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Can Shareholders Anticipate a Pot of Gold from the Oil Majors?

Section: Opinion · April 5, 2023 · No comments |

By Gerard Kreeft

All of the oil majors— Repsol, BP, Shell, ENI, TOTALEnergies, Chevron, ExxonMobil and Equinor—are enjoying their highest earnings ever. Is the message from shareholders: do not tamper with our cash machine?

In spite of increased dividends and stock buyback programmes by oil majors, their share prices have shown mixed results. In the period 2018-2022, US oil giants Chevron and ExxonMobil have seen their share prices flourish: Chevron up 39% and ExxonMobil 26%. European oil stocks have floundered: Repsol down 5%, BP down 19%, Shell down 17%, ENI down 17%, TOTALEnergies up 7%. Only Equinor was up 57%.

In the period January-March 2023 their stock market prices have not changed.

In the same period (January 2018-December 2022) the Dow Jones Industrial Index rose 31%: increasing from 25,295 to 33,147.

Table 1: Stock market prices of majors 2018-2022(NYSE)

Year

Repsol

Shell

ENI

TOTAL

Energies

Chevron

ExxonMobil

Equinor

2018

$17

$43

$69

$35

$58

$128

$87

$23

2022

$16

$35

$57

$29

$62

$179

$110

$36

Note: Values based on January 2018 and December 2022

Why is it that the share prices of Chevron and ExxonMobil have performed so well and their European counterparts have done so poorly (with the exception of Equinor)?

The message from the investor community is the clarity of the message. Chevron and ExxonMobil have as their mainstay–the production of hydrocarbons and this is the message that is preached. New energy policies including CCS (Carbon Capture and Storage) and other new energy initiatives make up only between 15-20% of their capital budgets. In the case of Chevron some $3Billion per year based on a capital budget of $15-$17Billion; ExxonMobil’s new energy comes in at $3Billion per year based on a capex of $23- $25Billion. The message is clear and simple: we are oil companies pure and simple. Done in the good tradition of John D. Rockefeller, the spiritual father of both companies.

European oil giants, have seen their dualism—wanting to maintain their green image and also profiting from the oil bonanza—fall out of favour by company shareholders. Their clarity of messaging has been found wanting. The sole exception is Equinor who has stated that the majority of its capex budget will be from renewables by 2030.

The Message from BP

For 2022, BP posted a profit of $27.7Billion( underlying replacement cost profit). In the period 2018-2022, BP shares were down 19%.

A key component of BP’s original green strategy was to build an investment structure, which would require only a few skilled accountants. The company sacked employees or was preparing delegating BP’s headcount to its joint ventures. The goal was to become lean and mean, reducing costs and, hopefully, increasing margins. In short becoming an investment vehicle. Instead the strategy has been turned on its head.

In Africa BP is becoming the junior partner to ENI. In Angola BP has merged its upstream activities with ENI to form Azule Energy. ENI has also taken over BP’s Algerian assets.

In 2020 BP painted a glowing picture of how it would attain its green future:

From 2025 onwards, when its low-carbon projects would start to kick in, expected growth of between 12–14% would be maintained.
Reducing its oil production by 40% by 2030.
Its $25Billion divestment would provide the basis for up-scaling its low-carbon business.
Spending $5Billion per year to green itself and by 2030 the company would have 50 GW of net generating capacity.

Now the company is clawing back on reducing its oil production. Again, the duality of message has not helped the BP share price.

On the green front the company has initiated a series of joint ventures to speed up its transition.

BP and Ørsted have partnered to develop zero-carbon ‘green hydrogen’ at BP’s Lingen Refinery in north-‎west Germany, BP’s first full-scale project in a sector that is expected to grow rapidly. The 50 MW electrolyser project is expected to produce 1 ton of ‎hydrogen per hour – almost 9,000 tonnes a year – starting in 2024. The project could be expanded to up to 500 MW at a later stage to replace all of Lingen’s fossil fuel-based hydrogen. Final investment decision is due later this year.
BP and Equinor revealed that BP will become a 50% partner of the non-operated assets Empire Wind (offshore New York State) and Beacon Wind (offshore Massachusetts). BP and Equinor will jointly develop four assets in two existing offshore wind leases located offshore of New York and Massachusetts that together have the potential to generate power for more than two million homes.

BP joined Statkraft and Aker Offshore Wind in a consortium bidding to develop offshore wind energy in Norway. The partnership—in which BP, Statkraft, and Aker Offshore Wind will each hold a 33.3% share—will pursue a bid to develop offshore wind power in the Sørlige Nordsjø II (SN2) licence area.

