Africa Oil and Gas The boom that never was

Africa Oil

Africa’s total oil output last year was about 8.26mn bpd with the top producers being Nigeria, Angola, Algeria and Egypt. Other producers such as Libya, South Sudan, Chad, Gabon, Equatorial Guinea and the Republic of Congo also made modest contributions. In all Nigeria and Angola remain top producers of crude oil on the continent though Libya has the largest proven reserves though production has been significantly disrupted due to the political instability that has reigned ever since the demise of Gaddafi. On the other hand, Egypt has the most developed oil refining industry on the continent and its strategic location means that it sits astride an important route through which most of the oil destined for Europe passes via the Suez Canal.

Despite the fact that Africa produces only a small fraction of the world’s crude oil it none-the-less consumes less than it produces making it a net exporter which means that overall low oil prices in the last year or so has had a negative overall effect on its GDP and as promising new entrants in the oil and gas industry struggle to come on stream the new reality of low oil prices may mean that the party for Africa has ended even before it begun. The new oil finds had created an air of excitement in the construction industry as the need for infrastructure development became a priority. Talk of pipelines, refineries and roads promised to spur the industry to greater heights last year when discoveries of new oil and gas fields were made in Ghana, Tanzania, Mozambique and Uganda. Other countries such as Kenya, Sierra Leone and Mali also established prospecting fields. The discoveries promised a new era of wealth and prosperity but those days seem in the distant past as investors and oil majors have made cutbacks in capital expenditures in both drilling and prospecting soon after the price of oil dropped by half towards the end of 2014 bringing with it weakening local currencies and increased inflation especially in the more oil reliant countries of Nigeria and Angola. Proof of this slowdown can be seen by the fact that late last year the IMF had predicted Africa’s GDP growth would be about 5.8 percent which was revised to 4.5 percent by mid this year.

Price slumps

In the past year the slump in crude oil prices has seen it fall from over US$100 per barrel in 2015 to as low as US$45 per barrel this year before making a modest recovery. This massive drop has been attributed to several factors such as the slowdown in the Chinese economy which has caused China to reduce its import bill while in the USA the worlds largest consumer, the reduced demand for imported oil has also played a part in reducing consumption from traditional suppliers Nigeria and Angola as well as the Middle East.

In the oil export countries of Nigeria and Angola which represent the highest producers, the effect of lower oil prices has been lower oil revenues and capital inflows with a negative impact on foreign exchange valuations for local currencies. In addition it has seen significant cutbacks in capital expenditures by oil companies as well as significant deficits in government revenues which has curtailed growth in the construction sector.

In East Africa, Uganda and Kenya had made discoveries of oil and are embarking on developing infrastructure which includes a US$4 Billion pipeline from Uganda’s Lake Albertine Basin where there are prove reserves of 2.5 billion barrels through Kenya’s northern oil rich region to Lamu. These projects along with a yet-to-be-built port in Lamu as well as a refinery in Uganda would be a boon for the construction industry but these plans have become less promising with oil prices close to the threshold for which the projects were deemed viable. More recently talk of an alternative route for the pipeline through Tanzania have thrown further confusion as regards the way forward for the projects.

Natural Gas

Just as the crude oil prices have dropped so too has the price of natural gas driven by the US shale gas phenomenon that has made the country the largest natural gas producer in the world. If US exports of gas are to kick in further turmoil in the market can be expected. For African countries like Mozambique and Tanzania which have made significant strides in developing proven reserves of natural gas funning to develop these has become more difficult to come by.

Mozambique sits on 180 trillion cubic feet of gas enough to supply most of Western Europe for over 15 years. The country’s reserves are reported to be greater than those of Angola or Nigeria giving the country the potential of becoming the third largest producer of natural gas in the World after Australia and Qatar. However they now face an uphill task in securing funding for infrastructure development as investors fight to cut back capital expenditures. Recent news reports however indicate Anadarko Petroleum Corp are inching closer to developing a US$15 billion onshore liquefaction plant to allow the company export over 12 million tons of LNG annually.

Tanzania also harbors hopes of becoming a major gas exporter but as in Mozambique the going is slow because it will require the construction of a liquefaction plant which in the face of stiff competition from USA, Qatar and Autralia makes the project less likely in the near future and at present price levels. In the meantime however the country hopes to spur the use of natural gas to generate electricity and reduce reliance on hydroelectric generation that has been plagued by drought induced cut backs. The completion of a 532 kilometer pipeline from Mtwara to Dar will be used to transport natural gas for the generation of 3,900MW of electricity. The country has been using natural gas since 2008 when the Ubungo gas plant was completed.

Egypt aims to begin production of natural gas from the recently discovered Zohr field by 2017 a year ahead of scheduled. The gas discovery by oil exploration company Eni, is likely to turn the country from a net importer to an exporter and help ease the crippling energy shortage currently being faced in the country.

The discovery is a Godsend since only early this year the country entered the LNG market with a burst of imports that made it one of the world’s top growth markets, after leasing a floating storage unit (FSRU) from Norway’s Höegh LNGfor five years in April.

Egypt has since added a second FSRU leased from Singapore-based Norwegian gas shipping company BW Gas.

Offshore gas fields typically take several years to come on stream, however, as Egypt already has some of the infrastructure in place it’s expected to be able to accelerate the process.

The gas is estimated to contain 30 trillion cubic feet of gas and the discovery will essentially rank it with middle East countries that have large reserves of natural gas and it remains to see how the competition for exports will eventually turn out.

The future

The USA’s success in reducing reliance on imports has seen the country satisfy about 90 percent of its domestic needs from new shale wells that have been sunk in the last 4 years. Though a controversial method of drilling for oil, fracking has proved successful in extracting more oil from shale rock formations at cost effective prices.

On its part the Organization of Petroleum Exporting Countries (OPEC) that has traditionally played a stabilizing role by regulating supply has taken a more aggressive stance of maintaining production levels in a bid to retain market share. This strategy has been a blow to more costly drilling operations which cannot survive in the current pricing environment while countries such as Saudi Arabia at production costs estimated to be as low as US$10 per barrel expect to ride out the storm comfortably. Compare this with estimated costs of production of US$50 for East African oil and the picture becomes clear why oil majors have adopted a wait and see attitude before investing in the development of new fields.

The implication of this is that in the foreseeable future prices are bound to remain soft due to these supply factors. Added to this is the fact that the USA is likely to lift an existing ban on exports of crude oil and gas, while the lifting of sanctions on Iran will also bring more supplies into the market while Iraq supplies are also likely to ramp up even in the face of the current instability in the region.

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