that includes the oil business,” the report says.
INDUSTRY'S FUTURE TRENDS
A recent British Petroleum study on Africa’s oil and gas sector has identified major trends that will shape up the industry until 2035.
• In 2035, Africa will account for 21% (1.8 billion) of the world’s population compared to 16% today. The region also will account for 45% of the global increase.
• Energy demand is projected to grow by over 75% between 2015 and 2035, much faster than the global average of 31%. By 2035 African demand will account for less than 5% of the global total.
• Renewables are set to grow strongly (+14.0% p.a.) contributing 17% to total African energy demand growth. Hydro will also grow strongly (over 5.2% p.a.) and will contribute nearly 14% to demand growth.
• Fossil fuels are set to account for over 80% of demand in 2035, with natural gas (+80%), oil (+56%) and coal (+25%) all expanding.
• Oil will continue to remain the dominant fuel accounting for over one-third of energy demand, followed by gas (nearly 30%) and coal (16%).
• By sector, ongoing urbanization and electrification mean energy demand in power generation is set to more than double and will account for over 45% of energy demand in 2035.
• Energy production in Africa is expected to grow by nearly 30% and remains dominated by oil. Oil’s share, however, will shrink from over 50% in 2015 to just below 40% in 2035, with natural gas rising from 24% to 28%.
• Africa currently exports a significant amount of its energy production (nearly 45%), but growing domestic demand will reduce this ratio to below 25% by 2035.
• Nevertheless, the region remains an important source of global oil and natural gas supply, accounting for 8% of global oil and 6% of natural gas production in 2035.
• By 2035 the continent is projected to produce 8.3 Mb/d of oil, of which over 2 Mb/d will be for export down from 5 Mb/d of export today.
• The equivalent numbers for gas are 30 Bcf/d of output by 2035, of which 6.5 Bcf/d will be for export down from 7.4 Bcf/d today.
** This article first appeared in Unisol magazine (Essel Group Middle East) published by Mediaquest Corp, Dubai, UAE.
By Atique Naqvi, aka Syed Atique Hussain, Boston, United States
 |
| The GDP growth in Africa is expected to strengthen to 2.4 percent in 2017. |
As the population increases in Africa’s 54 countries coupled with strong economic growth, the energy demand is set to rise as well for the next few decades. Major oil and gas producers in Africa such as Nigeria and Angola, and smaller producers such as South Sudan, Niger, Ghana, Uganda, and Kenya will witness the big shift in terms of energy exports.
One of the biggest future trends in the oil and gas sector is expected to affect exports of African energy. British Petroleum in its latest research says that Africa is experiencing the fastest demand growth owing to urbanization, rising population, improved infrastructure and strong economic growth.
At the same time, one of the biggest domestic challenges is the per capita energy consumption in Africa, which currently remains below global averages owing to the accessibility of energy for African consumers.
On the economic front, growth looks positive for 2018 and 2019. The World Bank in its latest note on Africa says following a sharp slowdown over the past two years, a recovery is underway in Sub-Saharan Africa.
“Gross domestic product (GDP) growth in the region is expected to strengthen to 2.4 percent in 2017 from 1.3 percent in 2016, slightly below the pace previously projected. The rebound is being led by the region’s largest economies.
“In the second quarter of 2017, Nigeria exited a five-quarter recession and South Africa emerged from two successive quarters of negative growth. Economic activity has also picked up in Angola. Elsewhere, an increase in mining output along with a pickup in the agriculture sector is boosting economic activity in metals exporters. GDP growth is stable in non-resource intensive countries, supported by domestic demand. But the recovery is weak in several important dimensions,” says the World Bank note, adding: “Regional per capita output growth is forecast to be negative for the second consecutive year, while investment growth remains low, and productivity growth is falling.”
On the financial sector, the World Bank says: “Higher commodity prices are helping to narrow current account deficits in the region, especially of oil exporters. International bond and equity inflows in the region are rising, helping to finance the current account deficits and cushion foreign reserves. Sovereign bond issuance has rebounded in 2017, with Nigeria, Senegal, and Côte d’Ivoire selling bonds on international capital markets, indicating improving global sentiment toward emerging and frontier markets.