The Message from Shell

Shell has just announced its highest results of the last 115 years: $40Billion in annual adjusted profit for 2022. Yet investor interest has been muted at best. Shell’s share price has only shown a downward spiral of 17% in the 2018-2022 period. Annual capital expenditures in the near term, according to Shell, could be in the range of $23-$27Billion up from an earlier estimate of $21-23Billion. Then the company stated that its renewables and energy solutions would be $2-3Billion, marketing $3Billion, integrated gas $4Billion, chemicals and products $4-5Billion, and upstream $8Billion. A more detailed breakdown is not available.

While its competitors—BP and TOTALEnergies—are busy buying and creating gigawatts of new energy, Shell maintains that it wants to focus on the value it generates for shareholders across the entire value chain. While the company is eager to proclaim value generation, there is little indication to shareholders what this means. For the period 2025-2030 Shell lumps together the capital budgets devoted to three categories:

Growth which entails renewables and marketing will receive 30% of Shell’s capital budget;

Transition which entails Integrated gas and chemical & products will receive 30-35% of Shell’s capital outlay; and

Upstream will get 30-35%.

The Dilemma of BP and Shell

Both BP and Shell continue to believe that their upstream divisions will provide the funding for their green future. Yet their share prices demonstrate that there is little trust in this vision. Depending on their upstream portfolio to lead them to a bright new green future is central to their dilemma. Upstream oil and gas is viewed by shareholders as a sunset industry. Upstream references, perhaps, a distant memory of the integrated oil companies of 50 years ago. Not one to build a green future on.

Both companies continue to believe in a dash of green and fail to understand the basic tenets of how the Green Alliance—Enel, Engie, Iberdrola, and Ørsted–is understood and viewed. What has set these companies apart is that they have created a huge competitive advantage which will be hard to challenge for newcomers. They have moved well beyond simply dabbling in green energy. These companies have become specialists and now moving on to the next level: creating a digital platform on which value does not reside in owning resources but rather in managing data-driven ecosystems. They are essentially borrowing a chapter from Uber, which does not own taxis or Booking, which does not own hotels. Some members of the Green Alliance have established new goals, such as CO₂ neutrality by 2040, instead of 2050 to which Shell is pledged. Consider the competition.

Enel: committed to achieving CO₂ neutrality by 2040 instead of 2050, achieving 75% of electricity from renewables and 80% digitalization of its customers on the grid by 2025. and having an installed generating capacity of 75GW by 2050.

Engie: pledged to reduce to CO₂ neutrality by 2045, 45% of investments is focused on renewables and by 2030 will have 80GW of installed generating capacity.

Iberdrola: in the period 2023-2025 the company will invest $50Billion and achieve net zero for Scope 1, 2 and 3 before 2040. By 2030 the company will have installed capacity of 100GW, valued at $70Billion.

Note: Essentially, scope 1 and 2 are those emissions that are owned or controlled by a company, whereas scope 3 emissions are a consequence of the activities of the company but occur from sources not owned or controlled by it.

Ørsted: the Danish wind energy pioneer, continues to set new records. Ørsted share price in December 2022 was $93; five years earlier in 10 June 2016 it was $37. By 2030 the company’s goal is to have an installed capacity of 50GW. Ørsted is also involved with the building of two energy islands– Bornholm and North Sea– which will deliver 10GW of power

How will shareholders react to these companies in 2023? To date there is good news and bad news for green energy companies.

Table 2: Stock market prices of new energy companies 2018-2022

Year	Enel	Engie	Iberdrola	Ørsted
2018	$5	$16	$7	$49
2022	$5	$14	$12	$93

Enel, the Italian power company has seen its share price remain flat. Engie, the large French energy giant has seen its share price decrease by 12.5%. Iberdrola, the Spanish power company has had an increase of 71% and Ørsted, the Danish power company, has seen its stock soar by 90%.

Some Final Thoughts

BP has become a company in search of its soul. BP’s strategy of reducing its oil production by 40% by 2030 has been cast aside.

BP’s Greater Tortue Ahmeyim (GTA) field in Mauritana and Senegal is one of the few oil and gas projects the company is developing.

For 2023 the company has earmarked up to $7.5Billion for oil and gas projects.

Shareholders continue to habour doubts about BP’s green vision.

Shell

Shell should seriously consider splitting the company in two key divisions:

An upstream division which could be hived off to joint venture with other upstream divisions to ensure economies of scale;
An integrated gas division which could prove to be Shell’s star asset.

Wood Mackenzie’s AET-2 Scenario (Accelerated Energy Transition Scenario) predicts that in the following decades, market power will shift from OPEC to the giant gas producers, such as the USA, Russia, and Qatar.

According to AET-2, the “Era of carbon-neutral gas is born. AET-2 would require $300Billion to support Liquified Natural Gas growth globally and $700Billion to support dry gas development in North America.” Given that Shell is the global leader of LNG (liquid natural gas)this is certainly a sweet sound for Shell’s LNG business.

