An oil rig in Turkana. FILE PHOTO | NMG
I have come to learn and appreciate that with oil and gas
projects it is never a done deal until a Final Investment Decision (FID)
is penned and ink dried. Prior to that it can be a lengthy and
uncertain journey. That is why countries that discover their oil should
reserve their celebrations until oil is either exported or locally
commercialised. It is a case of not counting the chickens before they
are hatched.
Take the case of Uganda which discovered
crude oil thirteen years ago in 2006 and which to date no one can say
with certainty when first oil will either be exported or refined
locally. Or Kenya which discovered its crude oil in 2012 and which no
investor has committed a date when it can export the first oil via Lamu.
And I am here not talking about early oil which is a miniature and
temporary project.
Tanzania which discovered its
natural gas in 2004 has managed to commercialise the gas locally with
electricity production, but a date for the first LNG (Liquefied Natural
Gas) export is still uncertain. For the three regional neighbors, FIDs
are conditional on something else being done or decided, mostly by the
host governments who are not always renowned for speed in decision
making.
Ghana on the other hand discovered crude oil in
2008 and was able to make its first oil export within two years in
2010, and since then production and exports have soared with natural gas
now planned for local power production. Within ten years, oil and gas
have become an integral part of Ghana’s economy.
One
factor that counts strongly for Ghana is that their resources are
offshore (in the ocean); away from onshore stakeholder community
politics and activism the way we know it in Kenya. Offshore production
has no land issues to contend with, and resource sharing debate is more
national than local. Further there is no oil export pipeline required. A
single multi-function mechanical unit out in the ocean will dig up the
oil, store it, and load tankers for export on the spot...
Oil and gas is a cyclic global commodity phenomenon with about
five year cycles. When global oil supply is plentiful and surplus, as it
is now, prices come down and investment economics become less
appealing, with investors becoming more selective on which projects
around the world they are going to commit their “risk capital”. Further,
the vast amount of US shale oil activity and potential and its
relatively low unit costs have effectively prolonged the current low
price cycle, and diverted investment attention away from other parts of
the world.
An oil and gas project will normally have
several participating investors, all with varying investment priorities,
liquidity, and break-even references for investments. Yet the final
decisions to commit investments have to be joint. The uncertain
investors will be seeking to farm out their participation and this
usually delays investments. If it takes too long to get projects
producing, they become stranded assets.
During this
cycle of surplus oil and low prices, multinationals are divesting from
marginal and stranded assets. Take the case of Exxon which is
consolidating its business by selling out marginal assets (like in Chad
and Nigeria) to concentrate on prolific opportunities with large
volumes, lower unit costs, and fewer investment risks. Exxon has chosen
three priority areas, USA shale, Guyana offshore oil, and Mozambique
natural gas...
Of course we have the so called state
oil companies (Chinese and Russian) which will ignore the economics of
the day and commit to develop oil and gas resources in partnerships with
governments of developing countries. In such cases investor interests
go beyond oil and gas and could include other strategic minerals, and
even geopolitical alliances
Reduced investments in the
current low price cycle will eventually lead to the next cycle of low
supply and high prices. This is when marginal areas will become
attractive, which is where Kenya was in 2012 when it discovered oil.
Today, we should not blame investors for delayed investment decisions
for indeed global investment climate may not be that conducive.
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