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Africa has so far avoided the worst health impacts of the
COVID-19 pandemic, but its economy and energy sector have been hit
hard. The region has experienced its largest economic contraction
on record and the energy sector must now navigate through the
narrowing straits of a pandemic-induced across-the-board drop in
energy demand as well as a looming energy transition. Despite a
tempestuous 2020, however, a few silver linings appear on the
horizon. Looking back at 2020, what happened in the region's
economy, upstream, and gas and power sectors that were of greatest
consequence, and what should we expect to see in 2021, as the
region focuses on accelerating economic growth and advancing energy
projects? In this report, we will review and identify the major
issues and events that shaped 2020 and offer an outlook for
2021.
Sluggish growth. African policy makers are
focused on supporting a quick economic recovery, and many African
economies are likely to see a rebound in growth over the next year.
But debt vulnerabilities and limited fiscal capacity will weigh
heavily on the pace of recovery, and political instability remains
a concern.
Energy Transition. African countries will be
affected by international oil companies' (IOC) shifting priorities
but planned regional divestments will create entry opportunities
for willing investors.
A Transition to Gas? Gas moves up the agenda,
but domestic projects are limited and export projects face
increasing uncertainty.
Upstream Oil and Gas Prospects. Shifting
global energy fundamentals will lead to increasingly selective
exploration and project development across much of Africa.
Upstream Competitiveness. Increasingly
selective upstream spending will put pressure on African countries
to improve their fiscal and regulatory competitiveness.
African Power. Further strain is likely for
the power sector but there is potential for the commercial and
industrial sectors to play a stronger role.
African policy makers are focused on supporting a quick
economy recovery, and many African economies are likely to see a
rebound in growth over the next year. But debt vulnerabilities and
limited fiscal capacity will weigh heavily on the pace of recovery,
and political instability remains a concern.
While the health impacts of the COVID-19 pandemic have been
relatively limited in much of Africa, the continent's exposure to
external investment and depressed internal markets has meant that
the pandemic's economic consequences have hit hard, with the
continent recording a historic recession in 2020. In particular,
the pandemic-driven oil price plunge has triggered sharp
contractions in West Africa's oil-dependent economies, pulling
countries into deeper poverty. Fiscal capacity to combat COVID-19's
economic impacts are further constrained as many African countries
remain deeply indebted to foreign private and sovereign creditors,
particularly China. Meanwhile producer and frontier governments
alike remain constrained in their ability to control porous borders
and suppress domestic and regional threats.
Elections over the past year saw the return of many incumbents
including in Togo, Ghana, Burkina Faso, and Tanzania as well as in
Guinea and Cote d'Ivoire, where presidents secured third terms.
Overall, the results signal policy continuity largely focused on
stimulating economic recovery to address current account and budget
deficits.
Figure 1: Top 20 absolute beneficiaries of the DSSI
expansion to June 2021, by total USD savings
Over 2021, some relief from pressure on fiscal finances and
external liquidity will come from the deferral of debt payments
under the G-20 Debt Service Suspension Initiatives (DSSI) - debt
relief awarded to low-income countries under the International
Monetary Fund (IMF)'s Catastrophe Containment and Relief Trust
(CCRT) - combined with stronger global oil prices and global trade
flows. Still, sluggish growth, COVID-19-related health spending,
and rising debt servicing obligations will continue to limit fiscal
flexibility. A slow path towards fiscal consolidation over the
medium term will furthermore mean that the public sector debt
burden will continue to rise, adding to the worsening debt backdrop
in the region.
IMF-support programs, such as Angola's Extended Fund Facility
(EFF) will, however, introduce a fiscal and monetary policy
framework under IMF-program conditions while the government pursues
privatization and economic diversification initiatives over the
medium term. Cameroon, Chad, and Gabon, whose IMF-support programs
expired during 2020, are expected to request successor programs
during 2021, with program targets focused on building external
buffers and government revenue resilience. Zambia, which defaulted
on its sovereign debt in November 2020, is only likely to engage
with the IMF in late 2021 to avoid further scrutiny of public
finances prior to hotly contested elections scheduled for August.
