Why oil & gas investors are moving capital out of East Africa

*Sudan oil pipeline.

*Sudan oil pipeline.

04 September 2016 – Companies interested in East Africa’s hydrocarbons have started putting their capital into countries with proven resources and decent fiscal terms.

The region still offers significant opportunities for investors taking future strategic positions, but it is not attracting attention as a hotspot of oil and gas exploration investment due to declining crude prices.

Data from Oslo-based consulting Rystad Energy shows that capital spending in East Africa by exploration companies was $4.6 billion in 2012, $4.7 billion in 2013, then dropped to $4.3 billion in 2014 and $2.5 billion in 2015 as crude prices declined.

The low price environment has led to a reduced level of activity among industry players, with a crippling effect on countries such as Nigeria and Angola that depended heavily on oil revenues.

PricewaterhouseCoopers (PwC) says governments in East Africa that want to attract oil and gas investors now have to offer an attractive environment by reforming their regulatory, fiscal and licensing systems.

“There seems to be an increased level of awareness on the part of governments and policymakers that they have to play their part in implementing projects as soon as possible,” said Chris Bredenhann, PwC Africa oil & gas advisory leader.

Kenya’s Petroleum (Exploration, Development, and Production) Bill, aimed at creating a new legal and regulatory framework, is being debated in parliament.

PwC’s Africa oil & gas tax leader Ayesha Bedwei said Tanzania’s regulatory environment is uncertain despite the promulgation of the Petroleum Act, 2015, which allows increased central government involvement, fuelling investor fears of project delays relating to developing liquefied natural gas (LNG) processing plant for natural gas.

While global demand for affordable reliable energy will continue to grow for the foreseeable future, navigating the years ahead will be challenging, as hydrocarbons are no longer as profitable to produce.

“The appetite for exploration has fallen, with companies moving away from higher risk wildcat wells in frontier regions like East Africa,” said Alasdair Reid, sub-Saharan Africa upstream research analyst at London-based consulting firm Woodmac.

He said hydrocarbons projects in the pre-final investment decision (FID) stage will not produce commercially for some years and the question is not “What do oil prices look like today?” but “What will they look in the early-to-mid 2020s when production could begin?”

Each operator will use a long-term price scenario and their projection will impact how they design and implement the projects with regard to when they plan to produce first oil, taking account of how they phase the development of the oilfields.

Getting off ground
Financing the projects and the associated infrastructure is a major constraint. If projects can break even below the projected long-term oil price, then they are likely to reach FID. If not, securing financing and getting them off the ground becomes far more challenging.

Mr. Reid said that Wood Mackenzie sees the Uganda and Kenya onshore projects breaking even at a Brent price between $40 and $60 a barrel, which is positive for Tullow Oil Plc with its joint venture partners.

“There is still an imperative for the partners to reduce costs as far as possible to ensure a reasonable rate of return. There is a likelihood that some upstream partners will reduce their equity stake in order to meet their capital commitments,” he said.

Some 6.5 billion barrels of crude oil have been discovered in the Albertine basin in western Uganda and 750 million barrels in South Lokichar, northwestern Kenya.

Tanzania’s natural gas is facing the challenge of massive LNG volumes coming on-stream in the next five years from the US and Australia, among other countries. The market is not expected to improve until 2024.

“The key question is whether Tanzania can ensure that its fiscal and regulatory structures are in place and supportive of the project,” said Mr. Reid.

Tanzania has 57.1 trillion cubic feet of natural gas. Mr. Reid said Tanzania’s LNG will need to be competitive with other projects around the world that are looking to supply the same markets.

*Kennedy Senelwa – The East African

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