AOP White Paper: Dare to Invest

No time for gloom: Low oil price environment presents opportunities and creates investment upside. What’s your downturn strategy?

The following is an excerpt of our White Paper on the state of the African oil and gas industry in 2016. Download the complete document here.


  • There is no time for gloom, even as African oil exporters are suffering across the board from low prices
  • Asset maturity and political challenges raise onshore operational costs while the offshore sector is deprived of capital expenditure
  • But with increasingly proven plays and proximity to a market with long-term demand drivers, Africa’s demographic fundamentals should sustain investor interest
  • A less optimistic public perception of the continent’s oil industry as a long-term source of economic uplift may come at some risk to socio-political stability
  • As a consequence, international oil companies are encouraged to safeguard local content initiatives, despite the need for OPEX cuts.
  • The outlook, for governments and corporations in the private sector, will continue to be shaped by downturn strategies that can provide flexibility and negotiate market uncertainty.

The downturn in the global oil industry over the last eighteen months has been one of the worst in recent history: More than 200,000 workers have lost their jobs and industry giants have suffered multi-billion dollar losses. While the fallout of low oil prices across the breadth of Africa’s oil economies is hardly uniform, impairments to government revenues have threatened economic stability in exporting countries.

In the North, Algeria’s 2016 budget is expected to include spending cuts and consumption tax increases to help stem a widening trade deficit of more than $20 billion. To the West, Equatorial Guinea, at $40 per barrel, will suffer oil revenue losses of 35 percent relative to a theoretical prevailing price of $100. And as Nigeria’s public finances threaten to carry a forecasted deficit of $11 billion, as well as face up to a 50 percent increase in unemployment, the public perception of the continent’s oil industry as a long-term source of economic uplift is beginning to wane.

This white paper finds that, on aggregate, low oil prices have negatively impacted oil-dependent African exporters across the broad base of their stability indicators, the most concerning of which is unemployment. However, with a twofold rise in the demand for oil products (to 4 million barrels per day) predicted for 2020, and a fourfold increase in electricity demand by 2040, some operators have identified sub-Saharan Africa’s economic capacity to stimulate a revival in the regional oil and gas industry. The long-term opportunities for firms working across the industry and the prospects for investment in a nascent deep-offshore industry also necessitate downturn strategies that can provide flexibility and negotiate the uncertainty that will characterise the industry in the medium term.

Economic Interest

Africa’s oil industry has not been spared any of the pain resulting from the slump in global oil prices. While production has remained steady, governments and their private partners have been forced to make painful adjustments. However, the challenges faced by Africa’s economies vary. In the case of predominantly oil importing countries, such as South Africa, where fuels account for approximately 25 percent of all domestic imports, core inflation has tumbled along with crude oil benchmarks (from more than 6.5 percent in early 2014 to 4.8 percent in November 2015), as businesses and consumers benefit from cheaper energy.

Crude oil is priced in US dollars, thus rand volatility may have undermined the full extent of the upside, but the fundamental benefits remain. Others, particularly those East African economies with ambitions of building hydrocarbons refining hubs, are bemoaning their lack of oil  storage capacity, according to a Deloitte study, as the region is missing an opportunity to accumulate cheap stockpiles, as is the trend around the world.

For the bona fide African oil producers, however, the last twelve months have brought economic adversity. These countries depend on petroleum for at least 90 percent of their export earnings and, in the case of Nigeria, approximately 70 percent of budget finance. As members of OPEC, Nigeria, Libya and Angola have urged for supply cuts and higher oil prices, but to no avail.


According to IMF and Deutsche Bank research, the governments of Nigeria and Libya needed a price of $122.50 and $184.50 per barrel, respectively, in order to balance their 2015 budgets, while Angola’s state planners estimated a price point of $98 to balance their 2014 fiscal budget. In reality, at the end of the first week of January 2016, Brent crude was trading at an intraday low of $32.16 per barrel, 72 percent lower than the peak of $115 reached in the summer of 2014, while WTI futures were a few cents above their 52-week low of $34.48. Analysts at KPMG have calculated that a $40 barrel equates to GDP losses (in terms of oil revenue, relative to $100 per barrel) of 7.6 percent for Nigeria, 19.5 percent for Angola and nearly 35 percent for Equatorial Guinea.


No Time for Gloom

Even as depressed prices and above the ground risks dominate today’s business news, increasingly proven plays and proximity to a market with long-term demand drivers should support investor interest in Africa’s oil industry throughout the downturn. On a continent where only 31 percent of people had access to electricity in 2014 , long-term investors are following fundamentals and perceiving more value in today’s assets than in recent history, as other players seek to de-risk their Africa portfolio.

A twofold rise in the demand for oil products (to 4 million barrels per day) is predicted for 2020 , as well as a fourfold increase in electricity demand by 2040. Justifiably, some operators have identified that sub-Saharan Africa has the economic capacity to stimulate a revival in the regional oil and gas industry. BG Group, which has a significant interest in east African LNG, reduced its CAPEX budget by 34 percent in 2015 but focused the cuts in Brazil and Australia to protect investment in Tanzania. The country’s economy sourced nearly 16 percent of its $125 billion worth of oil imports from African nations in 2015 and hopes to increase that figure to 25 percent in the short term.

ONGC Videsh, the overseas investment arm of India’s national oil company, is considering bidding for six blocks on offer in Uganda, with the successful bidders for these blocks to be announced by mid-January. Among other African nations set to offer exploration blocks in 2016 is the Republic of Congo. Following formal ratification of the new Petroleum Code by parliament, this year will see officials in Brazzaville invite offers for a licensing round of open blocks in the Cuvette basin.

Download the complete document here.


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