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<span/>While Africa's
geological appeal for frontier oil and gas exploration will remain
strong relative to other regions (one quarter of the new reserves
discovered worldwide in the past decade are African), the early
2020 oil price crash will have significant and long-lasting impacts
on upstream activity within the continent. Trends that were set in
motion after the 2014 oil price collapse are likely to be
exacerbated.
We will discuss the African upstream trends observed over the
last decade - providing some insight into the evolving strategies
of regionally grouped companies and attempting to make sense of
these in the context of the most recent crash. We will also look at
exploration activity over the same period with the view to drawing
insights from the 2014 crash and applying those to the current
environment and outlook.
A drama in three acts
Three distinct periods are defined within the scope of this
article, driven by crashes in the oil price:
A) Pre-2014 crash
Between 2010 and 2014, oil was trading in the region of USD
100/bbl and Africa was attracting significant interest from large
European, North American and Asian oil and gas companies. The
continent also presented numerous opportunities for smaller
independents and African companies allowing for the expansion of
acreage holdings. On average, some 300 entries or awards were
taking place annually while there was a downward trend in terms of
relinquishments (less than 80 annually at the end of the
period).
B) Post-2014 crash to Pre-2020 crash
The dramatic decline in the oil price from mid-2014 to early
2016 had an equally severe impact on company deals and investment
decisions in Africa. The number of new contracts awarded during the
period almost halved; conversely the number of relinquishments
significantly increased. To put this into context, 2016 was the
only year in the last decade when more acreage was relinquished
than awarded.
C) Post-2020 crash
The most recent oil shock was driven by the collapse of the OPEC
- Russia Vienna Alliance and the COVID-19 pandemic, simultaneously
creating a significant oil oversupply and a dramatic decline in
demand. Explorers have already slashed discretionary spending,
including dramatic reductions to exploration budgets. These cuts in
turn will lead to commitments being reneged on and/or block
relinquishments, as opposed to entering successive exploration
periods and the resulting commitments. Although it is early days,
it seems likely that many of the strategies exploited during the
period after the 2014 crash will be redeployed - slashing of
exploration budgets, deferrals of commitments when possible or
withdrawals from exploration acreage and divestments.
Regional company strategies adjusting to global market
trajectories
Since 2010, company strategies have shown a strong correlation
to the region of incorporation. Looking at the entire 10-year study
period, awards have been dominated by companies headquartered in
Europe and Africa. IOCs like BP, Eni, Equinor and Total entered
numerous agreements in West Africa and Shell's takeover of BG
Group, for example, allowed it access to significant acreage
offshore East Africa. This trend was not restricted to majors.
Independents like Tullow Oil, Afren (prior to the 2014 crash and
its ultimate bankruptcy) and Chariot expanded footprints. North
American and Asian companies were active in the region particularly
within the Pre-2014 crash period and again towards the end of the
Post-2014 crash to Pre-2020 crash period. US-based Anadarko and
Kosmos Energy were two of the most active players, particularly in
West Africa.
Figure 1:Graphical illustration of contracts awards
(in green) versus relinquishments (in grey) in Africa. The top left
graph gives the overall African trend. The five successive charts
provide a more granular view based on groups of companies with
similar regional provenance. Scales vary in order to optimise both
readability and comparison.
The 2014 oil crisis not only restrained investment, but it
expedited divestment programmes. This was particularly evident
within mature areas like the Niger Delta - the ultimate
beneficiaries being indigenous companies. In 2015, awards to
European companies dropped significantly while African companies
achieved their second-best year in terms of awards, as indicated on
Figure 1, despite this occurring during the worst of the oil price
collapse.
North American players sequentially increased acreage positions
in Africa prior to the 2014 oil crash. It is during this period
that we saw the likes of Anadarko, Chevron and ExxonMobil actively
exploring Liberia, Sierra Leone or Cote d'Ivoire, and
ConocoPhillips or Cobalt following suit in Angola. The strategy
changed significantly post 2014, when US-based companies greatly
accelerated withdrawals - relinquishing more licences than they
moved into. This trend continued until 2019 when sentiment seemed
to have shifted back to Africa and frontier exploration.
