HOUSTON—Considering some of the world’s biggest oil and gas discoveries have been made in or offshore Africa within the last decade or so, it’s no secret that the region has plenty to offer.
But despite having about half of the top 20 discoveries of 2014 as well as some impressive recent exploration successes, the continent is facing challenges due to depressed commodity prices and pullback from cash-strapped investors, speakers said Feb. 9 during King & Spalding’s Africa Oil & Gas Conference.
Yet, now is as good a time as ever for all stakeholders, including oil and gas companies, the service sector and host governments, to strengthen fiscal regimes and lower costs to push projects forward. The hope is that acting now will benefit not only investors but also governments and locals who depend on oil- and gas-related revenue, experts said.
“2015 was the first year that we saw capital investment in Sub-Saharan Africa drop back to 2012 levels at just under $40 billion” as $300 billion in investment retreated from the industry, said Martin Kelly, upstream research director of Sub-Sahara Africa for Wood Mackenzie. Sub-Sahara Africa lost about $10 billion in investment.
Hydrocarbon-rich Nigeria and Angola account for nearly three quarters of the region’s capital spend, but 2015 saw major companies shelving new projects—mainly large greenfield developments —or delaying final investment decisions, he added. These included Shell’s Bonga Southwest Development in Nigeria and ENI’s Coral FLNG project in Mozambique.
“Less than 10% of the projects in Sub-Saharan Africa break even at $50 a barrel,” Kelly said. “It is no surprise that companies are pushing back these projects and trying to revisit their cost structure,” redesigning projects and redrawing contracts to lower costs.
Nowadays companies are focusing more on “shorter-term, near-field, faster-turnaround, faster-payback projects that deliver the returns without requiring a huge amount of capital,” instead of exploration frontiers, he added.
Falling operating costs are helping the situation a bit.
Such costs are starting to come down, especially where currencies have lost value in countries such as Nigeria, Kelly said, noting the naira has seen a 20% devaluation since 2015.
Still, companies with assets in the region are reducing capital and exploration spending by between 10% and 80% in 2016, he said.
The drop in spending—which is not unique to the region—comes amid stagnant oil production.
Liquids production hovers just above 5 MMbbl/d, a level that Kelly said Sub-Saharan Africa has stood at for the past 10 years. Wood Mackenzie believes liquids production, mainly from Nigeria and Angola, will stay at that level for the next five years.
On the flip side, gas production has skyrocketed. Data from Wood Mackenzie show Sub-Saharan Africa could produce about 6 Bcf/d of gas in 2016, more than double of that produced 10 years ago. Kelly added that Wood Mackenzie forecasts 50% gas production growth for the region by the end of the decade. In the past, gas exported from African countries has landed in Europe.
In 2014, 11 of the top 20 discoveries were in Africa, which is ahead of the game in terms of LNG, said Philip Weems, co-head of King & Spalding’s Global Energy Practice in Houston.
“About 15% of the world’s LNG exports come from Africa even though only 8% of the gas comes from Africa,” Weems said, pointing out big discoveries in the past 10 years or so have kept companies interested in Africa. “LNG has been a big factor for what’s going on.”
Good, Bad News
However, today’s exploration story is somewhat bleak. While discoveries have been made, the number of exploration wells drilled in 2015 fell by 40% compared to the previous year, Kelly said. The number of exploration and appraisal wells hit a 10-year low as oil and gas companies chopped exploration budgets to preserve capital amid the downturn and $30 oil.
But there is some good news.
“There have been some tremendous exploration successes in Sub-Saharan Africa,” Kelly said although well results for some wells in the presalt Kwanza Basin offshore Angola have not lived up to initial hype.
- Cairn Energy produced high-quality oil at a rate of about 8,000 bbl/d from its SEN-2 appraisal well offshore Senegal earlier this year;
- Kosmos Energy in January said it added about 3 Tcf of gross prospective resources when its Guembeul-1 exploration well hit 101 m (331 ft) of net gas pay in two reservoirs offshore Senegal;
- ENI struck gas and condensates offshore Congo in its Nkala Marine exploration prospect. The discovery could have up to 350 MMboe in place, the company said in November 2015; and
- Anadarko Petroleum, BG Group, ENI, Ophir Energy and Pavillion Energy saw exploration success that led to more than 140 Tcf in the prolific Rovuma Basin offshore Mozambique and Tanzania.
Plus, the FLNG sector is starting to burgeon.
“Sub-Saharan Africa is slowly becoming one of the leading continents for FLNG projects,” Kelly said.
- Golar LNG’s Cameroon FLNG project with a targeted commissioning start date in second-quarter 2017;
- Ophir Energy’s Fortuna FLNG project. A final investment decision is expected in mid-2016 and
- Eni’s Coral FLNG offshore Mozambique’s Area 4.
There is another wave of gas fields out to fuel more FLNG projects whether they are in Ghana, Congo, Angola, East Africa—all offer LNG opportunity, Kelly said.
But he warned the challenge is where the LNG finds a home in the current market.
Velda Addison can be reached at email@example.com.
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