Publications
Partners
Johannesburg – Regulatory compliance within an uncertain regulatory framework remains one of the key challenges to companies in the oil and gas industry, the PwC Africa oil and gas review for 2016 found.
The report analyses what has happened in the last 12 months in the oil and gas industry within the major and emerging African markets. Speaking at a presentation in Johannesburg on Monday, Chris Bredenhann, PwC Africa Oil and Gas Advisory Leader explained that among the challenges, taxation requirements and government relations rose in importance.
“Tax requirements are one of the key challenges companies are looking to address and get right,” said Bredenhann. This has become “top of mind” for companies, which are trying to cut costs given the low prices, which has extended since 2014. The price of oil and natural gas is identified as the most significant factor that would affect businesses over the next three years. The price of oil is expected to reach $52 by the end of 2016.
Companies resolved to reduce their capital expenditure and operational costs, he explained. In turn, government revenues have declined as a result of low production and low prices, “so they need to make up revenue for the fiscus”.
Furthermore, regulatory uncertainty has remained the top challenge for the third year running, with 70% of organisations surveyed indicating that it is one of the five biggest issues they experience, the report stated.
For the first time since the advent of the report, six years ago, government relations has become one of the top six challenges for companies. Many organisations have experienced difficulty obtaining government sanction for new projects.
“Companies are seeing the need to manage government relations and understanding government agendas,” said Bredenhann. Regulatory regimes, tax requirements and government relations are all tied together, he added.
Oil and commodity prices is still the top factor impacting business. The decline in prices, has resulted in a oil glut to make up for the revenue shortfall, explained Bredenhann. This is followed by regulatory compliance and foreign currency volatility. Other challenges include corruption and ethics, poor physical infrastructure and a lack of skilled resources.
Bredenhann highlighted that protectionist governments had risen from position 15 in 2015 to 4 in 2016. “Governments are focusing on protecting their revenue stream,” he said. Safety, health, environment and quality which initially was of more importance had dropped to position 23. Companies are focusing on “survival” he explained, which is why prices and compliance with the regulatory framework has been prioritised.
“They have to comply with health and safety, but there are more pressing matters.” Oil and gas companies are focusing on optimisation and operational excellence.
Capital expenditure takes a knock
There is a lack of capital expenditure in the industry as a result of oversupply. “Crude oil storage is at the highest level in years,” said Bredenhann. There is a lower demand for oil and companies continue to produce and store.
The survey also registered the lowest level of new oil and gas finds in 24 years, as the result of price declines which impacted capital expenditure, he explained. However nine out of 20 discoveries are in the African continent, data reveals. “There is still activity, but not at the level it used to be.” There is a lack of money to be able to invest in the industry - Final investment Decisions have been deferred on over $300bn worth of projects. “If you want to invest largely, you need certainty.”
With the global market supply of Liquefied Natural Gas (LNG), South African companies need to consider negotiating the best supply deals they can get, explained Bredenhann.
Mergers and acquisitions decline
The price decline has resulted in a decline in merger and acquisition transactions too. There has been a decline in the size and number of transactions since 2010 - this from 502 transactions in 2010 to only 217 transactions reported in 2016.
Some of the reasons for transactions not going through are linked to competition and anti-trust challenges, explained Bredenhann. This dip is expected to continue.
Read Fin24's top stories trending on Twitter:
