Regulatory uncertainties, corruption, high taxation, foreign currency volatility and low crude prices on the international market are making it difficult for companies and investors to operate in Africa’s oil and gas sector.
Few international companies are willing to commit resources to exploration activities while those already operating on the continent are cutting down on their capital expenditure. This is despite the continent being touted as the next frontier for hydrocarbons.
This explains why there were only three major discoveries in 2016 and the first half of 2017, down from 11 in 2015. Notably, there were a total of 174 discoveries globally.
In East Africa, for example, capital spending by exploration companies has been on the decline from $4.7 billion in 2013 to $2.5 billion in 2015, according to data from Oslo-based consulting firm Rystad Energy.
A new report by audit firm PricewaterhouseCoopers reckons that Africa’s oil and gas sector is in a state of upheaval that is hampering the exploitation of its vast resources.
The report, dubbed Learning to Leapfrog, however adds that the focus on Africa is quite wide, with industry players preferring to invest in countries where the geology looks promising and where the fiscal terms are more attractive.
“The oil and gas industry in Africa is riddled with complex challenges and adversity, but with the challenges comes opportunities. It is clear that African oil players must ‘learn to leapfrog’ to remain competitive in the new energy future,” said PwC Africa oil and gas advisory leader Chris Bredenhann.
An uncertain regulatory framework on the continent continues to be a primary challenge for foreign companies eyeing opportunities in Africa.
“It is disheartening that governments are not heeding calls from oil and gas companies to ensure regulatory certainty for players who are looking to invest in hydrocarbons,” says the report.
It adds that regulatory uncertainty continues to delay development of the industry in a number of regions, with companies holding on to their investments until they can plan accordingly while others are opting to exit.
In Tanzania, for example, the passing of two laws that allows the government to forcibly renegotiate contracts with mining and energy companies has the potential to significantly undermine investor confidence.
Tanzania has 57 trillion cubic feet of largely undeveloped and proven natural gas reserves, from which it expects to earn close to $5 billion annually in gas exports.
In Uganda, a country with 7.5 billion in proven deposits, the Petroleum Bill (2012) that aimed to define the regulatory bodies lacks clarity as to whether institutions will be created from scratch or from existing bodies. The legislation has also been criticised for granting too much authority to the Energy Ministry.
Another challenge facing Africa’s oil and gas sector is corruption, which has been on the rise despite the existence of anti-graft programmes.
Investors in the industry are also grappling with the challenges of affordable financing and exchange rate volatility. The lack of skills development also continues to be a problem.
The significant decline in crude oil prices on the international market has also had an adverse impact on Africa’s oil and gas industry. The decline has forced companies to adjust to the new normal of lower oil prices, which have been relatively stable through 2017. Having recovered since its January 2016 low, the price of crude has averaged $50 to $60 per barrel this year.
“The demand for oil is picking up and supply is easing off, suggesting a market rebalancing is underway. However, as we have often seen with global oil prices, nothing is ever certain,” notes the report.
Of importance is that while there has been a reduction in upstream activities, midstream and downstream activities are picking up with several countries looking at opportunities to develop storage or transport facilities in order to take advantage of market needs.