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Eni and BP are examining possible upstream joint ventures in
Angola and Algeria. The proposed JVs highlight efforts by
international oil companies (IOCs) to adjust their asset portfolios
to redress weakened financial returns and pursue new low-carbon
strategic directives. The ventures also signal an accelerating
shift in the upstream competitive landscapes of maturing African
producers, as key players make more selective investments.
Angolan JV offers scale, synergies, and flexibility in a
maturing asset base
The proposed Angolan JV includes all of Eni and BP's oil, gas, and
liquefied natural gas (LNG) assets in the country, which would
enable the two European majors to derive operating efficiencies and
synergies from merging exploration and development assets. The
arrangement would also create a more material portfolio ripe for
future full or partial farm-down.
The new JV is expected to hold approximately a quarter of
Angola's hydrocarbon production, with more than 3 billion barrels
of oil equivalent (boe) of undeveloped resources weighted towards
oil. Angola's 2018 marginal field terms should facilitate new
developments, with approximately 0.4 billion boe of the JV's
undeveloped resources already qualifying for the improved terms.
Angola's 2018 Natural Gas Framework Law will also assist the JV's
focus on new gas developments to feed the Angola LNG plant, in
which both firms hold an equity stake.
Note: Historical and projected production volumes represent
estimated gross production volumes as per current company working
interest in IHS Markit Vantage.
Algerian discussions seek similar synergies to
Angola
In Algeria, potential co-operation between the companies has yet to
take a clear shape. Current discussions reportedly include the
possibility of BP divesting its Algerian assets to Eni, forming a
JV along the lines of the proposed Angolan venture, or swapping
them for stakes in other Eni assets, potentially in countries
including Egypt and Mozambique.
BP's portfolio in Algeria includes stakes in the In Salah and In
Amenas gas and condensate projects. The acquisition of these assets
would further consolidate Eni's position in Algeria as well as the
North Africa and Middle East region, which is already Eni's single
largest producing area (accounting for about 37% of global
production for 2020). The Algerian JV could pave the way for cost
reductions and additional low-cost, short-cycle exploration and
development opportunities.
Governments likely to back sustained investment - with
some caveats
The JVs are significant on a regional and country level, given
Eni's role (and to a lesser extent, BP's) as a key investor across
Africa. For the host governments, the JVs are probably a preferable
outcome to a wholesale company exit, but there are caveats. In
Angola, the authorities may not welcome further consolidation of
the limited deepwater competitor mix, although the Eni-BP venture
will probably unlock investment in both infrastructure-led
developments and new play-opening exploration that may not have
otherwise been realised.
In Algeria, meanwhile, the government is likely to be disappointed
to lose a high-profile, well-capitalised investor like BP, but it
has been eager to bolster its appeal to Eni, one of a number of
companies that have signed memoranda of understanding (MOUs) for
new opportunities. However, the government has hindered past
M&A activity - for example by blocking Occidental's sale to
Total - and could yet complicate any future divestment process
unless it can be convinced of the upsides.
JVs could become an appealing strategic lever as energy
transition unfolds
Both Eni and BP's revised transition-focused strategies envision
diminished oil and gas production, but upstream cash flow will
continue to be essential to expand low-carbon businesses and meet
shareholder distribution commitments.
In that context, the proposed JVs appear to be a strategic tool
for Eni and BP to drive upstream efficiencies in maturing areas,
and Eni is said to be considering new JVs with other companies in
the UK North Sea and the Middle East. Combinations of established
asset portfolios may become more common as the energy transition
plays out, offering IOCs flexibility in how they manage a gradual
reduction in upstream investment and how they account for the
emissions and financial liabilities associated with those
assets.
Governments need to be flexible on terms as upstream
evolves
Although host governments in Africa may welcome any strategy that
sustains investment and monetises resources, JVs could potentially
add a further disruptive dynamic and complexity to the continent's
upstream competitive landscapes. The shifting strategies of key
investors such as BP, Eni, and Total will have an important bearing
on resource monetisation and government revenue prospects given the
limited role of domestic capital and NOCs across much of the
continent.
The risk of outright divestments and mature country exits by key
IOCs remains a strong possibility in some more marginal producing
states, especially those that fail to grasp the urgency and speed
of transition dynamics and implications for upstream contractual
terms and prospects. In effect, all but a select few African
producing governments will increasingly need to tailor terms to
suit a new wave of potential players - some less pressured by
energy transition dynamics - including international NOCs, private
equity investors, and smaller independents. This new set of
investors will be focused on shorter-cycle, near-field exploration
alongside more traditional longer-term projects.
Governments that understand these pressures - and the shift in
investor portfolio interests - will be best placed to weather
future disruptive impacts, with the conduct of mature producers,
Angola and Algeria, representing interesting test cases for how the
continent might adapt.
IHS
Markit's Upstream Transformation Service supports upstream
stakeholders in identifying and assessing trends in reducing,
offsetting and using greenhouse emissions from core upstream
operations.
Posted 19 July 2021 by Cat Hunter, Msc, MA, Director, E&P Terms and Above-Ground Risk - North Africa and Levant and
Ismini Katsimpardi, Senior Technical Analyst, Upstream Energy, IHS Markit and
Roderick Bruce, Research and Analysis Associate Director, E&P Terms and Above-Ground Risk, IHS Markit
