Business Opportunity: Backing Oil And Gas Pipelines In East Africa And Beyond

By Kurt Davis Jr. AFKI Original Published: September 21, 2017, 4:31 pm
Oil and gas remains an investment opportunity in Africa. Photo - HowWeMadeItInAfricaOil and gas remains an investment opportunity in Africa. Photo - HowWeMadeItInAfrica

Betting on oil and gas prices these days is part-art and part-fun for bankers and investors. Critics will add that the so-called “Supreme Overlords” or “Masters of the Universe” are generally bad with their predictions.

The easy (and unfair) target of such criticism is Goldman Sachs. Be that as it may, the American investment bank predicted in mid-2014 that the West Texas Intermediate (WTI) crude price would hit $90 per barrel for the first quarter of 2015.

It made news when it cut that price target in late October 2014 to $75 per barrel, but prices still surprised by averaging right under $48 per barrel in March 2015 before falling precipitously to an average slightly above $37 in December 2015.

Their global Brent price predictions did not fare better. Since then, every bank and oil aficionado alike have generally predicted incorrectly, unless they predicted not much change since the first quarter of 2015.

Noting how the numbers have always flummoxed bankers, operators still have to make money and make their own bets. Most notably, in 2017, Total is betting on the East Africa oil and gas boom again.

First, the French oil giant is not a newcomer to the region, with regional African assets accounting for approximately 30 percent of Total’s oil and gas production – albeit a significant portion of those assets reside in the northern and western parts of Africa, including Algeria, Congo-Brazzaville, Gabon, and Nigeria.

But betting on East Africa in a bigger way is something to take notice of this time around.

It bet on East Africa in 2010 by purchasing a one-third stake in Tullow’s interests in Uganda’s main oil concessions for $2.9 billion.

In 2017, it is making a further aggressive push for oil assets. Total, in March this year, purchased 21.6 percent of Tullow’s remaining stake in the Uganda upstream assets for $900 million.

Then, a few months later, it purchased Gulf Africa Petroleum Corporation, a retailer of petroleum products in Kenya, Tanzania, and Uganda, to boost its downstream position, specifically fortifying its service station presence in East Africa.

Having announced to the market last year that it would be a big spender in 2017, Total cemented its presence in the East Africa market last month with the $7.5 billion purchase of Maersk Oil – a subsidiary of the Danish shipping giant A.P. Moller Maersk – which gave Total ownership in some of Kenya’s main oil concessions.

Owning all of Maersk Oil’s North Sea assets, where the majority of Total’s 160,000 barrels per day of oil is produced, may have spurred the transaction (making it the second largest producer in the region behind Norwegian oil giant Statoil), but taking control of the 25 percent stake the Danish company held in the Kenya’s onshore oil blocks, alongside Africa Oil and Tullow, played a major role in the thinking.

The East Africa pipeline

Oil and gas production (dominance) for Total may ultimately reside with the completion of the East African oil pipeline by 2020, targeted at transporting Uganda’s oil reserves to the Indian Ocean for export.

The $3.5 billion pipeline, agreed to by Uganda president Yoweri Museveni and Tanzania president Joseph Magufuli, will extend 898 miles from the oilfields on Lake Albert down the western side of Lake Victoria to Tanzania’s Tanga port.

Negotiating the deal has been a piece of art by Total CEO Patrick Puyanne, as it excludes Kenya – who originally insisted on the passage of the pipeline through its thorny northern region with significant additional construction costs and security risks.

Kenyan president Uhuru Kenyatta reportedly flew to Paris in 2016 to tell Total leadership to stay out of the pipeline politics.

The East African pipeline (and Total) may nevertheless be the first step in unlocking investment into pipelines in sub-Saharan Africa.

The pipeline was a major subject of discussion among attendees at the recent Tanzania Oil & Gas Congress in Dar es Salaam earlier this month, (not) surprisingly, with Total as the platinum sponsor.

For two days, international and indigenous producers, service providers, and financiers discussed the business opportunities in the Tanzanian oil and gas market.

The natural inclination at the conference was towards creating partnerships in pushing forward the production of Tanzania’s 57 cubic feet of natural gas reserves, of which nearly 50 cubic feet is offshore.

Yet the usual “crop circles” and networking chats turned to pipeline financing and Tanzania.

On one hand, gas explorers are keenly interested to see continued drilling offshore and onshore, with greater joint participation across the region with neighboring countries including the Democratic Republic of Congo, Kenya, Mozambique and Uganda.

