PH
DELAYS, RESTRUCTURING AND STALLING ARE EXPECTED AS OIL PRODUCERS CUT BACK. PHOTO©KEVIN M. LAW/ALL CANADA PHOTOS/CORBIS
Exporting countries and producers large and small are reeling from the impact of the oil price’s vertiginous drop over the past six months. The Africa Report looks at who is benefiting from the turmoil and who will be hurt the most.The extent of the big wins and painful losses experienced by governments, international oil companies (IOCs) and other stakeholders as oil prices have plunged is becoming clear across Africa.
Even though prices spiked upwards in late February from their sub-$50-per-barrel lows, few analysts expect a sustained increase during 2015, meaning importer governments, thermal-power producers and refiners will continue to benefit.
The IOCs have moved ruthlessly to make big spending cuts, but a number of national oil companies have yet to respond as quickly.
Morocco’s recent fortunes highlight the roller-coaster ride.
“The government had already made some brave moves on subsidies, but the arrival of the sub-$50-per-barrel oil is still a real benefit for this oil importer,” World Bank Middle East and North Africa chief economist Shanta Devarajan said in Casablanca on 4 February.
“It is worth at least 0.5% of GDP [gross domestic product] this year, and it could be 1%”.
But while cheaper imports have redressed the balance-of-payments deficit and cut a huge subsidy bill – down to zero in 2015 from 12.5% of government spending in 2015 – the Office National des Hydrocarbures et des Mines is looking on nervously as dozens of IOCs that entered the under-explored Moroccan offshore and onshore in 2013 and 2014 revise their budgets.
Several have already announced cuts and delays to their exploration plans. IOCs will continue to invest but only in the most attractive projects.
Even before the price crash, many IOCs had been cutting back on their ambitious offshore drilling plans to look for quick wins in onshore and shallow waters. Key players impacted by the reversal of fortunes include Tullow.
Saddled with $3.1bn in outstanding loans in late 2014, it cut its global exploration budget for 2015 to $200m – 80% lower than in 2014 – and announced $500m in spending cuts.
Chief executive Aidan Heavey announced the company’s first loss in 15 years – a massive $2bn – while the company’s share value has more than halved in one year.
Tullow urgently needs to produce more from its fields in Ghana, Uganda and Kenya to provide what Heavey has called “a dramatic change to cash flow”.
Even the biggest plays, such as the major offshore gas developments planned by Mozambique and Tanzania, could be delayed, restructured or stalled.
Super-indie Anadarko and Italy’s Eni are still expected to develop liquefied natural gas exports from Mozambique, but the timetables for these schemes are being pushed back.
Nigeria on hold
There have been persistent delays to a majority of Nigerian projects. They have largely been caused by IOCs’ doubts over a range of policy, governance and security concerns and the government’s failure to pass the 2008 Petroleum Industry Bill.
Many projects planned years ago that might have been expected to be developed during the low-price period have never reached their final investment decision stage and will be further stalled.
Plans for the $12bn Bonga South West offshore project have stalled despite operator Shell receiving bids last year for major engineering contracts. It is not just IOCs that must cut back.
In Nigeria and frontier markets, indigenous companies have been growing into serious players, in some cases buying assets relinquished by IOCs.
That is a path trodden by internationally listed Oando and Seplat in Nigeria. Oando is the only one of its cohort that has hedged its oil for the next couple of years, putting it in a better position with guaranteed higher prices for its oil sales.
Smaller players, which in Nigeria have purchased marginal fields and other assets by borrowing locally, are expected to come under real pressure.
Ecobank reports that Nigerian banks financed more than 80% of oil and gas asset purchases concluded in the country over the past five years.
Speaking during International Petroleum Week 2015 in London, Ecobank Capital oil and gas analyst Dolapo Oni commented that firms “who are largely reliant on debt funding are very exposed to high costs. They have smaller resources, smaller production. They have borrowed a lot so are very vulnerable.”
Hard-pressed producers can no longer count on the Organisation of Petroleum Exporting Countries (OPEC) to protect prices at any cost.
Saudi Arabia pushed the divided cartel to let prices drift to preserve market share at OPEC’s critical ministerial meeting in Vienna on 27 November.
According to veteran Saudi petroleum minister Ali bin Ibrahim Al-Naimi, Riyadh’s support for the decision to let prices fall was driven by a reaction to production from ‘marginal areas’ that was biting into more ‘efficient’ producers’ market share.
These included Brazil’s pre-salt zones and offshore West Africa, as well as US shale and Russian competition.
While the Gulf producers have very low production costs – often quoted at $3-$4 per barrel in Saudi Arabia – companies in the Gulf of Guinea and other rivals whose industries have boomed in recent years work on very different economics.
A February 2015 re- port by the South African arm of consultancy firm PwC quoted US Energy Information Administration data to observe that “Africa has one of the highest average finding costs in the world at a massive $35.01 per barrel in 2009, surpassed only by the US offshore fields which came in at $41.51 per barrel.”
In this high-cost environment, PwC observed: “Frontier areas around the world will potentially suffer from delayed development in the near term. These include technically difficult projects that require more spend than conventional production, such as deepwater, sub-salt, shale gas and enhanced oil recovery ventures.”
Among the frontier projects where delays could be expected, PwC cited offshore exploration and shale gas in South Africa, sub-salt projects in the Republic of Congo and Angola, and offshore acreage in Tanzania.
Coffers running dry
For now, there is little that OPEC members who find themselves in a precarious situation – including Algeria, Angola and Nigeria – can do.
Big-spending governments are fast running out of money.
A government official tells The Africa Report that Algeria’s much-vaunted foreign reserves fell from around $200bn in mid-2014 to about $130bn by January.
Observers heard Naimi and Algerian energy minister Youcef Yousfi shouting at each other in Vienna shortly before OPEC came to its decision in November.
Since then, anxious diplomacy by ‘loser’ governments has failed to budge the ‘market share’ hardliners.
London think tank Chatham House’s Paul Stevens advises analysts to “look at the body language […] there is still no sign of an emergency OPEC meeting being announced” that might signal any change of direction.
With many oil producers’ chanceries advocating meaningful spending cuts, governments’ normal default position – buying their way out of trouble – becomes all the harder.
Oil buyers took advantage of rising production worldwide to build stocks. Sellers now have cargoes of crude oil stranded in storage.
Oni observes that despite the Nigerian National Petroleum Corporation offering extra discounts to push sales, Nigeria has faced considerable difficulties in selling its crude since December.
As huge crude stocks build up in the US, Europe and other key economies, futures markets suggest the lower price environment will persist and that producers’ woes will mount accordingly.
By Jon Marks
