Africa Oil & Gas: Upstream industry risks in the continent

Upstream industry.jpgRelations have been tense between Angola’s old guard and the new government since Jose Eduardo dos Santos stepped down last year after 40 years as president. Zimbabwe however appears to be making things easier for investors.

State-owned Angolan oil company Sonangol has been battling headwinds related to its former chairwoman Isabel dos Santos which could damage the company’s prospects for developing its gas framework. She was also the daughter of the president.

“I cannot stop expressing my complete indignation with which… grave accusations and insinuations were made… against my honour and in contrary to the serious work that the previous administration team developed during the course of 18 months,” Dos Santos said in a statement.

Dos Santos’ comments follow remarks during a recent presentation by her successor, Sonangol chairman Carlos Saturnino, that some $38mn of its funds were unlawfully transferred out of the company’s account after dos Santos was relieved of her duties as company chairwoman. Dos Santos has consistently maintained that the allegations are false and told the Portuguese business newspaper Negocios that she would be launching a claim against Saturnino.

Dos Santos was originally made head of Sonangol by her father and tasked with streamlining Sonangol, cutting costs and improving the company’s debt crisis. But when Lourenco came to power, he stripped dos Santos of her title.

“Such politicised manoeuvring between the current and previous Sonangol management boards appears an inevitable part of the Lourenco government’s attempts to distance itself from the dos Santos regime,” IHS Markit‘s Angola analyst Roderick Bruce said. “But it is an unwelcome and disconcerting distraction for Sonangol’s foreign partners seeking signs of clarity at a critical point both for the national oil company and the country’s hydrocarbon sector.”

The latest issue flared up even more violently March 10 when dos Santos decided to launch a website dedicated to her defence of her time at Sonangol: http://www.factos-sonangol.com.

The rift is likely to distract Sonangol from one of its major aims: revamping the gas industry and enticing investors to take a risk in Angola. Findings from the working group on the fiscal terms for gas exploration are due to be published in April.

Angolan gas prospects

Angola is certainly not lacking in terms of potential gas prospects. Oil fields are ageing and petroleum production has been declining, placing a greater impetus on Angola to begin developing a legitimate framework for its gas industry. But investors have not had an easy ride with gas in Angola.

US company Cobalt crossed swords with Sonangol. This eventually led to court proceedings and Sonangol agreeing to pay off $500mn in compensation to Cobalt, after wrongfully cancelling a $1.75bn deal with it.

Other major oil players have chosen to pull out of Angola completely, or at least suspend their operations. Last year BP announced it would be pulling out of block 24, including the Katambi gas discovery, in the gassy Kwanza basin, citing a lack of commercial viability.

On top of this, some companies have had less-than-favourable drilling results in their attempts to explore for hydrocarbons in Angola, either finding them to be less than expected, or even finding none at all.

One of the issues relating to developing gas in Angola, aside from the lack of legislative framework and gas monetisation options, is that Angola is near other gas-rich countries, which can offer much better terms for developing gas and prospects that are not so risky. In an oversupplied global gas market, even these much simpler gas prospects are harder to sell – let alone Angola’s which would necessitate large investments and a company with a significant risk profile.

There has been a trend towards developing floating liquefaction (FLNG) projects over the past few years, such as those in Senegal and Mauritania.

Likewise, on the other side of the continent even larger gas reserves in Mozambique and Tanzania are much more attractive and far simpler to develop into LNG projects than Angola, with the Mozambican government in particular serious about developing gas.

Angola in this regard pales in comparison, as oil has always been the main focal point. However, Angola does have gas reserves that could be developed as FLNG projects, if only it can bring investors onside with the right fiscal framework, consultancy Wood Mackenzie said last October (NGW Magazine, Vol.2/21, p11-13).

Most of the gas prospects in Angola are either in deepwater or marginal fields. Angola published a marginal fields bill to try to encourage drilling, but there has been scant interest from IOCs.

Poor investment climate

At the moment gas is regarded as a by-product and it is not possible to monetise because all the gas technically belongs to Sonangol. Because of this, gas is only worth developing if there is money to be made through developing oil or other liquids.

But even for oil, Angola is no longer the first choice for investors. Since global commodities prices fell mid-2014, Angola has not changed its tax legislation, meaning that companies are still required to pay a regular oil tax rate of 62%, despite the fact that their return on investment is less. Cameroon, in comparison, has a regular tax rate for oil production of 30%. Aside from the legislative issues, a currency crisis in Angola means that companies operating in the country have to wrangle with huge operating costs. It is also complicated to expatriate proceeds since Angola has a limit on how much money may leave the country.