Downstream could also prove to be a key energy transition asset. Shell’s REFHYNE Project, the Rhineland Refinery in Germany, could well become the precedent that the company needs to ensure it becomes the leading supplier of green hydrogen, where hydrogen production is powered by renewable energy for industrial and transport customers. Could the REFHYNE Project be duplicated many times over to ensure that green technology becomes a key ingredient in the energy transition?

Pay attention to Shell’s Pernis refinery in the Netherlands. One of the largest in Europe, Pernis refinery has a 400,000 b/d capacity and a complexity enabling the processing of many different crude types. The site is already deeply integrated with chemicals production and is being transformed into an integrated energy and chemicals park that will deliver low-carbon products.

The current message from shareholders is: maintain the cash bonanza and do not tamper with our cash machine. No doubt the share price of Chevron and ExxonMobil will continue to flourish. Will Europe’s oil and gas companies—in particular BP and Shell—resolve their clarity of messaging? How long will this cash bonanza last?

Finally, one should not mistake the current cash bonanza with energy security. Rather this is a sign of energy insecurity which could very quickly end without further notice. Energy security will continue to be a key theme for the coming generations and no doubt the role of the members of the Green Alliance will be crucial.

Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise. He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe. Kreeft has Dutch and Canadian citizenship and resides in the Netherlands. He writes on a regular basis for Africa Oil + Gas Report and is a guest contributor to IEEFA(Institute for Energy Economics and Financial Analysis) based in Cleveland, Ohio, USA. His book ‘The 10 Commandments of the Energy Transition ‘is on sale at https://books.friesenpress.com/store/title/119734000211674846/Gerard-Kreeft-The-10-Commandments-of-the-Energy-Transition.

PNC Forum: The Energy and Consistency of Industry Players-OPINION

Section: Opinion · November 28, 2022 · No comments |

By Esueme Dan Kikile

In 10 unbroken years of active participation in the Practical Nigerian Content (PNC) Forum, organised by the Nigerian Content Development and Monitoring Board (NCDMB), the leading lights of Nigeria’s oil and gas industry have signified that local content has something of a creedal force in their ranks. In-country value addition through enhanced local capacities and capabilities remains the unchanging focus – what they must pursue and actualise to enhance the country’s economic performance and development.

The apostolic zeal of the industry stakeholders, as they assemble in their hundreds from year to year to appraise the state of the industry and to determine what way(s) to maximise opportunities along lines spelt out in the Nigerian Oil and Gas Industry Content Development Act, 2010, is most remarkable. In the spirit of collaboration and stakeholder engagement, issues of topical importance are ever adopted as themes for presentation and deliberations in different editions of the Forum.

Innovations at NCDMB and results

NCDMB and stakeholders have been thus guided in subsequent actions by way of interventions, policies and compliance. The Board gets more and more innovative as challenges emerge through workshops and exhibitions. Concepts and undertakings such as Nigerian Oil and Gas Technology (NOGTECH) Hackathon, Nigerian Oil and Gas Opportunity Fair (NOGOF), Nigerian Oil and Gas Industry Content Joint Qualification System (NOGIC JQS), and research and development funding, were in response to felt need and have bolstered the sector.

“Key Highlights of this year’s PNC Forum from December 5-8, 2022

Harnessing Nigerian content opportunities for indigenous companies in Nigeria’s “Decade of Gas”
What opportunities have been revealed by the Seven Ministerial Regulations for increasing Nigerian content compliance?
Outlining Nigeria’s future energy mix and Nigerian content objectives over the next 30 years
What are the enablers required to bridge the capacity gap for improved local content implementation with a growing focus on gas?
How can indigenous companies attract required funding?
What efforts are in place to explore Nigerian content opportunities in AfCTA?”

Together, the industry regulator and the oil and gas companies – upstream, midstream and downstream – have moved mountains, radically altering the status and image of Nigeria as rent-seeker and placing her in a respectable position as resource-endowed and with appropriate technological capabilities to efficiently exploit and utilise hydrocarbons.

What difference NCDMB has made

In twelve (12) years of implementation of the NOGICD Act, 2010, Nigeria, through the Board’s well targeted strategic interventions, has developed the widest range of competencies and facilities for engineering, procurement, fabrication, and a lot else, and thus upped in-country value retention from less than five (5) per cent in 2010 to forty six (46) per cent in the first quarter of 2022. And seventy (70) per cent is in focus as we march towards the 2027 terminal date of the Board’s Nigerian Content 10-Year Strategic Road Map.

Today the world-class fabrication yards and pipe mills have turned Nigeria into a hub for related businesses in the Gulf of Guinea, just as the country’s service companies now operate as international servicing companies in different African countries. That’s the success story of the NCDMB made possible by far-sighted and resourceful leadership that carries all stakeholders along, unhesitatingly intervening in material terms to bolster operational capabilities of companies. This year’s edition of the PNC Forum, scheduled for December 5-8, 2022, is another platform with great possibilities for participants and the wider society.