Traditionally, Asian and Russian companies have been
underrepresented in the African upstream landscape. This started to
change in the early 2010s when these groups were awarded contracts
in Ethiopia, Cote d'Ivoire and Egypt. However, after the 2014 oil
price crash, a divergence in this trend is observed. Asian
companies pulled back primarily from West Africa whereas Russian
companies progressively augmented their positions. In 2016, Rosneft
partnered with Eni and BP in the gas giant Zohr. In Congo, Gazprom
moved into two onshore licences later to be replaced by Lukoil
which in turn acquired additional offshore acreage in 2019. More
recently was the move by Lukoil to acquire the undeveloped
deep-water gas giant Fortuna in Equatorial Guinea. Further Russian
investment is expected in this country, in addition to a commitment
to invest in South Africa's upstream industry.
To deal or not to deal? That is the
questionfor 2020-2021
In late 2019 and early 2020, both authors were optimistic
regarding the continued revival of African Upstream activity. With
oil prices seemingly stable at around USD 60/bbl and expected to
remain relatively consistent, explorers were again looking at
frontier basins. However, at the time of writing (mid-April 2020),
the industry was in the grip of a crisis driven by a demand crash
related to the COVID-19 pandemic. The net result is that almost
without exception, company mergers and acquisitions that were
expected to be concluded within the next 12 to 18 months are facing
significant risk - a key issue being valuations at current prices.
In addition, drastic cost reductions in upstream budgets, will put
further downward pressure. That said, we are likely to see a few
opportunistic acquisitions.
Perhaps one of the biggest challenges within the near term will
be for companies looking to divest producing assets, finding buyers
that are willing and able to offer fair value will be difficult. In
response, several companies have already mentioned delaying
divestments until market conditions improve. Conversely,
relinquishments and or cancellations of exploration acreage is
likely to accelerate, particularly if entering successive
exploration periods triggers substantial commitments. One strategy
that operators have employed thus far is to evoke Force Majeure as
a means to extend current exploration periods and push back
commitments. Several examples in Libya and Cameroon are already
known of, and many more throughout Africa are expected.
Within this trying context, ExxonMobil hopes to finalise the
sale of the giant Zafiro oil field in 2020, offshore Equatorial
Guinea. Potential buyers include US-based Marathon Oil, Russian
Lukoil or GazpromNeft, or Chinese Sinopec that would partner with
Nigerian Waltersmith Petroman Oil. However, the current market
uncertainty may make concluding the sale difficult indeed. Based on
an USD 60/bbl oil price, the project had a net present value of
about 1.4 billion; but at USD 30/bbl it is barely economic. In
Nigeria, several majors are also looking to pursue divestment
programs, including Chevron, Total and ExxonMobil.
In North Africa, Shell is looking to divest its Egyptian assets
in the Western Desert. Dana Gas has also decided to market its
producing assets within the Nile Delta and the Gulf of Suez to
focus on Kurdistan, but the company has put off the sale due to
current market conditions. In Chad, ExxonMobil, Petronas and
Glencore plan to sell producing assets, while in Algeria, BHP,
CNOOC, Petrovietnam and smaller players are trying to divest
development/production acreage.
Smaller companies with less robust balance sheets are expected
to face significant headwinds. Tullow Oil - one of Africa's
greatest explorers - mentioned it may not be possible to continue
operating this year unless economic conditions improve. It is worth
remembering the collapse of Afren in 2015 was attributed at least
in part to the 2014 oil price crash. Chariot Oil and Gas recently
introduced a significant change in strategy - essentially a move
away from a high-impact explorer to a Moroccan gas producer. The
transition will be accompanied by portfolio streamlining, which
will likely result in the offloading of exploration acreage. This
pullback in frontier exploration has already been implemented by
Kosmos Energy. The decision was taken before the 2020 oil price
crash but would have been almost inevitable within the current
environment. The company plans to reduce exposure to offshore
Mauritania/Senegal, with gas end-users, utilities and supermajors
identified as potential buyers.
A time to be bold or a time to hold
African exploration drilling activity provides additional
insight into what might be expected in the years following the 2020
oil price crash. Broadly speaking, a pullback in exploration
drilling in line with the oil price can be anticipated. But far
more interesting is the likely response by sub-region, as
illustrated in Figure 2.
