Publications
Partners
Cape Town - While the oil price drop has caused activity in Africa's oil and gas industry to decline, it has also served as a wake-up call to many African governments, according to a report released by PwC on Wednesday.
This wake-up call has spurred many African governments to start passing favourable oil and gas legislation designed to attract investment into the sector, according to PwC Africa oil and gas advisory leader Chris Bredenhann.
The PwC report analyses what has happened in the last 12 months in the oil and gas industry within Africa's major and emerging markets.
As oil prices declined in 2014, the industry response was far-reaching with a significant reduction in headcount and other cost-cutting measures. Capital budgets have also been cut, and frontier exploration activity has decreased.
An example of this is Mozambique, which has passed a law in this regard, while other countries such as Kenya, South Africa and Tanzania have been taking a serious look at current legislation with a view to making it more investor-friendly.
“While response to such a drastic decline is necessary, we have seen that the most successful organisations are taking time to re-set, re-strategise and plan for the upturn in prices, which will inevitably come. Africa should be no exception as many of the frontier exploration plays lie on the continent,” said Bredenhann.
As at the end of 2014, Africa has proven natural gas reserves of just under 500 trillion cubic feet with 90% of the continent’s annual natural gas production still coming from Nigeria, Libya, Algeria and Egypt.
(Source: PwC)
READ:Africa's oil 'sweet spots' still viable
Main challenges
The oil and gas industry's main challenges remain the uncertain regulatory framework, corruption and poor physical infrastructure, according to the report.
South Africa’s uncertain regulatory framework for the oil and gas industry is mainly due to unclear and overlapping mandates between the government and state-owned enterprises.
Furthermore, the enforcement of the Minerals and Petroleum Resources Development Act has raised a number of compliance challenges in the industry, primarily resulting from new requirements directly introduced by the act.
Organisations identified the price of oil and natural gas as the most significant factor that would affect their companies’ businesses over the next three years, the report states.
Industry players are, however, planning for the longer term as 90% of respondents expect the oil price to rise gradually over the next three years.
The report rates people skills and skills retention as the second most likely factor to impact business over the next three years.
Community and social activism, instability and unstoppable political events also concern the oil and gas industry in Africa. Organisations from South Africa, Mozambique, Nigeria and Kenya, in particular, expect these kinds of events to have a significant impact on their business.
"After a rush of bidding rounds in 2014, 2015 and 2016 appear to be comparatively quiet with only a handful of bidding rounds expected. This is partly due to the flurry of bidding rounds in the previous couple of years and a consolidation of these agreements together with the lower oil price and lower interest to invest," said Bredenhann.
Although merger and acquisition (M&A) activity was low in 2014/2015, around one-fifth of respondents have been targeted and a third of respondents has targeted or intends targeting companies for acquisition.
According to Bredenhann, this suggests that an increase in M&A activity can be expected in the near future.
Fraud and corruption
Over 43% of respondents indicated that fraud and corruption would have a severe effect on their businesses.
Government officials continue to be implicated in 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, mining and utilities sectors.
"Despite pervasive fraud, some governments around the continent have made significant efforts to increase transparency in the industry," according to Bredenhann.
Sustainability
In the current economic climate, oil and gas companies are looking to increase production potential through improving efficiencies and operational excellence.
In addition, they are also looking towards exploration and finding new resources as an alternative to sustainability.
Despite development in renewable and alternative energy sources across Africa, respondents did not expect demand for these to have a significant impact on oil and gas businesses over the next three years.
READ: Oil dive puts paid to Shell's fracking plans
On the oil price organisations expect the Brent crude price spread to shift up over the three-year period, although, if it remains within a $30-band, it will be reasonably consistent, according to PwC.
A high 93% of respondents expect a price range of $50 to $80 in 2015, 90% of the respondents expect a price range of $60 to $90 in 2016 and 87% of the respondents expect a price range of $60 to $90 in 2017.
Acreage and licence costs
Respondents are uncertain about what to expect from acreage or licence acquisition costs. Just over a third (36%) believe acreage costs will rise, especially in Kenya and Mozambique.
Respondents in developed markets such as Nigeria and Angola expect acreage costs to fall as potential reserve valuations are affected by the oil price.
The survey found there is an expectation that the competitive landscape is likely to undergo change, with more than 50% of respondents sharing this view.
“The oil price decline, skills shortages and uncertain regulatory frameworks have put the oil and gas industry on the African continent in dire straits. The combined effect of these challenges places an increased burden on exploration activity and economies heavily reliant on oil and gas revenue, which may have far-reaching socio-economic impacts as a result,” said Bredenhann.
“The players that emerge when the oil price rebounds are going to be agile engines that are ready to take on the market.”
ALSO READ: Lower prices to hurt Africa's oil producers - IMF
(Source: PwC)