What to expect from PNC 2022

Face to face with potential clients and investors, participants in PNC Forum 2022 in Uyo, Akwa Ibom State, will deliberate on the theme, “Deepening Nigerian Content Opportunities in the Decade of Gas.” Key topics, as highlighted at the PNC dedicated website are:

Harnessing Nigerian content opportunities for indigenous companies in Nigeria’s “Decade of Gas”
What opportunities have been revealed by the Seven Ministerial Regulations for increasing Nigerian content compliance
Outlining Nigeria’s future energy mix and Nigerian content objectives over the next 30 years
What are the enablers required to bridge the capacity gap for improved local content implementation with a growing focus on gas?
How can indigenous companies attract required funding?
What efforts are in place to explore Nigerian content opportunities in AfCTA?

Conclusion

In the broadest terms the PNC Forum is billed “to help shape the Nigerian Content Agenda for the next twelve months.” Industry regulator and all stakeholders would hopefully be on the same page all the way, directing energies and resources in a manner that would best promote corporate success as well as national development. But economic spin-offs never fail, particularly for a host city and state, in this case, Uyo and Akwa Ibom, whose hospitality industry is already bubbling in anticipation of several hundreds of guests in early December.

PNC Forum 2022 is the place to be for fresh ideas and strategies in the nation’s quest for economic development through effective and efficient management of her abundant hydrocarbon resources, especially gas as the transition fuel for Nigeria.

Esueme Dan Kikile ESQ, is the Manager, Corporate Communications, NCDMB

TOTAL Can Do Better than the East African Crude Oil Pipeline(EACOP)-OPINION

Section: Opinion · November 13, 2022 · No comments |

By Gerrard Kreeft

Will the East African Crude Oil Pipeline (EACOP) ever be constructed? Public dissent has been mounting and financial hurdles have yet to be resolved. Continued delays only make the completion of this on-going saga more uncertain.

The Project

EACOP is being constructed in parallel with the Tilgenga and Kingfisher upstream development projects. Tilenga, operated by TOTALEnergies, will produce some 200,000 Barrels of Oil per Day (BOPD) and Kingfisher, operated by CNOOC(China National Offshore Oil Corporation) will produce some 40,000BOPD. Each development will consist of a Central Processing Facility (CPF) to separate and treat the oil, water and gas produced by the wells. Kingfisher will have 4 well pads and a CPF and Tilenga has 31 well pads. The Ugandan Refinery project has a right of first call to 60,000BOPD, with the remainder of the oil being exported via EACOP.

EACOP will have a length of 1,443 kilometres and export crude oil from Kabaale – Hoima in Uganda to the Chongoleani peninsula near Tanga port in Tanzania. At peak capacity it will handle 246,000BOPD.

The project dates its origins back to 2004 when Tullow Oil gained three exploration blocks following its acquisition of Energy Africa. In April 2020 Tullow sold all of its oil assets to TOTALEnergies for $575Million in order to reduce its debt and strengthen its balance sheet. TOTALEnergies’ vision was simple: purchasing Tullow Oil assets for next-to- nothing made it a no-brainer to move on to developing Tilenga and together with CNOOC, Kingfisher and EACOP.

The Next Hurdle

Time and events on the ground have proven difficult.

For example, the European Parliament’s resolution of September 2022, condemning human rights in Uganda and Tanzania, linked to investments in fossil fuel projects, have proven embarrassing to the French oil giant.

French President Macron has also indicated that France does not support this project.

Various interest groups have been extremely vocal and successful in their stand against the project:

The Climate Accountability Institute(CAI) have charged that during the 25-year lifespan of the project associated oil emissions would be more than double those of Uganda and Tanzania in 2020.

Omar Elmawi, coordinator of the Stop EACOP campaign, said: “EACOP and the associated oilfields in Uganda are a climate bomb that is being camouflaged us as an economic enabler to Uganda and Tanzania. It is for the benefit of people, nature and climate to stop this project.”

Stop EACOP Campaigners argue that, as the world’s longest heated oil pipeline which will run through many populated areas, it will contribute to poor social outcomes for those displaced. They also mention the significant risk to nature and biodiversity, as the pipeline runs through large areas of savannah, zones of high biodiversity value, mangroves, coastal waters, and protected areas, before arriving at the coast where an oil spill could be dire.

According to Elmawi, TOTALEnergies is still in search of $3Billion in order to complete the financing of EACOP. To date, he says, 24 banks, 18 insurance companies, and export credit agencies in France, Germany, Italy and the UK have refused supporting this project. “Already the project has suffered a three year delay”, the STOP EACOP campaigner claims.