In its 2017 annual results statement Sonangol announced that it will be targeting a rate of 1.6mn barrels/day of oil production, a continuation of today’s level. This once again pitches the country against its west African competitor Nigeria which will also be aiming to produce a lot more now that militant attacks are fewer. Sonangol said that in order to maintain its oil output rate it will be launching fresh investment; but with the state’s coffers emptying, it’s unclear how the country will find the funds required to boost upstream spending.

Bruce said that we can likely expect the new gas framework to be published next year, but that the projects it might unlock are unlikely to come on stream by Sonangol’s ambitious targeted date of 2025.

Miriam Malek

Reforming Zimbabwe Seeks CBM Cash

Zimbabwe’s parliament has passed a bill which seeks to amend a controversial indigenisation law that has been blamed for scaring away foreign investment from the country’s coalbed methane (CBM) sector and the wider extractive industry. Its passing by the upper house of parliament on February 15 came after the lower house had approved the proposed law three weeks earlier.

Relaxing the law is likely to build on foreign investors’ newfound interest in the economy following the resignation of Robert Mugabe as president in November 2017, one independent energy consultant has told NGW.

“We know that Zimbabwe has CBM potential but there isn’t much happening on that front because of this law, among other factors of course,” Ben Rafemoyo said. “Now that the clauses that made foreign investors uncomfortable have been removed, local investors who have special gas grants and were failing to raise capital now stand a better chance of succeeding,” he said.

Emmerson Mnangagwa who assumed the presidency after Mugabe was ousted, has pushed for amendments to the Indigenisation and Economic Empowerment Act as one of his priorities. At time of press he was expected to sign the bill into law and have it gazetted shortly. Enacted in 2008 as part of Mugabe’s tough but populist economic localisation and empowerment agenda, the old law set a 51/49 shareholding threshold in favour of “indigenous” Zimbabweans for all investments worth $0.5mn or more involving foreigners. In 2016, after widespread complaints, the government committed to relaxing the shareholding ratio, saying respective ministries would handle foreign investments on a case by case basis in the manufacturing and service sectors; but kept it for farming and mining.

However, locals who hold CBM mining and development licences for blocks in coal-rich western Zimbabwe complained that the provision made it virtually impossible for them to raise capital on the international market to develop their assets.

The new bill limits the application of the 51/49 ratio to only diamonds and platinum. It also abolishes the threshold in other sectors of the economy except retailing, packaging, advertising and tobacco processing where foreigners can invest only with government approval.

Since the government wanted to fast-track the economic localisation amendments, it included them in the 2018 Finance Bill so that they become law the moment the national budget takes effect. Both houses of parliament passed the alterations to the law without any amendments.

About six companies have special CBM grants for acreage in Zimbabwe, none of which has managed to raise enough capital fully explore or develop their resources. They include Zambezi Gas, Shangani Energy Exploration, Hwange Colliery Co (HCCL), Zimbabwe Mining Development Corporation (ZMDC), China Africa Sunlight Energy and Discovery Investments.

Shangani Energy Exploration, jointly owned by the Zimbabwe Mining and Smelting Company and China’s Sinosteel Corp, had its special grant extended in August 2017 for three more years. The company has been struggling to raise $120mn to build a 400-MW plant to power its chrome smelter in Zimbabwe. Discovery is the most advanced; but it has been at the resource-proving stage for many years after failing to raise $100mn to build a 15-MW gas-to-power plant.

Zambezi Gas CEO Thomas Nherera told NGW: “Yes, there were concerns over the law and it is good that it has been relaxed but we must go out there to compete for investment. The good thing is that the government is creating the right climate.” In recent years, the company has focused on coal production instead.

Winston Chitando, appointed as minister of mines in Mnangagwa’s government in November, has helped adopt the amendments to the indigenisation law. Until his ministerial appointment, he was executive chairperson of Zimbabwe’s second largest platinum miner, Mimosa Mining Company, a joint venture of Australia-listed Aquarius Mining and South Africa’s Implats.

He also served as chairman of the Zimbabwe Platinum Producers’ Association at the height of Mugabe’s indigenisation drive some five years ago and was involved in delicate negotiations with government at that time. He told Reuters last month that the indigenisation law review would improve investment, but said that most recent inquiries from investors are in lithium – followed by CBM, gold and coal.

The review of the indigenisation policy comes as ZMDC and HCCL are considering tenders for exploration and development at their CBM concessions, with both firms saying they will name winners by the end of April and are optimistic of recruiting solid bidders. Rafemoyo says their optimism is not misplaced.

Thulani Mpofu

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