While the acute impact of the pandemic saw South Africa and Nigeria
- the continent's two largest economies - seek IMF support - a
first for South Africa - neither is likely to proceed with a more
formal support program. South Africa's GDP is expected to rebound
by 3.3% in 2021, but the unfolding COVID-19 pandemic remains the
biggest risk to the economic outlook, with IHS Markit acknowledging
the possibility of a third wave during the southern hemisphere
winter months. Nigeria's economic rebound during 2021 is expected
to be modest, estimated at 1.2% growth GDP, with growth in oil
production dictating the outlook.
Figure 2: Supply-chain diversificiation opportunities in
sub-Saharan Africa
Momentum toward regional integration accelerated over the
pandemic - as seen with the African Union (AU)- and private
sector-led initiative to support the rapid procurement of personal
protective equipment under the Africa Medical Supplies Platform
(AMSP), with continued AU-led efforts to establish additional
channels for pooled procurement of vaccines as fiscal constraints
limit governments' capacity to establish bilateral agreements.
Still, vaccine roll-out plans across the region are only likely to
gain real momentum toward the latter half of 2021. Similarly, while
initially delayed due to the pandemic, on 1 January 2021 the AU
launched the African Continental Free Trade Agreement (AfCFTA),
which also is the world's largest free trade area. This agreement
will create enhanced supply chain diversification opportunities
across the continent over the medium to longer term. And the
removal of tariffs will provide significant incentives and growth
benefits by reducing production costs and enabling businesses to
take advantage of economies of scale.
Instability in the Sahel and Horn of Africa - which will see
several elections in 2021, most notably in Ethiopia, which is
slated for June - undermines multilateral stabilization efforts and
threatens to degrade into broader regional conflicts, while growing
piracy in the Gulf of Guinea and militancy in Mozambique's Cabo
Delgado region are also acute security watchpoints for 2021. In
North Africa, Libya's civil conflict is showing some signs of
easing with positive implications for oil and gas production, but
neighboring Tunisia is struggling to manage its democratic
transition with social protests often undermining efforts to expand
upstream investment. Within this, some countries stand out in terms
of relative resilience. Egypt is in a better position to manage
some of the current pressures having set in place economic and
energy reforms before the 2014 oil price collapse.
African countries will be affected by international oil
companies' (IOC) shifting priorities, but planned regional
divestments will create entry opportunities for willing
investors.
In 2020, the worst global recession in three quarters of a
century coincided with a wave of companies and governments alike
committing to net-zero emissions targets. This put pressure on the
fossil fuel industry's "social license to operate" and has kept
energy commodity prices stuck in low gear. In response, IOCs have
sought to reduce their financial exposure and deliver competitive
returns on capital to shareholders by refocusing on short-cycle,
high-margin developments, and infrastructure-led exploration.
Figure 3: IOC Africa Divestment Activity
Financial pressure on upstream companies, however, is expected
to continue into 2021, as IOCs remain focused on reducing high-cost
and high-carbon investments while increasing spending on low-carbon
electrification and carbon-offset technologies. Accordingly, major
IOCs are expected to both accelerate upstream divestments and
reduce frontier exploration activity. At the same time, the risk of
stranded assets - discovered resources that may not be developed
due to price or policy pressures - will increase. But IOC
divestments will also present new E&P opportunities for
well-capitalized, risk-tolerant buyers that are less strategically
constrained by shareholder and policy pressures, including
companies such as international NOCs, private equity firms, and
commodity traders. Local firms may also increasingly take a role in
the domestic upstream. But new players are unlikely to fully
replace the technical, social and revenue contributions of
retreating IOCs, and domestic NOCs' ability to fill the gaps will
be constrained as they continue to struggle financially.
Shifting global energy fundamentals will lead to
increasingly selective exploration and project development across
much of Africa.
