Energy transition plays role in driving FIDs across Africa

webinar ren atrThe ‘Closing Deals: Advancing FID During COVID-19’ webinar on 18 June addressed the prioritisation of energy projects in an environment of limited capital investment and explored the future of deal-making, following the unprecedented impact of COVID-19 on the sector

As operators continue to face uncertainty and a low-price oil environment, a range of survival strategies have been employed in the short term, including halting non-essential activities; adopting furlough or layoff strategies; slowing output; refining sales and purchase agreements and utilizing financial hedging instruments to market crude.

In the long term, however, COVID-19 will necessitate a reassessment of project development plans, many of which carry operating costs incompatible with a US$40-barrel price.

“We are in unchartered waters. The IMF is estimating a three per cent reduction in global GDP for 2020. The effect is almost triple to that of the 2008 financial crisis,” said Marcia Ashong, Founder and Executive Director of TheBoardroom Africa and Brace Energy. “Africa remains largely a commodity-based economy, and raw materials make up one-third of the continent’s export income. The road to recovery will be extremely slow and arduous. The full effect of COVID-19 on our economies is not fully recognized yet. From the oil and gas perspective, it has derailed major projects. For example, the Aker decision in Ghana [to postpone FID] will postpone further work on its Pecan discovery.”

While the financial viability of oil exploration and production projects has been called into question against a low barrel price, natural gas monetization projects appear to tell another story. In February, Total announced that its Mozambique LNG project is still on track to come online before 2025.

“There has definitely been a difference between oil and gas globally. In oil, COVID-19 has impacted mobility, and demand dropped as low as 72 million barrels in April,” said Paul Eardly-Taylor, oil and gas coverage, Southern Africa, Standard Bank. “Bizarrely, in the world of liquefied natural gas (LNG), things have been a bit different. As of last week’s IA report, LNG demand was up 8.5 per cent year-on-year globally. That is feeding through to Africa. For an African project [Total’s Mozambique LNG] to raise US$15bn in debt financing in the middle of COVID-19 is an astonishing achievement. With no material second wave occurring and from an energy perspective, the world could be right side by the end of the year. Hopefully 2021 will be Africa’s 2020.”

In terms of FIDs on the continent, only a few definitive delays have been encountered. In Mozambique, ExxonMobil has indefinitely delayed FID on its natural gas project in the Rovuma basin. In Uganda, FID taken by Total for the Tilenga project has been postponed until 2022, while initially planned for the end of 2019.

“We are seeing that if your project is squarely in the energy transition, at worst, it will be delayed by a year or so,” said Eardley-Taylor. “Mozambique is case-in-point. ExxonMobil is even expected to go ahead next year once it has secured a cheaper EPC price. Of the projects that are traditionally funded in Africa and are in the headlights of the energy transition, to what extent can they be achievable and fundable? In Uganda, there has been a strong alignment between stakeholders and lead sponsor Total. There is every expectation that even an onshore oil project with a long ride to the coast may take FID in the coming months or year.”

 

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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