Improve ‘Investment Environment’ to Seize opportunity in Oil—Expert advise new Africa producers

By Camillo Atampugre, Vice President for Oil and Gas Baclays Bank…

norwayThe number and calibre of delegates set to attend the Africa Oil Week conference in Cape Town next week clearly show that the sector is top of mind for many on the continent and around the world.

Africa’s potential for further oil and gas development remains substantial, with exciting prospects that can transform economies on the west and east coasts.

The recent sharp drop in the oil price has slowed some of these developments, but the resources remain in place and the continent stands to benefit for decades to come.

Africa has more oil and gas in the ground and under the sea than was ever imagined 10 or 15 years ago, and important new discoveries are being made almost every year. Africa accounted for nearly half of the recent big discoveries, and the continent is now becoming a major oil and gas producer.

Next week’s conference will focus heavily on the untapped potential of the African oil and gas industry and the investment opportunity it provides, while also considering how to manage the effects of the lower oil price and resulting project delays.

Oil and gas exploration and production companies have become more cautious as the price of oil has halved to below $50 a barrel over the past 18 months. Many analysts expect oil prices to remain lower for longer, driven by the slowdown in the Chinese economy and, more importantly, by resistance of US shale production to the global supply glut that is expected to keep prices depressed in the near to medium term.

Because of this, investments in large, capital-intensive projects in Africa and elsewhere are under review, and are at risk of being delayed or shelved with preference given to more accessible and profitable developments.

In this climate, African countries have to work harder to attract and retain investments, and to encourage the oil and gas projects that promise so much for national and regional economies.

Infrastructure development, legal and regulatory certainty, less corruption, less bureaucracy and a more investor-friendly approach are high on the list of most investor requirements.

Africa accounts for nearly 10% of global oil production and 6% of gas production, with most of this coming from Nigeria, Angola, Libya, Egypt and Algeria.

Ghana, Guinea, Gabon, Senegal, Kenya and Uganda are joining, or have recently joined, the ranks of Africa’s oil producers, while major offshore gas discoveries down the east coast, from Tanzania to southern Mozambique, promise to turn the region into a serious contender on world gas markets. Nigeria, long a substantial oil producer, is looking to add gas production by harnessing gas that was previously flared at its oil fields.

Shale oil and gas, usually extracted by hydraulic fracturing or fracking, are also longer-term African resources with significant potential. South Africa and Libya have significant shale resource potential, but they will not quickly mimic the US, which benefits from an extensive network of pipelines and infrastructure, an established environmental framework, access to capital and an entrepreneurial culture.

Tapping into Africa’s large gas reserves and resources has another potential benefit for regional economies — the generation of electricity that could help end Africa’s chronic power shortages and support economic growth.

Africa’s gas resources can play a major role in power generation and, particularly with the significant recent gas discoveries in Southern Africa, the region could become a regional electricity hub.

As Africa’s oil and gas industries have become more established, environmental concerns, sustainability issues, community benefits and local partnerships are coming to the fore.

Oil companies are now putting huge emphasis on the environmental impact of new projects, including post-production and decommissioning.

Major banks, such as Barclays Africa, will not finance projects unless they are satisfied with the environmental component, namely that they are in line with the Equator Principles.

In partnering with companies to develop Africa’s resources, there must also be a focus on helping to develop the local communities around oil activities and facilities. Oil companies know they cannot just show up, drill for oil, get their money and get out. Sustainability is now an important consideration for operators.

Oil revenues already dominate some African economies, new discoveries hold great promise, and huge new gas finds can transform economies in East and Southern Africa.

However, before oil and gas can be sold or used, it first has to be extracted. If investors in exploration and production do not see attractive conditions from which they can make a reasonable return, they will take their money elsewhere.

Sustained growth in Africa’s oil and gas industries will happen only if investors are attracted by financial terms that are stable and predictable, which will allow them to plan ahead knowing the terms will not change halfway through the project.

Companies and governments have the opportunity to work together to ensure that a clear regulatory framework is in place to enable Africa to benefit when the oil market improves.

Through partnership, we can ensure that Africa’s oil and gas resources deliver on the promises of economic growth, job creation and improved quality of life for millions of people across the continent.

First Published by Business Day Live

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