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Africa's upstream hydrocarbon sector is at a crucial turning
point, with reserve additions from final investment decisions
(FIDs) and project start-ups at their lowest levels in three
decades. Whilst some of the delays are due to the COVID-19 pandemic
they also reflect a longer term strategic refocus by international
oil companies (IOCs) towards more agile and lower carbon
production. Without action by African governments and NOCs to
support upstream investment and maintain project start-ups and FIDs
there is now a real risk of African oil production declining
post-2030.
Pandemic drives IOCs' strategic refocus
The significant decline in FID's and start-up delays over 2020
has been driven in part by the COVID-19 pandemic and resulting
demand destruction, but also by the longer term strategic refocus
of IOCs to reduce financial exposure to fossil fuels and increased
focus on lower carbon developments. This longer term refocus is
likely to increase the risk that higher cost, breakeven and/or
carbon emitting projects may well be delayed or even stranded in
favor of agile, advantaged, lower carbon barrels. With an
increasingly limited pool of discoveries that meet IOCs'
progressively stricter reserve development criteria there is a risk
that African oil production could steadily decline into the 2030's
and beyond, with significant negative implications for host
governments and national oil companies (NOCs).
Figure 1: Africa's FIDs taken in 2020 and planned for
2021
FID risk remains into 2021
Africa has been particularly affected by the IOC capital
refocus, as well as COVID-19 logistical difficulties, leading to
only two FIDs taking place over 2020; Sangomar Phase 1, taken
pre-pandemic in early 2020 followed by the much smaller Boatou
Marine in Congo. A further FID is likely over 2020 at Nidoco
Northwest in Egypt, but this is increasingly at risk. Even if this
project FID goes ahead African reserve additions from FID's will
fall to the lowest ever recorded level.
Looking specifically at 2021 potential FIDs, three projects are
particularly important; Block 32 (Northern Development Area Phase
1) and Agogo (Block 15/06) in Angola and Etinde (Etinde permit,
formally MLHP 7) in Cameroon. These three projects make up almost
50% of potential 2021 FID reserve additions and more than 70% of
expected FID capital spend.
An FID for Northern Development Area Phase 1 in Block 32 was
expected in 2020, however, appraisal operations were interrupted
due to the COVID-19 pandemic. The final appraisal well on the
Cominhos field was due to be completed in September 2020 but is now
likely to commence in the second half of 2021. If this is delayed
on FID could be delayed into 2022.
Agogo, which is operated by ENI Angola, was due to take FID in
2021. ENI currently report that they are in contact with relevant
contractors with regards to the full field development and a 2021
FID for Agogo (Phase 2) is still likely. In Cameroon, Etinde was
expected to be sanctioned in 2020 but partners, including the
operator New Age, announced that an FID had been deferred to 2021
due to several factors including stakeholder consensus and the
impact of the COVID-19 pandemic on the various workstreams both
inside and outside of Cameroon.
Figure 2: Africa upstream project sanction by year- Pre and
Post Crash Comparison
Project start-ups also vulnerable
As well as FID delays there has also been substantial project
start-ups delays in 2020, due to both logistical difficulties
created by the pandemic and the longer-term IOC strategic refocus.
Almost 50% of reserve additions expected to start-up over 2020 have
been delayed out, and not just by several years. Additionally the
initiation of the OPEC+ production cuts introduced earlier this
year to try and stabilize global oil prices may have also made
IOC's ponder whether it was worth bringing a new development
onstream this year as companies would not want to risk the economic
and technical consequences of being told to cut back
production.
Out of the 23 projects due to commission in 2020, 11 have
already started up and one more could still commission before year
end, though this is increasingly unlikely. Four projects, making up
400 MMboe of reserve additions, have been moved to a 2021 start-up;
Nene Marine (Phase 2b) in Congo, CLOV (Phase 2) in Angola, Hassi
Bir Rekaiz (Phase 1) in Algeria and Oryx in Chad. The COVID-19
pandemic was the main cause of these start-up delays. At Nene
Marine (Phase 2b) development operations were interrupted, while at
CLOV (Phase 2) drilling activity was suspended through the first
half of the year as the pandemic spread.
A similar situation in 2021 is forecast now as was expected pre
crisis but the project mix has changed as projects where delayed
out from 2020 and 2021. In total six projects have been deferred to
2022 from 2021 including the ANOH Gas development in Nigeria,
Masseko Marine 1 in Congo and Ruche (Dussafu) Phase 1 in Gabon.
Reserve additions hit historic lows
Project delays are likely to limit any increase in production
and lead to the lowest yearly reserve additions from start-ups
since the early 1980's and around 50% lower than in the last
downturn in 2015. In 2021 the situation is not expected to
significantly improve as smaller tiebacks and phased developments
continued to be prioritized.
Figure 3: Africa upstream project start-ups by year- reserve
additions
The deferment of project sanctions and start-ups has reduced
upstream capital investment flows into the continent, impacting not
just 2020 but through into the early 2020's. The combined lost
CAPEX through 2020 and 2021 is expected to total in excess of $20
billion. This rises to over $25 billion in 2022 reflecting delayed
FID's and further project start-up delays. Large capital spending
cuts have been announced this year including Total announcing a
CAPEX cut of $3.3 Billion, and Shell a reduction of $5 Billion,
further placing future projects at risk and extending the capital
flight.
Figure 4: African development capital flight
African upstream developments face stranding risk amid
higher economic hurdles
The African upstream oil industry is resilient as has been
demonstrated over previous price downturns, but pressures on the
industry are greater than ever - particularly limits on and the
refocus of capital investments by IOCs and funders, and longer-term
concerns about oil demand are all likely to impact near term
start-ups and FIDs. Every project, no matter how advanced is likely
to be re-evaluated on new tighter metrics and higher quality
projects prioritized and divestments of non-core assets increased.
Projects which have a break-even price (BEP) above $40 will
struggle to be commercialized and there is an increased risk of
those assets being stranded. For those projects with a sub-$40 BEP
development is far from certain with short cycle projects in
existing plays within tieback distances the most likely to be
developed. Additionally, lower carbon projects such as LNG
developments are likely to be prioritized, subject to global gas
market conditions.
Figure 5: African liquids reserve resilience
Now more than ever, the best projects will attract capital and
it is no longer just about just having a low BEP, as 2020 has shown
us. Reducing project risk is key, especially in Africa, as
companies also already contend with significant above ground risk
and fiscal and regulatory uncertainties. Fewer companies are
seeking opportunities with less urgency and more choice and 2020
has shown quite starkly that African governments and NOCs must move
quickly to encourage and support upstream investment or run the
risk of production decline.