“Looking ahead, Sub-Saharan Africa is projected to see a moderate pickup in activity, with growth rising to 3.2 percent in 2018 and 3.5 percent in 2019.”
AFRICAN OIL RECOVERY
A recovery in the oil sector, partly due to a decline in militants’ attacks on oil pipelines, helped Nigeria pull out of five consecutive quarters of negative growth but the rebound was softer than expected, says the World Bank report on the continent.
However, the increase in oil production was below projections, due to maintenance work, and growth in the non-oil sector has remained subdued, it says, it says adding that in Angola, higher oil prices offset slightly lower oil production, and the completion of two hydropower plants is supporting activity with an increase in electricity supply.
Though the oil and gas sector is growing, the global accounting, research and consulting firm PwC has identified some uncomfortable challenges. It says the challenges for the oil and gas companies operating in Africa continue to be diverse and numerous fueled by fraud, corruption, theft, poor infrastructure and a lack of skilled resources, among others.
Regulatory uncertainty and delays in passing laws are severely inhibiting sector development in many countries around the continent. Chris Bredenhann, PwC Africa Oil & Gas Advisory Leader, says: “Some key players have delayed or canceled projects until further clarity can be sought in their respective jurisdictions as they cannot move forward with doubts given the long-term nature of the needed investments.”
The African Oil & Gas Review by PwC shows that the industry in Africa continues to show substantial growth, with new hydrocarbon provinces developing at a significant pace. “Large gas finds in Mozambique and Tanzania have caused the world to take note of East Africa as an emerging player in the global industry,” says Bredenhann.
Africa has proven natural gas reserves of 502 trillion cubic feet (Tcf) with 90% of the continent’s annual natural gas production of 6.5Tcf coming from Nigeria, Libya, Algeria, and Egypt.
BUSINESS DEVELOPMENT ON THE ROLL
In the PwC survey, one of the major challenges identified by organizations in the oil and gas industry has remained largely unchanged with the top three issues of an uncertain regulatory framework, corruption, and poor physical infrastructure also identified as the biggest challenges in 2010 and 2012.
While uncertain regulatory frameworks remain a concern across the industry, Nigeria was one of the few countries where respondents did not consider it to be of the top-three challenges to developing the industry. According to the Review, this suggests that companies have accepted the lack of ratification of the Petroleum Industry Bill (PIB), which has been in the process of implementation for six years.
In other countries where uncertainty exists concerning the development or revision of energy policies, such as South Africa, DR of Congo and Tanzania, respondents indicated that the uncertain regulatory framework was a significant impediment to developing an African oil and gas business.
The inadequacy of basic infrastructure also ranked much higher in the current Review than in prior years. Respondents are concerned about the lack of infrastructure in developing countries and the negative consequences this may have for their businesses, especially those operating in Nigeria, Namibia, Madagascar and South Africa, says a media statement from PwC. Taxation issues have also become a concern to companies across Africa as uncertain taxation as well as new tax laws have created an additional financial burden for companies.
 |
| Energy demand in Africa is projected to grow by over 75% between 2015 and 2035. |
Also, respondents to the PwC African survey indicated that their companies will largely be relying on their own cash flows to fund their own businesses over the next 12 months. Exploration & Production (E&P) companies are funding their operations differently from the other industry players with less than 40 percent of funding coming from cash flow. This can largely be attributed to blocks and regions yet to come into production.
For E&P companies, farm-outs are the second-most common form of financing in Africa, with around 100 farm-out deals being made across the continent during 2013.
A company may decide to enter into a farm-out agreement, subject to government approval in some cases, with a third party if it wants to maintain its interest but wants to reduce its risk or doesn't have the money to undertake the operations that are desirable for that interest.
