Investment in the exploration and production of oil and gas has dropped precipitously since oil prices began to fall in 2014, and North Africa could be providing the near-term strategy for sub-Saharan Africa.
Upstream oil and gas operations identify deposits, drill wells and recover raw materials from underground. The upstream sector of the oil and gas industry includes all the steps involved from preliminary exploration through extraction.
North Africa is a microcosm of that global change. Upstream investment is expected to be down more than $30 billion for 2016 and 2017 combined. Yet ongoing projects, recent discoveries and investment in gas projects will push the upstream investment in North Africa to record levels by 2019.
Gas has always been valuable to North African economies, but it entered a new phase of recognition in 2015 when spending on gas projects surpassed spending on oil projects for the first time.
The capital expenditure for gas projects in 2019 is expected to be more than double that of oil and will push production of gas and natural gas liquids (NGLs) to more than 3.4 million barrels a day by 2024, according to global energy consultancy Wood Mackenzie.
The growth in spending is being fueled (no pun intended) by a growing need to address declining supply. Multi billion-dollar developments in Egypt, such as Eni’s Zohr and British Petroleum’s West Nile Delta projects, account for over $23 billion, or 30 percent of total capital expenditure in Middle East North Africa over the next five years. The corresponding bump in gas production is less robust at 7 percent, versus the 24 percent increase in capex spend.
The shift to gas is not a short-term reaction to low oil prices. The greater volumes of gas discovered versus oil in the last decade explains the story. Since 2006, oil discoveries have amounted to a new 3.7 billion barrels of oil, compared to 5.6 billion (or 32 trillion cubic feet) of gas. This does not include the 4 billion barrel Zohr discovery that clearly changes the energy discussion in region.
Capex spend
Sub-Saharan Africa does not need a lesson on cutting capital expenditure. Analysts suggest that the capex cut through 2019 is between 35 percent and 45 percent. Angola and Nigeria will likely see more than 50 percent in capex cuts. Many projects are not commercial in this price environment. Some projects accordingly have been redesigned, deferred or downgraded. The greatest cuts will come with oil deepwater projects.
Consider the four biggest combined cuts in Angola and Nigeria. The Block 31 SE project and the Block 16 Chissonga project in Angola will account for a near 20 billion cut in capex spend through 2020 while the Bosi project and the Etan &Zabazaba in project Angola will account for a near 21 billion cut in capex spend. The four projects combined are bigger than the next eight biggest cuts, of which only one is not in Nigeria or Angola.
Looking to gas
Major explorations have led to huge discoveries of offshore gas in Mozambique and Tanzania with investors looking to the lucrative prospects in the 2020s. Current prices rightfully concern investors in the short term as gas projects in Mozambique and Tanzania require significant capital investment. Still the resources are imperative to the development plan of both countries and accordingly will press on in the near term. Italian oil and gas company Eni is expected to spend more than $15 billion to monetize gas in Mozambique in the near term.
The greater question for gas is how it will play out in oil countries, specifically Nigeria. Nigeria is home to massive gas reserves. Its reserve profile should make it competitive with Algeria. Yet capital investment and public focus need an energy injection from the Nigerian government. The infrastructure is conspicuously inadequate, not simply for exploration and transmission but also for converting gas to power generation. Prices also remain an issue which makes commercialization a big question. The Power Holding Company of Nigeria (PHCN), as a major off-taker of gas in the country, struggled to pay for gas at market prices in the past few years. Little data suggest this will change for independent off-takers.
Changing perspective
Natural gas is most abundant in Nigeria, Mozambique and Tanzania with significant resources in other countries, including Angola and Cameroon. It is acceptable and affordable as a standalone energy source. But key policy and economic enablers must be implemented to change the outlook in sub-Saharan Africa.
Let North Africa be an example of how gas can be lucrative when operators can see opportunity and make it a focus. The serendipitous discoveries of gas in Nigeria are bewildering to many investors. Discovering gas while searching for oil is like finding gold outside your door when you need cash. The question is how you turn the gold into cash. That part is not as serendipitous and requires a little effort.
Kurt Davis Jr. is an investment banker with private equity experience in emerging economies focusing on the natural resources and energy sectors. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at kurt.davis.jr@gmail.com.
