Africa’s oil and gas industry continues to face market challenges arising from the low oil price, competition for revenue growth and local talent together with new expectations from investors and regulators
Africa’s share of global oil production has continued its downward trend compared to past years, dropping sharply, and moving from 9.1% of global output last year to 8.6% in 2017.
At the end of 2016, Africa is reported to have had proven natural gas reserves of 503.3 trillion cubic feet (Tcf). This marks an increase of around 1% in total gas reserves on the continent. About 90% of African gas production continues to come from Algeria, Nigeria, Egypt and Libya however, the overall quantity produced in 2016 reduced by 1.1% down to 208.3 billion cubic metres of natural gas (bcm) when compared to 2015. Because of the decrease in production and some additional discoveries, we have seen the years of available natural gas production go up from 66.4 to 68.4.
As industry activity continues to decline globally, industry participants are focusing investment on a very few select projects. Cost cutbacks continue, and exploration activity is at a historic low despite lower costs associated with rig day rates. Although there have been a few discoveries in offshore Africa over the last year, most of those prospects have been in the pipeline for some time.
The focus on the continent tends to be quite wide at the moment. Players are going where the geology looks promising and where the fiscal terms are most attractive. While we are seeing a reduction in upstream activity across the board, midstream and downstream activities are picking up pace. There are several countries or regions looking at opportunities to develop storage or transport facilities in order to take advantage of market needs.
In addition, independent power producers (IPPs) are regularly eyeing African markets for entry opportunities. Many of them offer gas-fired power solutions. This aligns with the expected overall growth agenda for a lower carbon future as gas is expected to be used as a bridging fuel as we move to more renewable alternatives.
Despite current market challenges, Africa continues to offer abundant opportunities to explore for hydrocarbons in frontier markets. New hydrocarbon provinces are popping up regularly; Mauritania and Senegal are good examples of countries where hydrocarbons have recently been discovered.
PwC recently published its annual Oil and Gas Review, Learning to Leapfrog. The review factors in the views of oil and gas participants operating in Africa and includes the experiences of international oil companies, national oil companies, oilfield service companies, independent oil companies and other industry stakeholders, to shed light on the key challenges and opportunities facing the sector. In this edition, we consider events that have taken place in the past year within burgeoning and established hydrocarbon provinces throughout the continent.
We believe the time is opportune for oil and gas companies to take up and utilise advances in technology and innovation as an enabler in meeting some of the challenges faced. Instead of playing catch up to the rest of the world, the industry should be ‘learning to leapfrog’ so that they are not only ahead of disruption –they actually cause it.
The sustained lower price of oil has largely been accepted as the new normal, and companies are putting plans in place to enable a more agile response to commodity price fluctuations in the future. For some, this means a diversification of portfolios, with many considering moves to an energy mix that includes some form of renewables.
The challenges in Africa’s oil and gas industry
The top challenges in the oil and gas industry have remained similar to those in previous years with uncertain regulatory frameworks, corruption, and tax requirements remaining in the top six for the past four years. It is notable that financing costs and foreign currency volatility have both become more critical challenges since 2015 when they were ranked 11th and 10th respectively.
While not surprising, it is disheartening that governments and regulators are still not taking up the plea from oil and gas companies to do something about ensuring certainty to players who are looking to invest in hydrocarbon plays in various African countries. Likely, it’s mainly due to the political nature of such a challenge. No one person or entity has direct control over regulatory frameworks, and many of the stakeholders don’t realise or appreciate how important they are in creating an attractive investment environment for potential entrants.
Corruption moved up slightly on the agenda this year, moving from third place to second place, with numerous instances occurring across the continent. It is notable that companies are prioritising and spending money on the prevention of fraud and corruption. More ethics training has been introduced for senior management both locally and globally to encourage companies to be legally compliant in all countries in which they operate. Another indication of attempts to drive change is that the Extractive Industries Transparency Initiative (EITI), which promotes transparency, good governance and accountability in the use of oil, gas and mining resources, has more African country participants by number and percentage than the rest of the world. African governments are aiming to become more compliant, primarily so that they can attract more foreign investment.
In addition to these and other challenges facing the industry, we continue to see organisations focus on cost cutting. Players continue to be more discerning in choosing the projects they wish to take forward, and operational excellence continues to factor high on the business agenda.
Are companies in Africa’s oil and gas industry fit for growth?
Oil and gas companies cited “too little investment in developing capabilities” as the most significant impediment to business growth. Weak strategy and leadership followed this. PwC’s Fit for Growth approach requires leaders to clearly pin down their identity and develop a capability-driven strategy that is clearly articulated and communicated among staff. This will need to not only address what the companies should be doing, but also needs to define what the company should stop doing to make sure it does not spread itself too thinly and focuses on differentiating value proposition in the market.
Achieving sustainability
The need to strategically assess whether the portfolio of activities oil and gas companies in Africa pursue, in order to be sustainable in the drive towards a low-carbon environment, is necessary. Low carbon is an agenda that has been building for some time, brought to a peak of global alignment on the issue with the COP21 Paris Agreement in which nations agreed to reducing carbon emissions in order to limit the rise in temperatures to “well below” 2ºC. This agenda continues to be a global focal point. Growing decarbonisation is therefore a medium-to-long term challenge that will continue to have significant implications for the sector.
The review results indicate that mergers and acquisitions (M&A) and partnerships are key to delivering the intended and repositioned strategies and growth. The survey results support our view that partnerships are key to delivering the intended and repositioned strategies and growth. The majority of respondents referred to a partnership proposition with nearly 60% having both been approached or approaching another entity for partnership.
Technology
While some oil and gas companies continue to explore opportunities for cost reduction and improved efficiency in the low oil price environment, consideration is now being given to how they will stay ahead of the competition. Given the perception of slow uptake of digital solutions in oil and gas, it is surprising to note that nearly a quarter of respondents stated that they had implemented some form of digital solution, from production and drilling to mobile solutions.
More technical innovations relating to operational process and efficiency, as well as other technology-based innovations were also cited. The use of drones was cited by 4% of respondents, indicating that the growth in use of technology highlights its significant potential for the industry.
The survey results indicate the application of digital, which is an important step in achieving sustainable operational efficiency. With lower oil prices likely to continue in the near future, digital technologies connecting equipment and field operations through the Internet of Things (IoT), the tasks of automating processes and access to data, as well as helping with cost-cutting, will be essential if the industry is to improve productivity while curbing costs.
Oil and gas in Africa continues to be one of the burgeoning and frontier plays for the industry. It is riddled with complex challenges and adversity, but with challenge comes opportunity. The opportunity is there for players who are willing to “reimagine the possible” in a future that looks very different to our present.
The outlook should include a strategy that is dynamic and fluid to market and situational changes. While portfolios should be diversified, African oil and gas companies need to “learn to leapfrog” to remain competitive in the new energy future. While there are some challenges that can be “leapfrogged”, others will continue to plague the industry.
In addition to being disruptors, oil and gas companies in Africa need to carefully consider strategic partnerships. This strategy will work hand-in-hand with portfolio diversification as it leads to risk diversification.
