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Abu Dhabi, UAESunday 16 December 2018

Rush back to African upstream raises regional dilemma

Regional oil ministers on continent voice cautious optimism that more Chinese investment is the best option - but is it?

Cars at a petrol station in Luanda, Angola, one of Africa's leading oil producers. AFP
Cars at a petrol station in Luanda, Angola, one of Africa's leading oil producers. AFP

Chinese President Xi Jinping this month announced a $60 billion financing package in aid, investment and loans to Africa, as the world's biggest energy importer continues to expand its global influence.

Part of that pledge will further underpin efforts by China's state oil giants to help develop the region's sizeable oil and gas resources.

For many existing and would-be African oil and gas producers, the promise of new funds to kick-start upstream activity after years of shrinking spending will be a welcome breath of fresh air.

Frontier African exploration was one of the main casualties of the oil price slump. When the returns from $100 oil evaporated, industry concerns over the region's political instability, local disputes and legal uncertainty soon resurfaced.

But with oil prices hovering close to $80 per barrel, the region is eager for a fresh wave of upstream investment and many governments are asking which source of upstream investment provides the swiftest monetisation options with the fewest strings attached.

Speaking at an Africa Oil and Power event in Cape Town last week, some regional oil ministers - many of whom had just returned from Beijing's triennial African investment forum, voiced cautious optimism that more Chinese investment is the best option.

"We are open to all offers but they [the Chinese oil majors] are offering the best prices, the most money. It’s that simple," said the oil minister of one sub-Saharan oil and gas producer.

But not everyone will be happy to hear of China's latest push to boost its control of the continent’s energy resources. Some industry players question the rationale of giving China's state oil majors even more access to upstream resources.

The head of one independent oil explorer operating in Niger, where Chinese state oil major CNPC already dominates oil finds in the Agadem basin, voiced concerns that Chinese oil firms are "just sitting on" discoveries, happy to pay licence fees and meet local content commitments to control the assets but with little motivation to actively develop the finds.

CNPC, which also controls most of South Sudan's oil, inked agreements to expand its upstream footprint there as well as Uganda and Kenya in the days before the Beijing investment forum.

Without doubt, Africa's remaining oil and gas potential across its little-explored resources basins remains vast.

Under a conservative scenario, a US Geological Survey report in 2016 estimates a 95 per cent chance that at least 41 billion barrels of oil and 319 trillion cubic feet of gas are still up for grabs in sub-Saharan Africa.

Time may also be running short to get these resources to market. Like the oil industry itself, regional governments are acutely aware of the narrowing window of opportunity to develop and monetise their resources as climate change concerns cloud the future of fossil fuel demand.

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With oil prices recovering, concerns that cash-flush oil companies will snap up control of new acreage on offer is not confined to China's state-backed giants.

Speaking in Cape Town, Equatorial Guinea's energy minister Gabriel Mbaga Obiang warned that the return of western oil majors to African exploration projects as upstream spending recovers also threatens to slow down, rather than accelerate, the pace of new finds in the region.

"Majors are like big elephants, they are very slow. That means that the development of fast-tracking initiatives will slow down," Mr Obiang said on the sidelines of the Cape Town event.

Acknowledging that deep-pocketed global oil majors are well suited to developing existing discoveries, the minister said the swift return of oil and gas "superpowers" to African exploration plays can make less sense for countries keen to quickly locate new resources.

Oil majors can often take longer to assess, prioritise, execute and appraise frontier exploration drilling compared to more nimble, tightly-focused independent explorers, Mr Obiang said.

His concern is sharpened by the pace at which energy majors are rushing back to Africa as oil prices firm. While the big players have successfully conserved cash and slashed costs during the downturn, many less project-diverse independents are still labouring under heavy debts and meagre cash flows.

As a result, more agile, less risk-averse independent explorers are being out-gunned in the competition for new quality exploration acreage to rebuild resources depleted during the spending slump.

Last October, Total took a majority stake in a Namibian block, and one in South Africa, from UK-based independent Impact Oil and Gas.

Shell secured its first exploration acreage off the coast of Mauritania in July, while ExxonMobil acquired stakes in Namibian fields from both Portugal's Galp in February and from minnow Azinam in August.

Clearly, as the appetite for African exploration heats up, regional leaders appear to be facing tough decisions over whether to favour hard cash or more operational focus and resolve.

For Equatorial Guinea, at least, the answer lies in prioritising exploration activity on the ground.

"We need to drill, that's the only way and we want companies that are willing to do that,” Mr Obiang said.

“If you want to be in Equatorial Guinea, you drill. If you don't want to drill, we'll look for someone else."

Robert Perkins is senior writer - Emea Oil News, S&P Global Platts