An oil rig at Ngamia-1 site in Turkana County in northern Kenya. Companies interested in East Africa’s hydrocarbons have started putting their capital into countries with proven resources and decent fiscal terms. PHOTO | FILE
By KENNEDY SENELWA
In Summary
- Companies interested in East Africa’s hydrocarbons have started putting their capital into countries with proven resources and decent fiscal terms.
- 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.
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.
READ: Tanzania upstages Mozambique on gas
Break-even prices for frontier oil exploration are typically high. Many projects in Africa are, therefore, less profitable, resulting in delays and cancellations in some cases.
Break-even prices for frontier oil exploration are typically high. Many projects in Africa are, therefore, less profitable, resulting in delays and cancellations in some cases.
INFOGRAPHIC- Oil and gas production schedules for East Africa
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