And, on the other hand, the neighboring oil producers, especially Uganda with 6.5 million barrels of oil in the Albertine Graben, want to move the oil to the coast for export or to a liquefied natural gas facility.

The gas and oil producers both see a clear opportunity in addressing sub-Saharan Africa’s energy crisis and strengthening its export capabilities.

Gas is the third largest fuel source in the global primary energy mix and the second largest source in power generation, contributing 24 percent and 22 percent to each market respectively, according to the World Energy Council.

Yet two-thirds of all people in sub-Saharan Africa live without electricity. Discovering the resource is effectively commonplace but moving it—and turning it into energy—has not been easy in sub-Saharan Africa.

Pipelines are not new

The African Development Bank and the African Union released a comprehensive report in 2009 on the oil and gas industry in Africa.

One vital recommendation to governments was to build oil and gas pipelines to facilitate the sustainable exploitation and utilization of the region’s oil and gas reserves. And, although the engineering and construction of pipelines in the region may be challenging with security issues and rough terrains, including the savannas of Angola and the delta of Nigeria, significant investment has been made in this space.

The Nigerian National Petroleum Corporation (NNPC) has focused on the construction of the 245-mile Calabar-Ajaokuta Pipeline and the 460-mile Ajaokuta-Kaduna-Kano Pipeline to transform the gas resources in the country into an actual energy solution.

The two pipelines will connect to form the South-North Pipeline, transporting gas to the eastern, middle, and northern regions of Nigeria.

Despite signing a Memorandum of Understanding (MoU) in 2009 to construct the pipelines as part of the a larger 2,734-mile Trans-Saharan Gas Pipeline, Algeria, Niger, and Nigeria have seen the greater project stall due to financing concerns and security.

The authorities in Ghana have focused on their own set of pipelines, including the West African Gas Pipeline (from Nigeria through Benin and Togo to Ghana), an offshore pipeline from the Jubilee field to Atuabo, and an onshore pipeline to transport processed gas from Atuabo to Aboadze. These pipelines have faced a series of delays with financing and gas supplies.

Equatorial Guinea inked a memorandum of understanding this month with the government of Burkina Faso to supply liquefied natural gas to Burkina Faso and build the infrastructure for the importation, storage, and transportation of gas.

The agreement acknowledges that transportation will either include liquefied natural gas carriers or pipelines—the latter of which would take a few years to construct.

Other pipeline projects in the region include the consortium of pipelines for the Angola liquefied natural gas project and Mtwara-Dar es Salaam pipeline, as well as numerous delayed pipelines including Cameron liquefied natural gas Project, an approximate 254-mile Mozambique-Malawi pipeline from Beira to Nsanje and the Mozambique-South Africa pipeline.

East Africa as the test case

The successful pipelines to date have not overshadowed the many stalled and de-/un-funded pipeline projects in the region.

The question today in East Africa is whether this Uganda-Tanzania pipeline could become an example for which private financiers and investors can build off (or replicate) across sub-Saharan Africa.

Infrastructure investors are hungry to see pipelines become a new investment platform for the sub-Saharan region. Consider the irony with A.P. Moller Maersk in selling Maersk Oil and then raising an Africa infrastructure fund – infrastructure capital and interest is out there.

At the Tanzania Oil & Gas Congress, infrastructure-related investors and financiers could be found with eyes wide open, networking the floor, and gauging African government officials’ interest in private funds and pension funds investing in this space.

Needless to say, ministers from across the region were listening with open minds.

Total’s venture into the East African pipeline space may be what is required at this time. The Brent oil price still hovers below $60, creating ongoing problems for large African exporters on their balance sheet.

Large national players in both oil and gas are increasingly open to private financing and finding the best balance between private capital and national sovereignty within a project finance structure to push pipelines to completion.

A successful Total project would surely change perspectives in this dynamic (and anxious) environment.

But in order to make project finance of pipeline platforms part of the larger infrastructure nomenclature with private investors and financiers, the pipeline, or more so Total, will have to navigate the usual political challenges (which it has done to date), survive the construction delays, and come out unscathed on the other end.

The 2020 completion date appears far out today. Yet interested parties will be eagerly watching to gauge the project trajectory.

A successful initial phase in construction, good faith actions by involved governments (such as Tanzania’s recent tax benefits package to Uganda), and a positive-talking Total will spur more capital to the pipeline sub-sector and the larger midstream vertical. That would be a Total change in the oil & gas sector (pun intended).

 

Kurt Davis Jr. is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at kurt.davis.jr@gmail.com.

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