Tentative recovery under way for region
October 25, 2018 | Singapore | OSEA2018 Industry Insights
Strengthening oil price fuelling hopes but players need to hold their nerve
Hopes are high that West Africa’s upstream prospects will soon revive as confidence returns and the oil price rebounds.
It has been a lean few years, with several licensing rounds delayed and regime instability across the region.
Nigeria, the self-styled giant of Africa, has so far failed to reform its ageing oil institutions and legal framework, while local players remain mired in a debt-equity trap following the Shell divestment programme, which left local banks over-extended.
With Nigeria condemned to play catch-up, Ghana is forging ahead, while other players along the littoral are poised to turn the corner in 2019, willing to embrace the reforms needed to see the exploration dollars return.
All eyes are on Nigeria to ensure a peaceful election and transition next February, and on the Cameroon authorities to act wisely to avert catastrophe after controversial polling this month fractured an already fragile polity.
No one is predicting a regional meltdown, but while the oil industry may not be easy to scare, its financiers might be.
A raft of multi-billion-dollar projects are at stake, spanning deep-water oil and liquefied natural gas to cross-border oil pipeline schemes. It is time for all to hold their nerve.
With a 200 million-strong population, regional giant Nigeria shows the greatest potential for growth — but also the greatest risk of dragging down the neighbourhood if its own economic recovery is not secured.
The World Bank this month downgraded Nigeria’s growth forecast for 2018, calculating gross domestic product (GDP) may rise by only 1.9%, down from the 2.1% earlier estimated, based on lower than expected oil production following pipeline closures and a sudden agricultural contraction in the wake of deepening rural conflicts.
Yet despite oil activity dipping from the second quarter, the Nigerian economy may accelerate out of recession as oil prices recover and inflationary pressures ease, according to last month’s report from Barcelona-based FocusEconomics, which forecasts GDP growth of 2.3% this year, rising to 2.8% in 2019.
Deep-water operations remain constrained amid weak offshore investments, says Ecobank Research, with major projects progressing slowly or stalled, citing “regulatory uncertainty, intensified regional competition for the E&P dollar and unresolved security upheavals”.
Reserves replacement is poor due to ageing fields, with continued weakness likely in the wake of interruptions of onshore production. Ecobank believes the threat to review existing offshore production sharing contracts has not helped either, with an estimated 875,000 barrels per day trapped in projects awaiting a final investment decision.
Promised reforms seem far away. This month’s trumpeting of plans to bring forward the national gas flare-out target from 2030 to 2020 has been met with scepticism as implementation “will largely mirror the level of transparency and competition in the bidding process”.
However, major opportunities continue to emerge, such as the $300 million pitch by Nigerian Gas Processing & Transportation Company to acquire 50% of Seplat Petroleum subsidiary ANOH Gas Processing, for which project sanction is expected imminently.
And Total’s deep-water Egina flagship project is progressing well, despite unexpected integration travails at the Ladol yard on the floating production, storage and offloading vessel, with one third of the 58,000 metric tonnes of equipment manufactured locally and 75% of project hours worked in-country.
According to the chief executive of one indigenous player: “There’s barely any exploration going on — it’s all about developing what we’ve got. No one is really serious about the reform process or improving efficiencies, though we may see some tinkering with existing laws.”
Local companies taking on Shell divestments were immediately hit by falling oil prices and remain burdened by debt to over-extended local lenders.
“The crisis has not played out. Only now are Nigerian banks really restructuring and agreeing 10-year debt papers with stricken oil companies,” the chief executive says.
Another blames the protracted denouement of Afren, founded by former Petroleum Resources Minister Rilwanu Lukman, for “destroying the international capital markets for Nigerian E&P players, ripping away confidence that took two decades to build”.
UK prosecutors last month alleged that Afren’s former chief executive Osman Shahenshah and former chief operating officer Shahid Ullah conned shareholders of some $400 million in 2013. The case has dragged on for two years since the company’s $1.5 billion collapse, leaving a tangle of investments and liabilities in its wake.
Oriental Energy Resources and Amni International have been dragged into in the Afren debacle, while fledgling Lekoil is in court fighting off officials siding with Optimum Petroleum over whether consent was required before acquiring equity in OPL-310.
Legal discord dogs the Nigerian sector, whether it is Aiteo Group chief executive Benedict Peters locked in combat with the Economic & Financial Crimes Commission or majors Shell and Eni fighting off graft allegations in four jurisdictions.
That is the real story, one Nigerian chief executive tells Upstream. “It’s actually a good sign,” he says. “English law and arbitration provisions are finally catching up with Nigerian players who will inevitably rely going forward on Western finance and technology. We are finally seeing the reach of UK anti-bribery legislation and the US Foreign Corrupt Practices Act.”
Nigeria has not seen the usual hastily cobbled pre-election licensing exercise designed to fill campaign coffers or enrich presidential cronies, prompting several seasoned Nigerian executives canvassed by Upstream to express optimism that a new era of accountability may be dawning.