The Outlook for Africa’s Oil & Gas Sector

By Peter Roberts, Head of the Global Oil & Gas Practice at Orrick, Herrington & Sutcliffe LLP

Any article about the promise and the problems of Africa usually starts with a string of superlatives, and when assessing the continent’s oil and gas prospects it is equally tempting to do so.  

Africa is home to some of the world's largest petroleum discoveries in recent years. A relative lack of exploration throughout the continent offers huge potential for the further exploitation of untapped resources.  But there are also plenty of difficulties ahead for much of the continent. 

This article considers some of those difficulties, the extent to which they can fairly be attributed to the current low oil price environment and what could be done to address them.

Regional challenges

Mozambique and Tanzania continue to vie for the title of principal exporter of LNG from East Africa. Continuing offshore gas discoveries indicate a huge reserves base (this also bodes well for Somalia's nascent offshore development plans, although Somalia is having problems of its own with establishing a settled federal state system), but regulatory and commercial progress continues to be slow and the present global glut of LNG offers a reduced incentive to race to the market.    

Still on the eastern seaboard, significant reserves promise is held by Kenya and Madagascar, although in Madagascar’s case the economic profile of commercialising heavy oil deposits will always be challenging in a low price environment. In Uganda, there are continuing difficulties relating to agreeing an export pipeline route across Kenya and/or Tanzania so that Uganda’s significant but landlocked oil discoveries can be commercialised. 

On the other side of the continent, each of Mauritania, Senegal and Benin indicate attractive reserves bases ripe for further exploration, albeit with the attendant cost consequences of deep-water exploration and production.  

The nascent oil industry in South Sudan has suffered badly due to the civil war that broke out in early 2014, with reduced production from the Unity region. No less a problem is the impact of the agreed tariff regime for the transportation of South Sudanese oil to Port Sudan for export, which has resulted in oil being sold at a loss in consequence of collapsed global prices. The situation is so bad that the South Sudan government has threatened to shut-in production (no mean threat for a country where oil sales represent some 95 percent of national revenues). A working group established between the governments of South Sudan and Sudan earlier this year has recognised the severity of the situation, and is working to recast the current tariff arrangements to create something that benefits both countries. 

Political instability 

Political instability has also affected each other compass point in the continent. Algeria is a major oil producer and gas exporter to Europe, but the fear of more terrorist attacks on energy facilities and ongoing uncertainties about the planned presidential succession are stifling investment in the country’s petroleum sector. 

In Nigeria, there is a continuing lack of progress towards the programme of regulatory reform. This is desperately needed to eliminate the country’s well-known gas flaring profile and to kick-start the use of indigenous gas as a reliable feedstock for much needed power generation. 

South Africa continues to face regulatory uncertainty regarding state participation rights, which undermines upstream investment appetite at a time when levels of reliable electricity generation in the country have dropped dramatically. 

Libya has seen oil production levels hit a five year low in the midst of a shattered‎ governmental structure, and Morocco continues to grapple with demarcation and sovereignty issues over the disputed Western Sahara region. 

Wider economic impact

All of these woes, combined with collapses in exportable commodity prices have contributed to a wider economic decline in Africa, with continent-wide aggregated GDP sliding towards the lowest rate of growth since the start of the century. 

The principal casualties are the local and international oil companies, but equally hard-hit are service sector companies. These businesses face an industry in stasis and national economies suffering from declining revenues.  

Despite producing more than a million and half barrels of oil per day, Angola has recently requested a bailout from the International Monetary Fund to help cope with the fallout from collapsed global oil prices (at a time when certain deep water gas projects‎ have been shelved in response to the challenging economic circumstances). In Nigeria, a lack of foreign currency has led to a fuel crisis caused by the difficulty of paying for imported refined products.   

Combating the challenges

Despite these difficulties littering the investment landscape, African governments have recognised there is stiff competition between them to attract new entrants. It is instructive to notice that as of today there are licensing rounds underway in each of Angola, Congo, Egypt, Equatorial Guinea, Gabon, Liberia, Madagascar, Namibia, Senegal, Tanzania and Tunisia. Many governments have sharpened their fiscal and other concession terms in order to attract the necessary private sector investment. An early indication of the need to be more responsive came in 2014, when a licensing round in Tanzania resulted in a disappointingly small number of compliant bids. 

It is obvious that now is the time for private sector participants to invest (whether through licensing rounds, farm-ins or acquisitions) to secure relatively low priced reserves. But for potential investors, much will depend on them being comfortable with the various non-economic project risks.  

Key amongst these risks is political instability and regulatory uncertainty. These are the areas where the governments of Africa need to pick up the pace, to be ready to secure the interests of investors and rebuild their damaged economies.

The anticipated wave of merger and acquisition activity hasn’t materialised.‎ While many people believe this is because prices have yet to bottom out, the real reasons for a lack of investment appetite could run deeper. Put simply, the opportunities on offer might not be attractive because of wider political and regulatory issues (whatever the monetary costs of entry are).