How much delay can TOTALEnergies withstand before it walks away from the project and declare the necessary impairment charges? The delay will also ensure that TOTALEnergies’ financial team will be re-evaluating their energy portfolio. Think back to the summer of 2020 when TOTALEnergies announced a $7Billion impairment charge for two Canadian oil sands projects. This might have seemed like an innocuous move, merely an acknowledgement that the projects hadn’t worked out as planned.

Yet it opened a Pandora’s box that could change the way the industry thinks about its core business model—and point the way towards a new path to financial success in the energy sector.

While it wrote off some weak assets, it did something else: TOTALEnergies began to sketch a blueprint for how to transition an oil company into an energy company.

Patrick Pouyanné, TOTALEnergies’ chairman and chief executive, said that by 2030 the company “will grow by one-third, roughly from 3Million barrels of oil equivalent per day (BOEPD) to 4Million BOEPD, half from LNG, half from electricity, mainly from renewables.” This was the first time that any major energy company had translated its renewable energy portfolio into barrels of oil equivalent. So, at the same time that the company slashed “proved” oil and gas from its books, it added renewable power as a new form of reserves.

TOTALEnergies’ emphasis is on ensuring that its LNG portfolio and its renewables continue to grow to ensure shareholder income. Pesky oil projects which highlight climate opposition and encourage environmental activism, both local and international, are not the type of projects which promote TOTALEnergies’ shareholder stability.

Finally, COP27, the next UN Climate Conference, to be held in November 2022 in Egypt, will no doubt also become a rallying cry for stopping EACOP. Could EACOP become an African stranded asset much like the Keystone Oil Pipeline in the USA?

Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise. He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe. Kreeft has Dutch and Canadian citizenship and resides in the Netherlands. He writes on a regular basis for Africa Oil + Gas Report, and contributes to IEEFA(Institute for Energy Economics and Financial Analysis). His book the 10 commandments of the Energy Transition is on sale at https://books.friesenpress.com/store/title/119734000211674846/Gerard-Kreeft-The-10-Commandments-of-the-Energy-Transition

Trust the South Africans to Throw Away the Opportunity

Section: Opinion · April 6, 2021 · No comments |

By Toyin Akinosho

In 2015, PricewaterhouseCoopers PwC, the global advisory firm, declared that a large pool of respondents to its annual survey were concerned that South Africa’s policy makers did not understand the hydrocarbon industry.

I read the report with alarm. I responded with a sense of outrage.

Governments sometimes make the wrong calls, I argued in a column, in a monthly edition of Africa Oil+Gas Report, with the example of the UK Government’s tax regimes that led to massive disinvestment in the North Sea. “But you can’t dismiss an entire government as having no clue about an industry”, I declared.

At the time, I was impressed by Pretoria’s roll out of its Renewable Energy Independent Power Producer Procurement (REIPPP) programme which had, between 2012 and 2015, attracted billions of dollars of investment in over 5,000MW of renewables without a single cent coming from the treasury. The government was considering the same strategy for getting natural gas into the energy mix. If that worked, I enthused, it could alter the downward trajectory of Africa’s most industrialised economy.

But I’d spoken too soon. By mid-2016, the country’s widely applauded renewable energy programme had been thrown out the window. Just one statement by Brian Molefe, then the CEO of Eskom, South Africa’s be-all and end-all of energy issues, and the entire REIPPP had collapsed like a park of cards. He said that the projects were too expensive, and when Eskom factored what it would pay the producers into its cost of delivering power from the sun and wind into homes, electricity tariffs would balloon. It turned out that Mr. Molefe’s statement wasn’t true in every material particular, but his remarks had shut down an entire industry. It would take the country a full four years to return to the renewables track, but significant opportunity had been lost.

Today, with the country gripped by excitement around significant discoveries of natural gas and condensates off its western coast by TOTAL, the French oil major, there’s a frenzied debate about whether government would speedily push, for passage, the draft Upstream Petroleum Resources Development Bill (Upstream Bill), released in December 2019.

It had always been assumed that, as an industrialised economy, South Africa has the absorptive capacity to monetise large discoveries of hydrocarbon at terribly short notice. In reality, South Africa is closer to what Mozambique was in 2010; a jurisdiction without a clue about how large sized, deepwater gas would be developed, than it is to Egypt in 2015; which took the discovery of 30Trillion cubic feet of gas in 2,000 metre water depth, to market by 2017. “One of the obstacles to open the economic potential of South Africa’s offshore operations is a lack of legislative certainty”, lawyers would tell you, “which has also been acknowledged as an investor deterrence:”

My experience, as an energy reporter watching the country’s attitude to procurement and utilization of hydrocarbon resources and allied energy industry, is that there’s no sense of urgency to create a coherent framework.

