Oil & Gas Africa: Africa’s Offshore Is Still Alive
As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.
Luckily, the ups and downs of the African oil and gas trade aren’t one of them if you know where to look. To help with that, AFK Insider has compiled all the news you need to know now in order to slim down your risk in the weeks ahead. Let’s see what’s happening out there.
Total’s big three West African projects spared budget axe
First, the good news for those interested in the African offshore. The head of Total’s African-focused exploration and production work, Guy Maurice, spoke to reporters recently about how the price downturn might impact the company’s investments.
He noted that three big projects that were greenlighted recently will still go through: the Egina project in Nigeria, Angola’s Kaombo Field and the Moho Nord Field in the Republic of Congo. All three are scheduled to come online by 2018.
Egina is a 2003 discovery in Nigeria’s Niger Delta Basin estimated to hold at least 200 million barrels of oil. Total will drill 44 wells connected to a floating production and storage vessel capable of producing 200,000 barrels of oil per day and some 320 million cubic feet per day of gas.
Drilling began in December and production is slated to begin in the second half of 2017. Kaombo in turn sits in Angola’s offshore Block 32 and will develop three fields that collectively hold some 650 million barrels of oil.
Total’s Moho Nord in turn is a next-phase development of the Moho-Bilondo complex that currently produces 90,000 barrels of oil per day. It sits in the Republic of Congo’s offshore Haute Mer Block and the company and its partners will drill 45 wells that will be connected to floating production units and a new platform.
Parts of the project are scheduled to come online in 2016 and plateau production should eventually hit 140,000 barrels of oil equivalent per day.
Eni’s banner year in Africa
Eni in turn began February by giving the go ahead for its $7.0-billion Offshore Cape Three Points project in Ghana. The project sits 60 km off the coast and will tap 1.45 trillion cubic feet of gas and 500 million barrels of oil.
Oil will flow in 2017 and gas later in 2018 with peak production expected at 80,000 barrels of oil equivalent per day. In addition to the considerable export earning the project will provide, Ghana will also benefit from the considerable amount of gas that will be pumped ashore for domestic electricity production.
The Cape Three Points project in just the latest in a string of offshore victories for Eni in Africa. In late January the company started up its Nene Marine project in offshore Republic of Congo just a few days after production began at its West Hub in Angola.
Those projects brought 52,000 barrels of oil per day online and will eventually produce a combined 240,000 barrels of oil per day. When this is combined with the just-sanctioned Cape Three Points project and West Hub’s future twin East Hub, another 180,000 barrels of oil equivalent will be added to this total.
Although both Eni and Total seem set to continue operating in offshore Africa for the next couple of years as they bring these projects to conclusion, post-development the future isn’t so clear. That’s in part because offshore projects take so long to develop and are so expensive that once they are started they are very difficult to stop once they get going.
In part some of this is simply sunk-cost thinking, illogical though it may be, but it is also based on long-term oil price modeling that predicts a positive rate of return given a certain amount of variability in the price of oil. Given what we know about prices and the recent dip notwithstanding, these projects sill make sense.
If low prices continue, however, countries are going to have to start thinking hard about the type of terms they are willing to extend to companies to invest as low demand will certainly make companies far more cautious in determining where they will invest.
Future projects in the new low-price environment
After all, when prices are high working with even the most difficult country can make economic sense. When they are low, and stay low, such logic quickly disappears and each partner country demand for an extra bit of tax, royalty percentage and share for the national oil company is a deterrent to investment.
Especially onerous are local content requirements, which can add billions of dollars in cost to company bottom lines.
That’s because local content providers, especially in less developed countries like those in Africa, are simply less efficient and more expensive to use than content sourced from elsewhere, making overall development more difficult to justify for a profit-conscious company like Total.
Indeed, Maurice noted at the same time he announced the above projects were safe that Angola’s willingness to reduce local content requirements at the Kaombo project shaved $1.0 billion in cost off the development’s bottom line, thus making Total much more confident in investing in it.
Going ahead, this means countries seeking investment will have to be much more competitive in attracting oil company interest – just having lots of oil and gas does not necessarily cut it. Instead, local partner governments will have to provide sufficient incentives to firms by providing flexibility of the type Total got from Angola. Make it easy and they will come, make it hard and they’ll be sure to invest elsewhere.
Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider and Mint Press News.
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