Market uncertainties and low energy prices in the wake of the
COVID-19 pandemic and sustained by concerns around the energy
transition have led operators to defer new projects in the region
and delay planned drilling programs. Only two of the 28 African
upstream project sanctions expected pre-pandemic were approved in
2020, while several sanctioned project start-ups were also
postponed. Additionally, OPEC's enforcement of compliance targets
impacted large producers such as Angola and Nigeria, lowering their
overall production levels for 2020. While BP and Kosmos pulled back
from frontier exploration, Total and Shell added to their
respective frontier acreage holdings.
Nigerian and Angolan drilling bounced back relatively quickly
into late 2020 and in Mozambique in early 2021 but drilling
restarts in other markets such as Congo are likely to be more
sluggish. New field wells are expected to be drilled across Angola
and Namibia, though the timeline is still uncertain. ReconAfrica's
Owambo Basin drilling campaign should reveal the basin's potential
for hydrocarbon exploration and provide hints about the potential
in analogous basins.
Figure 4: Sub-Saharan Africa Five-Year Crude and Condensate
Capacity Outlook (FID and start-up delays)
Following a record low year of CAPEX spend and reserve additions
in 2020, the number of project sanctions in 2021 is likely to
remain relatively limited, with capital spend down $16 billion from
expected pre-pandemic levels. To reduce project costs, most
start-ups in 2021 are likely to be situated near field development
tiebacks or planned expansions of existing projects. This trend is
expected to continue into 2022.
While overall production is due to re-bound in 2021 as drilling
restarts and OPEC compliance requirements ease, overall supply
levels are not forecast to return to pre-pandemic levels until
2025.
Gas moves up the agenda, but domestic projects are
limited, and export projects face increasing
uncertainty.
With IOCs refocusing their global strategies towards lower
carbon assets, gas is gaining prominence as a transition or
"bridge" fuel that advances a lower-carbon energy mix. For Africa,
however, the notion of gas as a bridging fuel is more complicated.
Most discovered gas reserves are likely to be developed not for
domestic markets but rather for export, via LNG, with its
characteristically long and now increasingly uncertain development
timelines. LNG projects already online faced a challenging market
environment in 2020 as global gas prices plummeted on the back of
falling demand. And Africa's limited and fragmented domestic gas
markets are seeing lower demand due to COVID-19 lockdowns. Reduced
demand particularly affected North African countries, markets which
have more gas fired electrification and industrial gas utilization
than other countries across the continent.
Prospects for African upstream gas projects are mixed. Egypt
fired the starting gun for African final investment decisions
(FIDs) when both the NEA and NI marginal gas tiebacks were
sanctioned in January 2021. In Angola, Chevron is to sanction the
Sanha Lean Gas project, as attested to by recently announced
large-scale contracting. Nigeria's Aje Gas project may take FID
over 2021 but is facing financing concerns. A 2021 FID for Libya's
Bouri Phase 2 project is largely dependent on the progress of
Libya's UN-backed peace negotiations. While no major gas
development projects are due online over 2021, several smaller
projects are expected to commence production, including the Alen
Gas Hub in Equatorial Guinea and the delayed Raven and Elan
start-ups in Egypt.
Almost 40 Bcf of LNG projects that were stalled over 2020 are
expected to make further progress over 2021, though likely at a
slower pace than previously expected. Intensifying Islamist
militant activity in Mozambique, which the government and foreign
partners are struggling to control, has put at risk the planned
timeline for the Mozambique LNG and Rovuma LNG developments. The
reevaluation of development concepts aimed at reducing costs and
increasing competitiveness is also underway in several projects
across the continent, with a major restructuring at Senegal's
Greater Tortue already announced and another taking place at Rovuma
LNG. In terms of domestic supply development, both route to and
size of market remain key issues and in some cases risk limiting
oil and condensate production. Ghana already increased gas flaring
and reinjection over 2020 to support oil production and likely
needs to continue to do so given recent announced plans to import
LNG. And gas commercialization pathways are still unclear for
several planned domestic projects including Cameroon's Etinde
MLHP-7 field and South Africa's Luiperd and Brulpadda fields.
Increasingly selective upstream spending will put
pressure on African countries to improve their fiscal and
regulatory competitiveness.