As I have written severally in Africa Oil+Gas Report, the absence of a framework for gas intake and utilisation is a core reason for the looming shutdown of the 200Million standard cubic feet of gas per day (200MMscf/d) state-run Gas to Liquid (GTL) plant which, at inception, was the largest such plant in the world. For 14 years now, as far as I know, government officials have expressed concern about the decline of gas feedstock for the Gas to Liquid plant, but all they do is flail their arms; no one has lifted a finger to do anything about alternative feedstock.

The absence of a coherent guidance on gas to industry is why Sasol’s importation of (currently about) 400Million standard cubic feet of gas a day does not come across as a leverage factor for what the country can do with gas.

In mid-2015, the government announced it was working on a Gas Utilisation Master Plan, GUMP, which analyses the potential and opportunity for the development of South Africa’s gas economy and sets out a plan of how this could be achieved. Key objectives were to enable the development of indigenous gas resources and to create the opportunity to stimulate the introduction of a portfolio of gas supply options. It’s been 68 months since the first announcement and the details of plan remains resolutely unfinalized.

The Upstream Petroleum Resources Development Bill (Upstream Bill), is the most current edition of a draft legislation that has stayed in parliament for over 10 years. Let’s remember how we got here:

Between the moment of the faceoff between Shell and the antifracking activists of the Karoo Basin in 2011 and the announcement of the GUMP in 2015, the Mineral and Petroleum Resources Development Act (MPRDA) returned to parliament for amendment. It stayed in debate mode, unpassed, for seven years, challenged, in part by Exploration and Production companies for harbouring certain clauses, one of which entitles the state to a 20% free carry in exploration and production rights and an ‘uncapped’ further participation clause allowing the state up to 80% at an agreed price or under a production sharing agreement. In the event, the executive arm of government decided to disaggregate oil and gas from mineral resources and present a different law in parliament that focuses strictly on hydrocarbons. That is how it became the Upstream Petroleum Resources Development Bill (Upstream Bill). Still, it has been talk talk talk.

There’s a bit of good news now, of course. The S.A. Government has enunciated a tactic, not a strategy for getting natural gas into the electricity fuel mix. In March 2021, energy minister Gwede Mantashe announced preferred bidders to provide emergency power to the country, which continues to face power outages. Of the eight bidders that are allowed provide a total of 1,845 megawatts from various technologies to be connected to the grid by August 2022, three bidders will provide 1,220MW of power from LNG. This will be the first formal introduction of natural gas into the country’s energy mix and it is not coming from any broad-based strategy to bring in gas to “energise the economy”. Let me provide a quick context.

In October 2016, a preliminary information memorandum, outlining the scope of a LNG Gas-to-Power programme was released by the Independent Power Programme office IPPO for prospective and interested bidders. The programme planned up to 3,000MW of Capacity from the gas-fired power generation facilities. Its first phase, targeting 2,000MW, aimed to identify and select successful bidders and enable them to develop, finance, construct and operate a gas-fired power generation plant at each of the two ports: Nqurra and Richards Bay in the Eastern Cape and Kwazulu Natal provinces respectively. The successful bidder would be required to put in place the gas supply chain to fuel the plant with gas from imported LNG and would provide the anchor gas demand on which LNG import and regasification facilities can be established at the Ports, providing the basis for LNG import, storage and regasification facilities, available also for use by other parties for LNG import and gas utilisation. This project has been on the back burner in the last four years and it has stalled. This IPP plan is not to be confused with the emergency power announcement of March 2021.

Nor can we tie the emergency power announcement to the Integrated Resource Plan, or IRP, published in October 2019, which seeks to chart the means by which the country will manage and meet its electricity needs leading up to the year 2040. The plan provides insight into the state’s 20-year approach to SA’s energy mix IRP 2019 envisages, among other energy types, some 1000 MW of Gas To Power capacity being introduced into the South African grid by 2024, with a further 2 000 MW to be added by 2027.

If we consider all of these halting steps and indecisions, we get a sense that there is no blueprint in the horizon, to ensure: Gas to Industry (GTI) through new gas infrastructure to such industrial zones as Mossel Bay, Coega (South) West Coast to Saldanha/Cape Town, which can reduce energy costs for SA manufacturing; enhance expansion/modernisation of existing state owned GTL plant; roll-out of Compressed Natural Gas (CNG) fuelled transport; natural filling station network and repowering of truck and bus fleets, leading to balance of payments savings (reduced oil imports); gas to communities (GTC) which can allow huge benefits for rural/poor communities (e.g. reduced wood consumption, increased safety).

Policy paralysis around hydrocarbon resources, whether mined in country or imported, is at the heart of why a natural gas market hasn’t taken off properly in South Africa.

The political elite says all the right things all the time about what natural gas can do for the slumbering economic giant of Africa. But nothing actually gets done.

This piece was originally published in the December 2020 edition of Africa Oil+Gas Report. The March 2021 announcement that include LNGs for emergency South African power, is the only addition in this version.

