The African oil and gas hangover from 2015 and 2016 - and how it will affect the rest of 2017

13634757664 f4bf88d61a kDeep Ocean Ascension off Cape Town, South Africa. (Image source: Christopher Griner/Flickr)The last two years are best characterised by spending cuts and project delays

Digesting the market in the current state—better understood as not “betting on US$100 let alone US$90 oil by the end of year”—forced executives to generate free cash flow and make real choices on where to invest. This reality, in real numbers according to Wood Mackenzie, amounted to nearly US$230bn in spending cuts on exploration and production in 2016, or approximately 49 per cent on 2014 levels. The positive result was more nimble (and pragmatic) companies. The negative was a drop in long-term investment in some assets (and equivalently parts of the world).

Africa is one region that felt the investment decline.The region delivered eight of the top 20 discoveries globally in 2015, most notably ENI’s Zohr gas field discovery off the shore of Egypt, containing about 30 trillion cubic feet of gas. It also delivered nine of the top 20 discoveries globally in 2016, including Kosmos Energy’s discovery of 11 to 15 tcf of gas off the shore of Mauritania. But the region’s financial and political troubles of 2015 and 2016 added to the list of concerns for investors already cagey about capital-intensive investments in markets with anemic (yet vastly improving) infrastructure and young regulatory environments. 

Mozambique is a good example. The bright story of recent years dimmed when the country revealed its hidden debt obligations. Coupled with uncertain views on gas and concerns about the country’s ability to finance its infrastructure endeavors, companies slowed investment into gas projects in the country. Nigeria’s production cut in 2016 can partly be blamed on the political challenges and security threat in the Niger Delta. The state-run Nigerian National Petroleum Corporation Group (NNPC), according Managing Director Dr. Maikanti Baru, lost more than 1.5 trillion naira (US$4.8bn) as a result of the attacks on pipelines and facilities in the region.

Third time (or year) is a charm, as the oil and gas markets waited for positive news to no avail in the past two years, 2017 has an upbeat feeling. Exploration and production spending, according to Wood Mackenzie, is expected to increase to US$450bn this year, up 3 per cent from 2016 yet still 40 per cent below 2014 levels. This should more than double new project developments, according to the same consultancy. The optimistic outlook comes on the back of a crude oil price bump north of 20 per cent in the past few months, spurred by an agreement to cut output between producers in the Organization of the Petroleum Exporting Countries (OPEC).

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
T: +44 20 7834 7676, F: +44 20 7973 0076, W: www.alaincharles.com

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