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Oilfield Technology
January
2016
throughout 2015. While the oil price has caused activity to drop,
it has also served as a wake-up call to many African governments,
which are working hard to pass favourable oil and gas legislation
in order to attract investment into the sector. Countries such as
Kenya, South Africa, Mozambique and Tanzania have been taking
a serious look at legislation currently in place with a view to
making it more investor-friendly. Poorly drafted or ill-conceived
legislation will lead to project delays. It is therefore important that
unattractive fiscal policies that are detrimental to investment are
carefully weighed up prior to promulgation, so that future special
dispensation is not required to boost the industry.
In a recent PwC Africa oil and gas survey over 98% of
the respondents indicated that they have an anti-fraud and
anti-corruption programme in place – of these, more than 60%
believe that the programme is very effective at preventing and/or
detecting fraud. Only 8% of respondents indicated that they did
not have a compliance programme.
Over 43% of respondents indicated that fraud and corruption
would have a severe effect on their businesses. Government
officials continue to be implicated in a number of fraudulent
activities across the continent. Recent research conducted by
PwC shows that bribery and procurement fraud remain some
of the top types of economic crimes in the broader energy
sectors. Despite pervasive fraud, some governments around the
continent have made significant efforts to increase transparency
in the industry. The economic crisis that a number governments
are having with hugely decreased revenue from oil may provide
an incentive for these governments to make a concerted effort
to root out corruption. President Buhari in Nigeria won the 2015
election with an anti-corruption agenda and he dissolved the
board of the country’s state-run oil company.
Rethinkingstrategies
Companies have recently cut their capital budgets and frontier
exploration activity has decreased. While response to such a
drastic decline is necessary, the most successful organisations
are taking time to reset, re-strategise and plan for the upturn in
oil prices, which will inevitably come. Companies are looking at
their Capex and deferring these expenses to a later date where
possible, except in the case where development could lead to
increased cash flow in the near future, such as the TEN project
in Ghana. Companies have had to arrange funding in order to
ensure that these projects can be completed. This may not
bode well in the short run for the majority of the Sub-Saharan
oil and gas development inventory as almost all of them need a
US$40/bbl of oil price to breakeven. More than half require more
than a US$60/bbl of oil price to breakeven thus many projects
are being delayed and put on the back burner.
As projects can take a number of years to come on-line,
companies need to assess the developments based on long term
forecasts that show that the oil price is likely to rise again. As
service companies are hurting it is possible for E&P companies
to renegotiate or negotiate better terms than they have had for
a decade.
Companies are also looking at consolidating what they
have, collaborating with suppliers, optimising and improving
efficiencies so that they are fit for the future, even where an oil
price may remain low for a period of time.
Companies that have taken a long term view and committed
to socio-economic country development and training are likely
to have the greatest success of sustainability within Africa.
The main challenges identified by organisations in the oil
and gas industry over the last few years have remained largely
unchanged, with the top three issues being uncertain regulatory
frameworks, corruption and poor physical infrastructure.
Uncertain regulatory frameworks will remain a concern
across the industry with a number of respondents in the recent
African oil and gas survey regarding regulatory uncertainty as
the top challenge facing the business. Respondents particularly
from Tanzania, Nigeria, Kenya and Angola cited concern about
regulatory uncertainty as a significant challenge to their future
growth strategies.
Investment
Financing and investing within Africa is essential for the industry
to do well in 2016. After a rush of bidding rounds in 2014, 2015
and 2016 appear to be comparatively quiet with only a handful
of bidding rounds expected in countries such as Madagascar,
Mozambique, Kenya, Equatorial Guinea and Uganda. This is
partly due to the flurry of bidding rounds in the previous years
and a consolidation of these agreements together with the
lower oil price, a reduced interest to invest and many of the
supposedly better blocks already having been awarded. The
difficult economic times will also lead to many companies only
bidding/negotiating for acreage where licence conditions have
lower levels of compliance in respect to E&P activities and
increased timelines, as well as certain regulatory environments.
Although merger and acquisition (M&A) activity was low in
2015, companies that continue to have strong balance sheets
have the opportunity of targeting companies and acreage at a
‘good price’. Both large and small players within Africa continue
to look for partners to farm into their acerage with a number of
likely deals in 2016.
Central banks in the oil exporting countries are facing a
challenging time as local currencies depreciate on the back
of lower oil prices. It is likely that central banks may make it
increasing difficult for foreign E&P companies to get foreign
currencies in exchange for the local currency. This will make it
harder to exit, however this may also hamper new investment
and only companies with long term investment strategies are
likely to be willing to take up new investments.
The effect of the oil price will lead to high levels of sub-surface
asset resource impairment for companies reporting in 2015 and
2016, however the underlying businesses may remain profitable
and have a positive cash flow if one looks beyond suggesting that
there are many strong companies operating in Africa.
Oil companies may be better off when prices are low as
costs tend to rise faster during boom times when prices are high
and demand outstrips supply opportunities. In fact costs can
significantly decrease with lower commodity input costs and
reduced rig costs improving gross margins.
People skills and skills retention have been rated as a factor
that will greatly impact business over the next three years as
companies and this is especially important now as retaining core
talent will allow companies to survive and be ready to prosper
when the oil price recovers.
Positiveoutlook
Looking forward, PwC believes that the expected lower activity
levels in 2016 will provide the ideal opportunity for companies
to address the challenges related to doing business in Africa.
Strategic planning is required for continued, profitable