Despite the Climate, Nigerian Oil Industry Delivered on a Few Things in 2020

Section: Opinion · December 30, 2020 · No comments |

By Adeniyi Adeoloye

The petroleum industry is in a bust cycle at the moment. The valley, this time, is deeper than any low the industry has been for decades.

But in the face of the hydrocarbon demand destruction brought on by the pandemic and the ensuing deferments of project FIDs, massive scale back of operations, and significant cash losses, the Nigerian Oil Industry delivered on some key issues.

NLNG Awarded EPC for Her Train 7

Nigeria Liquefied Natural Gas (NLNG) Ltd, in May 2020, in the thick of a global lockdown, awarded the Engineering, Procurement and Construction EPC contract for its Train 7 project to three companies. Saipem, Chiyoda, and Daewoo.

Africa’s biggest LNG producer expects over $12Billion to be invested in the project with anticipated 12,000 jobs during the peak of construction.

The Train 7 when completed will see Nigeria’s LNG output increase from the current 22Million Metric Tons Per Annum (MMTPA) to 30MMTPA, a whopping 35% increase. The project also set ambitious local content targets (total in-country engineering hours set at 55%, while the procurement for execution of the project is also pegged at 55%) which will spur economic activity as well as enhancing technical capacity of indigenous companies and people.

Waltersmith Petroma Commissions a 5,000Barrels of Oi Per Day Refinery

Waltersmith Petroman, a Nigerian independent, on November 24, 2020, commissioned her 5000 barrel per day refinery, the first phase in a planned 50,000BPD refinery project. The ground-breaking of the second phase (a 25,000BPD Condensate Refinery Project) was also carried out on the same day.

The first phase is expected to bring 271Million litres of refined petroleum products (Heavy Fuel Oil, Dual Purpose Kerosene, and Automotive Gas Oil) to the national and regional market. The delivery of the project is sure a step in the right direction, as it will help bridge some demand gap, conserve scarce foreign exchange deployed in importation of refined products, and provide jobs for the teeming youth population.

The Return of the Petroleum Industry Bill

The Petroleum Industry Bill is back on the floor of the National Assembly, Nigeria’s bicameral house of legislature.

It was forwarded to the Assembly by President Muhammadu Buhari, in September 2020, for consideration and passage. The Bill has had a long life of going to the Assembly and ending up not becoming law. The first time it was introduced at the National Assembly was in 2008. It has returned, in several variations, thrice after that.

The purpose, however, is the same: to reform the country’s hydrocarbon industry. The bill seeks to provide a legal, governance, regulatory and fiscal framework for the Nigerian Petroleum Industry and Development of Host Communities.

The Senate, the Upper Chambers of the House, introduced the Bill for First Reading, at its plenary session of Wednesday, 30 September 2020.

The National Assembly leadership, which includes The Senate [resident Ahmed Lawan and the Speaker of the House of Representatives Femi Gbajabiamila, has repeated assurances that the Bill will become law this time. The PIB proposes reforms which many industry stakeholders believe will bring clarity to the fiscal regime and spur investment. Amongst many other items, the bill seeks to spinoff stake in the State hydrocarbon company NNPC to a commercially driven and profit focused enterprise to be called NNPC Limited; to be incorporated within 6 months of the passage of the bill. In addition, the new bill also provide for two regulators – one for “Upstream operations and the other for Midstream and Downstream”. These entities will succeed Department of Petroleum Resources – DPR, the current industry regulator. Furthermore, the new bill makes provision for “Host Community Trust Fund” which is set out to develop key infrastructural and human capital development in areas of operations. Although the passage of the bill has been postponed to mid 2021, there is a sense that the jinx about the PIB will be broken with this administration and this edition of the Bill will actually become an act of parliament.

DPR’S Call for Marginal Field Bid Round

Department of Petroleum Resources (DPR), Nigeria industry regulator called for a bid round for a total of 57 fields in land, swamp, and shallow offshore terrains in the outgoing year 2020. This round came to many observers as a surprise given the peculiarity of the time (low oil price regime as caused by the twin knock of a pandemic and Russia – Saudi’s crave for market dominance) the bid was announced. Nigeria’s last licencing round took place in 2007. The first and last Marginal Field bid round was conducted in 2003.

The data room and other processes were done virtually given the reality of the pandemic. The completion of this bid campaign should help increase Nigeria’s oil production, create jobs and put money into government coffer in earned signature bonus, taxes and royalties.

This piece is contributed by Adeniyi Adeoloye, a Petroleum Geoscientist who lives and works in Dublin, Ireland. He holds a Master of Science Degree in Petroleum Geoscience from the University College, Dublin Belfield, Ireland. He is passionate about the transformation of the study of geosciences and market intelligence in the Africa Oil and Gas landscape. He will contribute from time to time to Africa Oil+Gas Report.