Figure 2:Exploration drilling activity in North Africa
(primarily onshore) versus West Africa (primarily offshore) over
the past decade (green bars), including a subjective estimate of
the expected exploration drilling in 2020 prior to the current
crisis and a likely reduction in 2020 (orange bars).
North African exploratory drilling is primarily onshore and is
dominated by Egypt and Algeria. Within this region, the response to
market fluctuations - both up and down - has been rapid.
Exploratory activity showed a strong recovery from the 2015 lows to
levels similar to those seen prior to the 2014 crash. This upward
trend was expected to continue prior to the 2020 oil price
crash.
The same cannot be said for Sub-Saharan Africa, in particular
West Africa. Exploratory drilling in this region - at least in
recent years - has been dominated by offshore drilling in
increasingly deep waters. The oil industry has traditionally
responded quickly to downturns, but the same is not true for its
response to oil price recoveries. Typically, a 2 to 3-year delay
can be expected before a year-on-year increase in exploratory
drilling activity is observed.
The main reason for the divergence is related to the typical
cost of an offshore versus onshore well, and the related
development costs of offshore discoveries (no one wants to spend
USD 50 - 150 million on an offshore exploratory drilling with no
guarantee of field development, assuming the well is successful).
Moreover, only a few companies have the financial and technical
capacity to drill in deep waters. These tend to be the large
independents or majors, which are very reactive when it comes to
cutting discretionary spending in low oil price environments and
less responsive to price recoveries.
Based on this, we expect a recovery in Saharan Africa drilling
as soon as a recovery in the oil price takes place. However, in
Sub-Saharan Africa a post-2022 recovery is likely if prices recover
this year. It is worth noting that there is another factor that
could skew this: commitment wells. In 2015, there were more wells
drilled within the Kwanza Basin (Angola) than one might expect.
Majors didn't have many options to cancel or delay these as they
were contractual commitments and the penalties for not drilling
were similar to the cost of drilling.
Round-up
As one might expect, the oil price has a significant influence
on company strategies. Although the 2014-2015 drivers for the oil
price collapse are not strictly the same as in 2020, useful
inferences can still be made. A significant pullback in awards and
increase in relinquishments is expected. Distinct trends related to
company's region of incorporation are evident from historic data
and these trends will likely persist. African and European
companies have historically dominated the numbers of awards and or
deals concluded on the continent and although a drop off in line
with the oil price is expected, these groups will maintain a strong
African focus. North American companies have in the past reacted
rapidly and aggressively in reducing African exposure. Perhaps the
most recent tentative trend is the increasing activity of Russian
firms in Africa; it seems likely that this will continue and may
indeed be facilitated by the recent crises.
While African governments did respond to the 2014 oil price
crash, implementing tax incentives and legislation to stimulate
upstream activity and improve the economics for selected projects,
these measures came into place 3 to 4 years after the crash. This
suggests that governments generally lack the ability to react
rapidly, which does not bode well for the current crisis.
In the next 12 to 18 months - given the expected morose oil
price environment - company deals involving producing assets are
expected to face delays unless sellers are in a distressed
position. Exploration acreage awards will likely plummet, and the
number of relinquishments will rise. Explorers will hold acreage in
the absence of pending commitments, while entering successive
exploration periods which trigger near term commitments seems
unlikely.
Exploratory drilling activity is expected to follow a similar
trajectory to that of the 2014-2015 crash. Drilling will drop off
significantly - possibly to less than a third of what was observed
in 2019. Regionally, North African exploration drilling will
respond similarly in line with the recovery. However, in
Sub-Saharan Africa a recovery in drilling activity is not expected
until 2022.
IHS Markit experts are available for consultation on the
industries and subjects they specialize in. Meetings are virtual
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in a consultation with Justin Cochrane.
Etienne Kolly is an associate director at IHS
Markit.
Justin Cochrane is an associate director at IHS
Markit.
Posted 09 July 2020
Posted 09 July 2020 by Etienne Kolly, Associate Director, Upstream Intelligence, IHS Markit and