Also, oil and gas companies in Africa have identified safety, health, environment, and quality as the most significant factor that would affect their companies’ businesses over the next three years. “This is not a surprise as companies recognize the environment and human health and security as a pressing issue which, when viewed in conjunction with regulatory changes and poor infrastructure, will have resulted in their carefully assessing the risk and financial burden of working in certain areas,” says PwC’s Bredenhann.
SUSTAINABLE GROWTH
Governments and national oil companies play a significant role in sustaining growth and development in Africa’s oil & gas sector, says media statement from PwC. Many African countries have a host of stringent laws and regulations that create challenges for companies and international investors to overcome.
“Operational planning, therefore, needs to be carefully thought out, taking into account demand growth, infrastructure requirements, investment needs and potential, long-term strategies and the role of government if companies and countries want to sustain growth and development in Africa,” adds Bredenhann.
HARNESSING HUMAN CAPITAL
African oil and gas companies are looking at their strategies in an effort to make themselves more resilient. “Whereas in previous downturns, we might have witnessed mass layoffs followed by a hiring surge in the upswing, now players are realizing that they must design their organizations in order to be dynamic and nimble,” write PwC analysts in Learning to Leapfrog report on Africa.
From a human resource aspect, this means that more individuals need to have broad knowledge across the business so that they can be deployed in areas where they are needed, which may vary from cycle to cycle. Specialist individuals who can only fulfill specialist roles will likely become less attractive as companies reinvent themselves.
Technology and innovation obviously present a great growth opportunity for industry players in Africa, says PwC. “Because of the frontier nature of the territory, companies working here feel as though the region needs to catch up with the rest of the world when it comes to the energy sector. We believe, instead, that the industry should be ‘learning to leapfrog’ in order to jump past the competition by harnessing innovation and technology.
“Other industries in Africa have done just the same – the telecommunications sector in Africa, for example, is very advanced. Instead of rolling out copper wire for communications, many African countries went straight to mobile solutions. This was borne out of the challenges that the African market faced. Instead of simply trying to go through the challenge, they innovatively went around it, offering cutting-edge products to the market.
“The African people must embrace these opportunities while also demonstrating patience and resilience to weather the storm and come through the turbulence to create a strong and prosperous future—and that includes the oil business,” the report says.
INDUSTRY'S FUTURE TRENDS
A recent British Petroleum study on Africa’s oil and gas sector has identified major trends that will shape up the industry until 2035.
• In 2035, Africa will account for 21% (1.8 billion) of the world’s population compared to 16% today. The region also will account for 45% of the global increase.
• Energy demand is projected to grow by over 75% between 2015 and 2035, much faster than the global average of 31%. By 2035 African demand will account for less than 5% of the global total.
• Renewables are set to grow strongly (+14.0% p.a.) contributing 17% to total African energy demand growth. Hydro will also grow strongly (over 5.2% p.a.) and will contribute nearly 14% to demand growth.
• Fossil fuels are set to account for over 80% of demand in 2035, with natural gas (+80%), oil (+56%) and coal (+25%) all expanding.
• Oil will continue to remain the dominant fuel accounting for over one-third of energy demand, followed by gas (nearly 30%) and coal (16%).
• By sector, ongoing urbanization and electrification mean energy demand in power generation is set to more than double and will account for over 45% of energy demand in 2035.
• Energy production in Africa is expected to grow by nearly 30% and remains dominated by oil. Oil’s share, however, will shrink from over 50% in 2015 to just below 40% in 2035, with natural gas rising from 24% to 28%.
• Africa currently exports a significant amount of its energy production (nearly 45%), but growing domestic demand will reduce this ratio to below 25% by 2035.
• Nevertheless, the region remains an important source of global oil and natural gas supply, accounting for 8% of global oil and 6% of natural gas production in 2035.
• By 2035 the continent is projected to produce 8.3 Mb/d of oil, of which over 2 Mb/d will be for export down from 5 Mb/d of export today.
• The equivalent numbers for gas are 30 Bcf/d of output by 2035, of which 6.5 Bcf/d will be for export down from 7.4 Bcf/d today.
** This article first appeared in Unisol magazine (Essel Group Middle East) published by Mediaquest Corp, Dubai, UAE.
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