Oil and gas disruption triggers “fuel for thought”

“Fuel for thought” is the tantalising but very apt title of the 2019 edition of PwC’s Africa oil and gas review (“the PwC review”).  Against a background of a global energy market in an exciting phase of transition and disruption, issues included in the mix for this “fuel for thought” include investor sentiment towards the sector, and gas’s increasing prominence and price trends, and the resultant implications for Africa. Overall, the PwC review sees the stage set for a dynamic future for Africa’s hydrocarbon-rich and import-dependent countries, investors, national oil companies (“NOCs”) and international oil companies (“IOCs”).

Over the last decade, the oil and gas industry (similar to the mining industry) has offered little to no equity returns for shareholders, leading to increased pressure on companies to preserve value and follow stringent capital allocation models. Nevertheless, globally capital expenditure improved in 2018 in line with the 2017 oil price recovery (reversing the decline triggered by the oil price crash of 2014–2016), but Africa’s capital expenditure showed a significant decline, which continued into 2018.

2018 was a successful year in oil & gas exploration globally with discoveries approximately doubling those made in 2017.  However, in both 2017 and 2018 West Africa had the only African discovery to make it onto the 2017 and 2018 “top 10” list for new discoveries - a result not unexpected given the reduced exploration spend.  While exploration provides the pipeline for future developments, the short term focus in Africa will be development of known resources - especially its gas reserves. With 509.6 trillion cubic feet (“tcf”), a 4.5% increase from prior year,  Africa now has 7.3% of the world’s proven gas reserves.

One of the most dramatic finds in Africa over the past decade is Mozambique’s natural gas estimated at over 180 tcf, which has already unlocked the first three large-scale Liquified Natural Gas (“LNG”) projects. These projects, together with project expansion phases and additional exploration, mean that by 2030 Mozambique could become the third largest global LNG producer after Qatar and Australia. The PwC review includes a special section focussing on Mozambique, including a summary on the three key LNG projects that have been secured, as well as commentary on the potential economic contribution to the economy (including additional annual potential impact of USD 24.5bn to gross domestic product (“GDP”) and USD 6.8bn to total government revenue).

By contrast, another special section of the PwC review (titled “Nigeria’s oil & gas sector: lessons to be learned”) highlights how development can be stifled by regulatory complexity and uncertainty.  It notes that many industry players and investors are holding back on making high-volume core investments in the sector until a clear regulatory direction for the country is set and implemented.

Of particular interest in the PwC review, especially for Tanzania, is the commentary on gas.  On the one hand, the environmental sustainability agenda and consequent decarbonisation drive will see a continued increase in the demand for gas, with LNG demand projected to have a 3% compound annual growth rate from 2020 to 2040, and China remaining the biggest growth market for LNG by more than doubling its current demand.  Indeed, by 2030 gas is likely to become the world’s number two fuel. However, the pricing side for gas has also been disrupted with the decoupling of natural gas prices from oil prices, and US LNG exports creating increased flexibility of global energy marketing and trading.  Indeed, current LNG oversupply is putting downward pressure on global LNG prices, a trend which is likely to continue over the next decade or two.

Given this era of increased uncertainty, reduced margins, tighter cash flows and changing risk profiles, the PwC review anticipates a highly competitive market for securing long-term sales agreements for gas.  For Tanzania, with proven natural gas reserves of 57 trillion cubic feet (“tcf”), most of which (49.5 tcf is far offshore), it certainly does provide food for thought!

By David Tarimo, Country Senior Partner - PwC Tanzania.