While Africa looks to accelerate the development of its significant oil and gas resources – particularly as the continent struggles with the impacts of the COVID-19 pandemic and energy poverty crisis – significant investment is needed in the upstream and midstream sectors. Rather than abandon fossil fuels in the name of the energy transition, Africa needs to ramp up exploration in order to revitalize production and ensure energy security.
The African Energy Chamber spoke to John Hamilton, CEO Panoro Energy, about the reasons Africa’s production is declining, what can be done to turn this around, and the role gas monetization and development will play in the continent’s energy future.
What will this production underperformance in Nigeria, Libya, Angola, Congo, Equatorial Guinea and African countries mean for the continent as a whole?
Production underperformance is not necessarily a term I would use. Generally, reservoir performance and well productivity has met or frequently exceeded expectations which is a reflection of the high-quality petroleum geology much of the continent is blessed with. The underlying issue is more about investment and development activity not offsetting a natural depletion curve and the risk of substantial oil volumes being left stranded in the ground as the global energy transition plays out, potentially depriving future generations of the benefit these resources can deliver.
What it means for the continent, and more specifically the producing countries, really starts with how it emphasises a present lack of economic diversification and high dependency of governments on oil production for revenues and more specifically foreign currency. Economic diversification is going to be key for the oil dependent economies in Africa. Accelerating the safe and responsible development of current production together with the considerable discovered but undeveloped oil resources and future discoveries from exploration efforts will help provide the means for these economies to grow and diversify for long term prosperity and better balance.
What do you feel are the primary reasons influencing production decline in Africa?
The majority of assets are still held by large companies with intense competition for capital across global portfolios. A pivot towards global gas and alternative energy solutions, with added pressure from shareholders and providers of capital to accelerate decarbonisation strategies, means that a diminishing number of upstream assets secure growth investment capital each year. This means that on a fundamental level, assets that will not attract growth capital under current ownership need to transfer into the hands of companies that will prioritise fresh investment to maximise economic recovery and grow output.
Access to capital is also a major factor. This affects the industry as a whole globally, with banks and equity investors having been reluctant to fund hydrocarbon projects over the past few years. For Africa specifically, this global trend is felt perhaps more acutely given that financing is even more scarce. The majority of assets are still held by large companies with intense competition for capital across global portfolios
What can be done to turn this around?
It is encouraging that in several instances fiscal terms are being implemented specifically to allow commercialisation of smaller (marginal) fields that may have been sub economic under previous terms. However, this needs to be applied alongside a more rigorous “use it or lose it” policy to prevent incumbent asset owners holding assets with little or no prospect of developing them. License renewal events should also be seen as an opportunity to assess and if necessary, adapt fiscal terms to help ensure mature brownfield developments are not overlooked and field-life can be extended where possible and economic recovery maximised.
On access to financing, this is an issue that all stakeholders need to continue to make efforts to promote the importance of energy investment on the continent. Success stories need to be heard. All encouragement should be given to governments and international companies to promote responsible and sustainable projects that benefit both energy security imperatives and the need for a return on capital.
What would you recommend as an industry approach to low carbon gas monetisation and financing in Africa?
Its less about an industry approach – but instead a unified and aligned approach between all stakeholders. It is most obvious that there is no shortage of gas in the ground, but to develop the upstream source there has to be a midstream business to receive and process the gas, a pipeline network to transport the gas to customers, bankable GSA’s in place with power and industrial users with sufficient reliable demand, a pricing structure that supports the gas value chain, currency convertibility where tariffs are not paid in USD and ultimately a paying customer base for the end products be it domestic power supply or manufacturing output. Wrapped around this is access to capital – both from domestic and international capital markets – and development of clear policies and incentives by host governments to attract the required investment and development.
Gas development is the abundant and logical transition fuel for African economies to address energy poverty and benefit from the multiplier effect that access to reliable power yields.
What should new independents consider while entering a changing African energy sector?
Speaking from an international E&P perspective it is an immersive industry and you have to commit to being a physical presence in your chosen market. Developing the relationships in country with host governments, regulators, partners, service providers and a multitude of other stakeholders is equally as important as identifying an asset. You can not work in Africa remotely.
Is it time for Model Gas/LNG Production Sharing Agreement?
It is not uncommon for gas resources to sit outside current contract terms. Where this is the case the agreement of gas terms would certainly facilitate acceleration of development in some cases. Projects and markets vary greatly so a “one size fits all” model agreement is probably not the solution. It links into the earlier comment about a unified approach between all stakeholders – contract terms being a key element of that.