Bid rounds that were stalled in 2020 are expected to resume in
2021, along with the launch of new license rounds. While bid rounds
in Angola, Gabon, Mozambique, and Senegal will serve as barometers
for investor appetite, governments that offer investors a flexible
and accommodating contractual and regulatory environment are
expected to have an upper hand in attracting new drilling.
Below are other key market developments to look out for:
Algeria. Algeria is on track to promulgate new
regulations under the new hydrocarbon law by mid-2021, though as
the timetable has slipped before there is a risk it will happen
again. Nevertheless, the country's improved fiscal and contractual
terms have piqued investor interest, which could lead to a
resurgence in near-field developments and enhanced recovery
projects if the government can demonstrate that it truly is cutting
red-tape.
Nigeria. Progress on the petroleum industry
bill (PIB) is possible in Q1 2021. But even if the PIB is passed,
it is unclear whether its terms will spur sufficient investment in
deep-water developments to lead to a much-needed revival in the
sector.
Egypt. A new deal with TransGlobe allowing the
company to develop existing brownfield fields under an updated
contract that provides significantly improved fiscal terms
demonstrates the government's desire to support investment into
more marginal assets and to maximize the country's remaining oil
resources. Negotiations have taken over two years to complete but
should pave the way for other small operators to navigate upgraded
agreements and help with the government's efforts to revitalize
interest in maturing areas. This deal may also serve as a model for
other countries that seek to do the same.
Senegal. An emerging producer, Senegal's
efforts to harness investment in its hydrocarbon potential have
been stymied through repeated delays to its first bid round, which
has been extended three times and is now due to close at the end of
May.
Further strain is likely for the power sector but there
is potential for the commercial and industrial sectors to play a
stronger role.
Industrial power demand declined across Africa due to the
COVID-19-induced strain on the economy. Some markets in Sub-Saharan
Africa, however, such as Nigeria, saw an overall increase in power
demand owing to the increase in electricity intensity in the
residential and commercial sectors, a product of suppressed power
demand. Despite the increase in these markets, however, overall
demand growth was lower than expected.
Power demand recovery post-lockdowns will place significant
pressure on already strained power systems facing capacity
shortages, including South Africa. Investment from private players
and multinational institutions will be essential to addressing
power supply deficiencies. However, the uncertainty created by the
pandemic, as well as the strain on financial resources, delays in
project permitting, changes to sovereign risk ratings, and the
devaluation of local currencies, will put projects in the pipeline
at risk. Corporate power offtakers will play a more prominent role
going forward, either by investing in renewable self-generation
projects or serving as offtakers to large-scale projects under
power purchase agreements. Solving regulation bottlenecks around
direct sales will be crucial to unlocking this potential across the
region.
Looking further out, planned changes to the power mix in South
Africa and Nigeria to increase gas and renewable generation face
funding uncertainty. In South Africa, 45,900 megavolt-amperes (MVA)
of new network assets are required to support planned capacity
additions through 2028. In Nigeria, supply shortages continue to
constrain gas-fired generation due inadequate gas infrastructure,
maintenance issues, and malicious sabotages. Power evacuation and
water management issues also continue to strain supply.
Moreover, there will be pressure on countries to increase their
nationally determined commitments (NDCs) both ahead of the COP-26
meeting this November, and afterwards. While very low tendered
prices for renewables are putting pressure on gas-fired power
generation projects, protracted low LNG prices make LNG import
projects relatively more attractive than major pipeline delivery
routes especially when these entail cross-border issues. Coal
phase-out remains a key issue for South Africa, focused around the
retirement program for Eskom generation, while new coal plants are
severely underperforming and the state utility is in fragile
financial health. Coal is also under pressure more broadly across
Africa - projects have been cancelled in Kenya, Egypt, and
elsewhere - though this is as much due to surplus capacity in the
face of slowing electricity demand as to environmental
pressures.
Since 2021 it has been observed a strong reduction of stacked OSVs. The increasing demand has encouraged companies… https://t.co/TcqJsN4JMp
Jul 05
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