Africa Oil & Gas: Continent upstream investment terms fails to impress

Upstream services
Upstream services

The region will have to offer much more attractive investment terms to lure operators to its upstream, Petroleum Economist reports.

Put a group of oil company bosses in a room together at virtually any time in the industry’s history and they will complain about investment terms or the regulatory environment in the countries they operate.

Paul McDade, chief executive of Africa-focused Tullow Oil, told the Africa Oil Week conference in Cape Town that exploration licence terms must be competitive to attract new investors to the region’s upstream.

“This means governments and regulators being bold and flexible and allowing companies to make final investment decisions more quickly by improving fiscal terms that were in many cases initially agreed at greater than $100 per barrel,” he said.

Phil Loader, executive vice president of global exploration at Australian-based Woodside Energy, echoed McDade’s view.

“At the end of the day capital goes where it’s welcome and that’s especially the case at $50 oil. If we like the play and we like the basin, but the terms don’t work, then we won’t be investing,” McDade said.

Woodside Energy farmed into Cairn Energy’s oil development in Senegal in 2016 and plans to take over the operatorship in the coming months.

Pade Durotoye, chief executive of Nigerian independent Oando Energy Resources, also expressed frustration at the delay the company faced in exploration and production on its acreage because of unattractive terms.

“One of the things we are trying to make the government understand and appreciate is that a higher government take of nothing is nothing,” he said.

These messages come at a critical time for the industry in the region, as governments rethink their hydrocarbons strategies at $50-60 oil. The continent’s two largest oil producers, Nigeria and Angola, are revamping their investment frameworks for the oil and gas sector and a plethora of other African states are keen to emulate the recent success of Senegal, Mauritania and Mozambique in kick-starting exploration and converting successful finds into concrete development plans.

Côte d’Ivoire, having just settled a protracted maritime border dispute with Ghana, has relaunched its efforts to encourage new exploration, offering redrawn blocks through direct negotiation with oil companies. Elsewhere on the continent, Namibia, Sierra Leone, Liberia and the Gambia are also promoting frontier offshore acreage. Onshore, Mali is also offering up blocks, hoping that investors will overlook the security risks posed by Islamist terrorism.

They will be keen to emulate countries such as Ghana, Mozambique and Senegal, which have managed to maintain exploration momentum during the industry downturn since Brent crude futures began to tumble in mid-2014.

Ghana’s energy minister, Boakye Agyarko, told the conference that a stable investment environment with predictable fiscal regimes and clear rules for international oil companies had played a major role in bolstering the country’s hydrocarbons sector. Clarity has also been brought to the industry by the settlement in September of Ghana’s long running maritime border dispute with Côte d’Ivoire, which paves the way for companies with acreage close to the frontier to step up developments in the area.

It is good news for cash-strapped Tullow Oil, which says it will now re-start drilling around the end of the year in its Tweneboa, Enyenra and Ntomme (TEN) oilfields, close to the border, with a view to raising production from 50,000 barrels per day this year to the 80,0000 b/d that its floating production storage and offloading vessel on site can handle. The company is also planning to push on with development of its offshore Greater Jubilee Field Development, where it hopes drilling will add to output from its existing Jubilee development, which has a capacity of around 120,000 b/d.

Les Wood, Tullow’s chief finance officer, told Petroleum Economist that Ghana would be a key focus area for the company, adding that the allocation of resources between Greater Jubilee and TEN would be decided in coming months.

Mozambique is another African country that has had success in pulling in investment, with Eni taking a positive final investment decision on its Coral South floating liquefied natural gas project earlier this year, based on 5 trillion cubic feet of reserves from within its Area 4 acreage. That deal was struck on the basis that all production would go for export, with the country’s government betting that getting the export industry established without desirable gas offtake for the local market would attract further onshore investments later on. In neighbouring Tanzania, where the government has been less flexible on the terms of first exports, the industry is struggling to get off the ground.

Senegal, meanwhile, has both oil and gas developments in the works. BP and Kosmos are developing the Greater Tortue gas complex, straddling the border with Mauritania, which is estimated to hold upwards of 15 trillion cf of gas, with a plan in place to develop them via floating LNG in the early 2020s. Woodside and Cairn’s SNE field crude find, around 100km offshore from the capital Dakar, holds reserves of around 563m barrels, according to Cairn. A floating production, storage and offloading vessel with a capacity of up to 120,000 b/d is expected to produce first oil by 2023, with the project requiring more than $2bn of investment between now and then, according to Cairn.

Nigerian challenges

Nigeria has been starved of investment in oil and gas exploration over recent years, especially for deepwater acreage. This is mainly because of uncertainties over the investment framework and the easier opportunities on offer elsewhere, notably in US shale, where the required upfront financing is lower and easier to obtain and the returns are more rapid.

That has brought deepwater exploration in Nigeria to a virtual halt, with maintenance of output largely dependent on eking out more from existing fields. The Total-led Egina ultra-deepwater project—expected online in 2018—is the only major new development scheduled to start up in the foreseeable future. It is forecast to add 200,000 b/d to the country’s output by the end of next year.

Oando’s Durotoye said he doubted the majors would be enticed to plough substantial investment into costly Nigerian deepwater acreage in the near future, even allowing for the greater clarity promised in a new and long-awaited Petroleum Industry Governance Bill and other legislation currently being assessed by lawmakers. He said it was vital that terms for the industry needed to be attractive enough to persuade local independent firms with less financial clout to invest. It remains unclear when Nigeria’s new legislation will be enacted.

At present, Nigeria’s crude output is steadily recovering, as comparative calm returns to the Niger Delta, where militant attacks on infrastructure promoted a collapse in exports to well below 1.4m b/d last year. Emmanuel Kachikwu, Nigeria’s energy minister, told the conference that production continued to recover and currently stood at around 1.6m-1.7m b/d. However, he added that the country’s output would not exceed the 1.8m b/d ceiling it had agreed with Opec, as part of the group’s coordinated production cuts.

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