By Thabo Thobejane; Senior Associate; Oil and Gas Finance – Nedbank Corporate and Investment Banking
Despite having experienced significant growth in recent years, Africa’s oil and gas industry remains poised for continued expansion, mainly to the energy appetites of many developed and developing countries across the globe. A number of recent events in this vital sector of the overall African economy also point to significant change and the potential for continued growth in coming years. This is particularly true for African countries where the upstream and power sectors are fast moving towards development, with a number of projects predicting Final Investment Decisions (FID) either this year or early in 2018.
Some of the more notable of these change and growth catalysts include the agreement of the route for the 1 400km pipeline to carry Ugandan oil through Tanzania for export. Tullow & Total are also expected to reach FID on the Uganda project in 2017/18 while, in Kenya, both companies are planning to reach FID in 2018/19.
In the exploration sector, Africa-focused exploration and production company, Kosmos, invested substantial sums in 2015/16 and they now appear to be moving towards development for their discoveries in Senegal and Mauritania.
In East Africa, and particularly Mozambique and Tanzania, the gas-to-power industry appears set to continue gaining massive momentum, as evidenced by Sasol’s planned development of a 400MW gas-to-power plant in Maputo on the back of clear indications of a very healthy supply of gas in the region.
Even countries that have historically been dependent on coal imports for their power needs are moving towards gas-to-power solutions. Botswana is a prime example and is actively investigating such solutions in partnership with AIM/ASX-listed company, Tlou Energy, which is in the process of tendering to develop a 100MW gas-to-power capacity in the country.
In Ghana, gas-to-power is also advancing, while in the Ivory Coast, there is talk of the development of a Liquefied Natural Gas (LNG) regasification terminal and a Floating Storage Regasification Unit (FSRU) for gas-to-power generation.
On the subject of LNG, this remains another significant oil and gas growth catalyst with the prospect of exports from both Mozambique and Tanzania. While there have been some delays, Mozambique is expected to reach FID on the Coral floating LNG project this year, or in early 2018. ExxonMobil is also said to be in talks with Eni and the Mozambique Government about buying into Area4. Moving west, the Angola LNG project has come to fruition and is said to be ramping up.
Nigeria is set to soon reclaim its position as Africa’s number one oil producer thanks to continued negotiations between that government and militant groups that appear to be halting militancy in the Niger Delta region.
These, and the many other forward-looking oil and gas developments in Africa of late are especially positive given the challenges experienced by the industry as a result of very low liquidity levels in 2015 and 2016, due mainly to the global slump in price. Since the start of 2017, however, we have seen a measure of stability and liquidity return after OPEC’s announcement that it would cut production in the last quarter of 2016.
Private equity involvement in the industry is also playing an increasingly important part in improving liquidity, with the likes of Kosmos and New Age – another Africa-focused exploration and production company – seeking funding from the private equity market.
As always, the governments of African countries have a vital role to play in maintaining and growing this positive momentum. Fundamental to the sustainable success of the industry is reliable, long-term legal frameworks that ensure the laws governing the oil and gas activity in any given country are consistent across projects. This will afford prospective investors the comfort they require and the solid foundation they demand in order to invest.
Local or indigenous African banks will also play an increasingly important part in the growth of oil and gas in Africa. In addition to having their finger securely on the financial pulse of the countries in which they operate, these banks have invaluable local knowledge in terms of stakeholders, rules and regulations that stand to make or break any undertaking.
That said, most mega projects tend to be dollar-funded, particularly upstream, and most local banks struggle to raise dollars cheaply. As a result, one can expect that the involvement by indigenous banks in oil and gas growth will be more focused on the downstream sector, which tends to be funded in local currency, but is nevertheless equally important to the sustainable development of the industry and its vital ability to positively impact economies and populations across Africa.