Mixed blessings of low prices

Geoffrey White, CEO of Agility Africa, looks at the impact of low oil and gas prices on Africa.

The collapse of oil prices in 2014 and the slow recovery to around a $50-a-barrel level has had good and bad impacts on the African economy.

Two thirds of African countries are net energy importers and have benefited from lower energy prices. Many of them have used the lower input costs to reduce or eliminate fuel subsidies that have historically burdened government, thus freeing up funds for economic growth and implementing infrastructure projects. As a result many of the non-energy exporting African countries, (with the exception of South Africa which has its own set of challenges) are delivering economic growth at rates that are amongst the highest in the world.

In contrast, the African oil exporting countries have experienced a very different scenario. Two of sub-Saharan Africa’s largest oil exporters have been devastated by the fall in oil revenues. Nigeria and Angola, which produce 2 million and 1.8 million bpd respectively and whose economies are highly dependent on oil revenues, have seen government incomes halved. As emerging economies dependent on oil revenues (98% of Angola’s economy is oil related), the impact was substantial. Government infrastructure investment was curtailed or cancelled, creditors were extended and access to foreign exchange was restricted. Severe economic deterioration resulted and economic growth fell from close to double figures to a mere 1 or 2 percent.

There are signs of fresh interest in African energy, driven by the ongoing depletion in global supply as projects reach the end of their productive life and increasing global energy consumption.

Having been through a torrid time for the past three years, both countries are managing to realign government spending and adjust to lower prices. As a result, investors are beginning to engage again and become more bullish about the future. These economies are still among the largest in Africa and have significant budgets to spend on development. With a population of 200 million, Nigeria is Africa’s largest economy and a market hard for investors to ignore.

One of the most critical effects of the collapse of prices was the impact on foreign direct investment into oil and gas project development: Africa has more prospective exploration blocks than the rest of the world combined. Sector investment across Africa fell by 60% as projects were suspended or cancelled. Exploration budgets were curtailed, and the investment in existing, approved projects with proven reserves stalled as economic viability was reviewed. The market turmoil was compounded by an oversupply of product from the increased output of U.S. shale oil and gas.

Now there are signs of fresh interest in African energy, driven by the ongoing depletion in global supply as projects reach the end of their productive life and increasing global energy consumption. FDI has realigned to the new pricing levels, and in the past twelve months there has been a gradual momentum building for the major projects in Africa, many of which offer highly competitive production costs. Africa is back on track to become an increasingly important global supplier, especially for China, India and other parts of Asia.

An estimated $120 billion is to be invested in Mozambique’s offshore gas production over the next ten years. Proven reserves of 300 tcf could make the east African nation one of the largest and most competitive LNG producers in the world.

One of the key opportunities is in Mozambique where proven reserves of 300 tcf of gas make it potentially one of the largest and most competitive LNG producers in the world. In June, Italian multi-national ENI declared a final investment decision on its $5.4 billion CORAL floating liquefied natural gas (FLNG) project, awarding contracts to the TechnipFMC/JGC/Samsung consortium. That ENI has been able to fund the project and BP has signed a 20-year off-take agreement was a major vote of confidence that the world-class gas reserves off Mozambique are viable. Over the next decade, ExxonMobil/ENI and Anadarko plan to develop up to ten LNG trains in northern Mozambique, along with a Shell GTL plant and Yara fertiliser project. Overall investment is forecast to be $120 billion, with an estimated 13 million tonnes of project freight needing to be delivered. Renewed momentum for the industry is evident across Africa. In East Africa, Tanzania has 50 tcf of recoverable gas, whilst further north there are commercially viable reserves in Kenya, Uganda and South Sudan. South Africa is reporting positive results both offshore and potentially from shale reserves in the Karoo basin.

On the west coast, Angola is to significantly increase production to support its economic growth and aims to become Africa’s largest producer. Nigeria has significant gas resources to develop. Ghana is in production and will reach 200,000 bpd whilst Cote D’Ivoire, Chad, Cameroon, Senegal and Mauritania all have new resources being developed. Equatorial Guinea has joined OPEC and commenced an FLNG project.

In Nigeria, the $14.3 billion, 650,000 bpd Dangote refinery at Lekki is now progressing rapidly and will be one of the largest refineries in the world, gradually ending Nigeria’s historic dependence on imported fuel. The project requires 100,000 TEUs of project cargo delivered.