by Siraj Ahmed, Impact Oil & Gas

Despite being blessed with abundant oil and gas resources, Africa’s production is declining, representing a challenge for the continent as it moves to initiate an economic recovery and address energy poverty. With exploration restricted due to reduced capital for fossil fuel projects and the transition away from hydrocarbons, the continent needs to act now if it is to reap the benefits of its oil and gas resources.

Nigeria, Libya, Angola, the Democratic Republic of the Congo, Equatorial Guinea and other African countries are heavily dependent on the export of oil and natural gas, so production underperformance will inevitably have an impact on their economies, both in terms of access to cheap energy and revenues into the treasury. This in turn could have a destabilising effect on these countries. While temporary underperformance could be managed, persistent underperformance is far more damaging, holding back development and the ability of these countries to invest in the energy transition.

In modern society, technology drives progress, but technology requires power – be it a smartphone, tablet, laptop, or other gadget designed to make life easier. Nations which fail to invest in energy will be left behind and lack the economic growth they need to fund development. This is an issue for health and social care, progress in living standards and access to opportunities.

In the short term, reduction in supply means higher oil prices, which leads to higher inflation. Higher inflation affects the poorest people most. These countries have the means and ability to turn this around, so the underperformance need only be temporary.

Leaving aside the impact of the recent Covid-19 pandemic, global issues such as the energy transition, compounded by important country-specific issues, are driving a decline in production. At the heart of the challenge is a lack of investment in exploration and the question of what countries must do to attract this investment.

The pool of both equity and debt capital for oil and gas projects is on the decline, largely (but not exclusively) due to pressure to meet the energy transition. With an ever-decreasing supply of global capital for such projects, funders can be selective about where capital is invested and, therefore, competition is stiff and the threshold to secure it is high.

Countries in Africa must provide a stable and competitive framework for investment. This applies not only to countries with existing production, where infrastructure-led exploration (ILEX) can provide lower risk additional resources, but also to counties with frontier exploration potential. These higher risk, but high resource frontiers which have the opportunity to make large scale economic impact, have the greatest challenges to attract capital.

A stable and competitive framework for investment requires policy certainty, with transparent decision-making processes which enable projects to be progressed quickly, since pace is intrinsically linked to value. Other important aspects are competitive and stable fiscal terms, and a stable legal framework. Often, governments are too quick to tighten fiscal terms immediately after early discoveries, thereby introducing significant hurdles for subsequent exploration. Fiscal terms and the opportunity to participate in new licensing rounds must remain competitive to attract risked capital.

Norway has been producing oil since the 1970s. It recently announced the award of 53 new licenses, of which Equinor picked up interests in 26 blocks, and announced that it plans to drill 25 exploration wells during 2022. By comparison, South Africa, where Impact has a large footprint, has only seen two exploration wells during the last decade. Norway operates a model which enables and incentivises exploration, which has put Norway in the top 15 oil producers globally and allowed it to create a sovereign wealth fund worth over a trillion dollars.

Much of Africa’s production is in shallower waters and is rapidly maturing. Declining production requires investment in exploration. It is important, therefore, to incentivise frontier exploration alongside ILEX opportunities, and maintain a suitable fiscal framework. A one size-fits-all fiscal framework will limit exploration to smaller, near field exploration opportunities.

Although the demand for energy is growing, there is a rapid and concurrent reduction in investment in exploration and production. This reality, and the consequences of it, are reflected in current global oil and gas prices and the apparent economic and geopolitical turmoil it is causing. It is unlikely that the demand trend will reverse soon, so Africa should invest to reverse its growing production shortfall.

Natural gas is a relatively low carbon energy source when compared to oil or coal, therefore it is an obvious transition fuel that could meet the energy needs of Africa from its own resources. However, this must be done quickly since the transition period is not indefinite.

Powering African countries through the use of domestic gas has a number of advantages:

• Importing LNG and/or oil has a much higher carbon footprint than using domestic gas.
• It enables a just transition away from coal in countries such as South Africa where 80% of its electricity is generated from coal.
• It provides a cleaner alternative to firewood and charcoal, used by more than 60% of families in sub-Saharan Africa for meal preparation and to meet other energy needs, due to the absence of affordable alternatives. This is damaging to health and a significant contributor to forest degradation.

Natural gas should form part of a wider energy mix which embraces other low carbon energy sources. The role of the oil and gas industry in Africa can and should be broader than exploration and development of oil and gas resources. We are increasingly seeing agreements between governments and international oil companies to collaborate on investment in a multi-energy strategy that supports development of renewable projects alongside major oil and gas projects.

For example, as part of the recent final investment decision for the Uganda-Tanzania crude oil pipeline, the Kingfisher and Tilenga oil projects in the Lake Albert region of Uganda, Uganda and TotalEnergies signed a deal to explore opportunities to develop renewable energy projects. Initiatives such as this bring expertise as well as finance to the continent.

Africa has historically provided great opportunities for independents. Indeed, it has benefitted from their nimble and aggressive strategies and their ability to raise capital for higher risk, early entry projects. Companies such as Kosmos, Tullow, Ophir, Cove and Far (for example) have been at the forefront of major, play-opening discoveries in Senegal, Mauritania, Ghana, Mozambique and Tanzania, leading the way for majors in frontier opportunities.

The role of independents in the sector is changing, however. New Africa-focused independents are chasing production (ILEX, mature and marginal fields), but the billion-barrel, play-opening exploration opportunities remain in frontier, high risk areas.

Although there is no longer the space for standalone explorers to build greenfield exploration portfolios – there is neither the time nor the capital to support such strategies – independents can still play an important role in accelerating growth in countries with play-opening discoveries, by pushing out the play to the riskier limits.

About Impact Oil & Gas

Impact Oil & Gas is a pure exploration company with a strategic focus on large scale, mid to deep water plays of sufficient size to be of interest to major companies. It currently invests in African oil and gas blocks including Namibia, South Africa and the AGC Profond block in Guinea Bissau and Senegal. Siraj Ahmed is the CEO at Impact Oil & Gas.

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