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Eni and BP’s African joint ventures: A new IOC upstream approach for energy transition?

19 July 2021 Cat Hunter, Msc, MA Ismini Katsimpardi Roderick Bruce

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.

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Posted 19 July 2021 by Cat Hunter, Director, E&P Terms and Above-Ground Risk, North Africa and Levant, S&P Global Commodity Insights and

Ismini Katsimpardi, Technical Researcher and Analysis Lead - Upstream Asset Valuation/ Africa and

Roderick Bruce, Research and Analysis Associate Director, E&P Terms and Above-Ground Risk, S&P Global Commodity Insights

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