The low price of oil has dashed initial hopes for oil and gas investment in Africa, but governments have the opportunity to turn things around.
The discovery of oil off the coast of Ghana in 2007 – and subsequent hydrocarbon finds in Uganda, Kenya, Tanzania and Mozambique – sparked an exuberant international response, with oil and gas investors and companies initially flocking to what many saw as a new frontier for the energy industry.
The excitement was understandable. The oil and gas finds in Mozambique had the potential to increase its GDP five-fold by 2040. Ghana’s economy, too, was being transformed. Prices were booming and the ‘Africa Rising’ narrative was taking hold across the world, with rising consumption and improved political stability changing investor perceptions.
Eight years on, with the oil price halved to below US$50 a barrel, the enthusiasm of those early days looks a little optimistic.
While there have been significant successes in oil and gas exploration in Africa, the overall pace of oil and gas investment still lags behind other destinations.
The cost of infrastructure and evolving local regulation often makes for a more uncertain investment in Africa, compared to markets which have been operating for decades.
Investors wary of risks
Rules requiring the inclusion of local companies and workers in oil and gas supply chains are positive for long-term economic development, but mean more upfront investment in the transfer of knowledge and skills.
Meanwhile, Africa’s ‘above ground’ risks, such as political complexity, insecurity, fiscal instability and regulatory change, are often higher than those found in markets with an established oil and gas sector.
Taxation and regulatory frameworks take time to establish in ‘new’ oil markets, and as such, can potentially be seen as a risk by investors. When the oil price is high, and capital abundant, investors are able to balance these risks with the potential returns. However, at lowered oil prices, investors look for lower-risk oil and gas markets – another factor stacked against Africa.
Currently, we are seeing evidence of investment flows in oil and gas being pulled back towards North America, as the competition for capital within the sector becomes more acute.
Meanwhile, as investors chase safe returns, Africa’s oil and gas sector increasingly has to compete for investment dollars with other sectors of the economy, such as the fast growing consumer market or technology sectors. As a result, the oil and gas sector lacks capital at a time when, ironically, investment capital has never been so available.
The current low oil price is an opportunity for Africa to review the relationship between host governments and oil and gas investors – and for African governments to do all they can to make the investment opportunities as conducive as possible.
When prices were at $100 a barrel, some governments (particularly those new to oil), ran the risk of being lulled into a false sense of security, assuming they had the upper hand in negotiating inward investment.
Today, however, with lower oil prices and competitive investment alternatives available in Africa and beyond, we are seeing an increased level of pragmatism on the part of some governments and policy makers. Public sector leaders and influencers are beginning to understand the importance for projects to go ahead, and go ahead as soon as possible.
Experience is everything. Having seen both the peaks and troughs of oil prices, African governments are more likely now to introduce investment-friendly policies, regulations and incentives, which could boost the growth potential of the oil and gas sector.
Playing a new game
Through my various conversations with governments across Africa, I am encouraged by a growing understanding of the need to create a more collaborative and investment-friendly environment.
This is the fourth oil price slump I have witnessed in my career. The timing of the recovery is unclear, but when it does happen, and the dust settles, the winners will be those countries that were able to attract investment dollars despite the downturn. The losers will be those inflexible destinations who stuck to the old rules that worked in a $100 a barrel world.
Africa can use this time to secure itself a position among the winners by creating a robust investment environment, avoiding the ‘feast and famine’ scenario that all too often accompanies oil price cycles.
Rob Tims is the managing director of Oil and Gas at Standard Chartered. This article was originally published on Standard Chartered’s Beyond Borders blog.