African oil & gas organisations plan for a response to low oil prices

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Overall, activity in the oil & gas industry across the African continent has slowed in the wake of the declining oil price in late 2014. Oil production in Africa has fallen from 10.1% to 9.6% of the world’s total in 2014. This has forced successful oil producers to re-strategise and plan ahead for a prolonged low price environment, employing measures like downsizing their workforce and re-evaluating their business strategies. Meanwhile governments are revisiting their legislations, according to PwC’s ‘Africa oil & gas review’.

PwC’s ‘Africa oil & gas review, 2015’ analyses what has happened in the last 12 months in the oil & gas industry within the major and emerging African markets. As oil prices declined in 2014, the industry response has been far-reaching with a significant reduction in headcount and other cost cutting measures.

The main challenges cited by survey respondents include uncertain regulatory frameworks, corruption and the inadequate physical infrastructure. In Tanzania more than 80% of respondents regarded regulatory framework uncertainty as one of the top challenges facing the business. Over 50% of respondents in Nigeria, Kenya and Angola viewed regulatory uncertainty as a major obstacle to their business in Africa.

Organisations identified the price of oil and natural gas as the most significant factor that would affect their companies’ businesses over the next three years. However, Kenya experienced marginal success over the previous year. The attention is still set on the East African region as it develops significant gas projects, while other players are considering South Africa as hopes for favourable legislation are renewed.

After a rush of bidding rounds last year, 2015 and 2016 appear to be comparatively quiet with only a handful of bidding rounds expected. This is partly due to the flurry of bidding rounds in the previous couple of years and a consolidation of these agreements together with the lower oil price and lower interest to invest.

In 2014/15 merger and acquisition activity was low. Around one-fifth of respondents have been targeted, and a third of respondents has targeted or intends targeting companies for acquisition. The main driver for M&A is opportunistic investment where investors are able to buy quality assets at a good price. For instance the deal between Shell and BG, which could see Shell acquiring BG’s assets, including those in Madagascar, Tunisia, Kenya, Egypt and Tanzania for US$86bn.

Around 40% of exploration and production (E&P) companies expressed interest in investing in drilling or exploration programmes. This is lower than the 70% interest recorded in 2014 as a strategic focus.

Regarding concerns around fraud and corruption, 98% of organisations said that they have an anti-fraud and anti-corruption programme in place, while 60% believe that their programme is effective at preventing and detecting fraud.

Though some governments have made some effort in trying to curb fraud and corruption, other officials continue to be implicated in fraudulent crimes throughout the continent. At the top of the list is bribery and procurement fraud.

The study also shows that there is an indication that the foundation of the uncertain regulatory framework is partially due to African governments’ lack of understanding of the dynamics of the sector. Essentially, governments are trying to extract too much value too early, when resource bases are still yet to be proven as commercial. This is especially the case in South Africa, where most respondents cited concern over regulation.

Oil and gas companies expect the Brent crude price to change over the next three years. However, if it remains within a $30 circle it will be fairly consistent. A high 93% expected the price to range between $50-80 in 2015, 90% expected it to be between $60-90 while 87% said in 2017 it will be between $60-90.

They further believe that difficult times are ahead of them as the oil price continues to decline and that the low commodity price would have a severe impact, in particular, on the oilfield services (OFS) companies.

The instability and low price have been outlined as one of the important factors that are posing problems within the sector, as more than 50% of E&P and non-E&P companies expect more price instability.

Companies also do not know what to expect regarding acreage/licence acquisition costs. In Kenya and Mozambique, 36% of respondents believe that the acreage cost will increase, while those from developed markets believe the opposite as potential reserves are affected by oil prices.

Finally, 50% of the survey respondents believe that the competitive environment is likely to change. The decline in oil prices, and concerns around corruption and skill shortages have further disadvantaged the industry. However, companies are encouraged to take advantage of this time and address the many challenges they are confronted with.

This will require strategic planning for continued, profitable presence in Africa. This will include amongst other things, getting costs under control, and attracting the strongest players within the industry that are looking for acquisition opportunities.

Chris Bredenhann is PwC’s Africa oil & gas advisory leader. This article was first published on PwC’s Africa Upfront blog.