Be Bold, Cut Out Entitlement: No One Owes Us Anything

Section: Opinion · December 29, 2020 · No comments |

By NJ Ayuk

In 2021 most opportunities in the energy sector and in business in general will go to those who show up and negotiate better deals and get involved in making African resources work for us. Forget handouts, foreign aid and government handouts.

As I wrote in the second edition of Billions at Play: The Future of African Energy and Doing Deals, in 2021, young African dealmakers, negotiators and lawyers will have to embrace a new mindset to win. They will have to mobilize their resources and advocate for important principles of personal responsibility, smaller government, lower taxes, free markets, personal liberty, and the rule of law.

In 2021, African gas projects are going to be in the news. Companies will push to get them going, from Mozambique to Nigeria and from Equatorial Guinea to Tanzania.

If some extremists have their way, none of these projects should happen and our people should be left in the dark. Question we must also ask is how Africans are going to participate when it comes to jobs and contracts. In 2021, we cannot be bystanders. We all can’t afford to.

Africa’s economic recovery from Covid-19 and our global significance in the era of energy transition and attacks on our energy sector must be driven by the talent and entrepreneurship of its people.

Our continent is still struggling when it comes to establishing democratic and trade institutions, we must push for more democracy. Democracy isn’t perfect but it is the best of all political practices and we must embrace it.

I have a few words of advice for this generation, for Africa’s young attorneys, entrepreneurs, rising stars and dealmakers:

Never lose sight of the significance of your work.

By negotiating effectively for African businesses and governments, you can play a huge role in transforming the lives of hundreds of thousands of Africans. Few things in life are more satisfying.

I am proud of the law group I have built, but I consider the work I have done to get justice for and empower African individuals, businesses, and communities among my greatest successes.

I am the first to advise many young people to avoid feeling entitled to anything. No one owes you or us anything. We have to earn it. Our approach and success in oil and gas negotiations stem from our deep preparation and mindset. More of that is needed in 2021.

I have stated many times: you succeed when you look for mentors and let them mentor you. It’s important to have someone who is promoting you when you are not in the room. Next, be stubbornly loyal. Don’t try to pull a fast one because you know more than others! Further, embrace your trials and shortcomings for they teach you to be a better person and lawyer.

I have seen too many young lawyers or rising stars who get a chance to be on a podium, and then tend to spend more time being celebrities than being around colleagues or supervisors.

Many so-called celebrities have not earned a deal and completed one, so avoid having a big head. For me if you have not closed a deal and are not making money, you need to keep your philosophies to yourself. It is crucial to have a strong focus on building your skills because clients and business partners really want you to be good at what you do. Your writing, critical thinking, commercial mindset and in-depth industry skills cannot hurt you. Most clients want to know who is working on their deals, and they do not care about your race or nationality. They want to know you are qualified and can get the job done.

When you finally get a deal done and you get your first bonus or check, do not fall in the trap of buying that fancy car or getting into fast life. You will get broke so quickly. Spend wisely even when you think you have arrived where you need to be. Always think there is more and stay hungry. Look at the Texas oil boys, they are always hungry. They wear their cowboy boots and continue searching for the next big discovery.

Hashtags do not pay the bills. Get off your phone.

Get offline, social media is nice but it isn’t everything, we have seen people who prefer to seat on their phone even during business meetings rather than engage on real business. How do want a deal when you are busy on your whatsapp group chats? Why have a meeting with someone when you will be on your phone while they are talking? Get out of the room and take the call or send a message. If you decide to work on your Instagram while talking to me, I walk you out of my office or end the meeting. When you don’t get the job or the contract, don’t be so quick on blaming the “White Man” or Racism.

I know this will get the young generation annoyed, but its real. We need to start having a post covid mindset and know we will have to engage again. I am not crazy about Zoom meetings, but we have to do it. Business is not about who had the best tweet two hours ago or who does the best hooting and hollering. Get down on the ground and make money. Do not believe those who tell you money is bad. We know it is bad being broke and we hate being broke. You should never apologise for working hard and making money. To do that, you must be focused and yes, get off your phone.

Commit to work. Pay your dues. Your time to shine will come.

Always ask yourself, “Am I adding value to the firm or the company?” Don’t think you are in the firm to be the labour union representative or the head of diversity.

Do not walk around the firm or even a negotiation with arrogance or give off a sense that you are entitled, or that your opinion matters on every subject. You are not owed anything. It is important not to cry over discrimination on every issue, whether it is sexism, racism, or xenophobia.

You beat them with excellence and success. We see it every day and you will be surprised it comes from the same liberals who claim to love all humans and want to save the world. They will love to patronize you and put you in your place. I have experienced it myself. I just work harder, and success follows.

You must understand that building a successful practice or business calls for something not taught in law school or business school or any school: the ability to hustle and deliver on deals. I have always had run-ins with young lawyers because I can be a tough, goal-oriented taskmaster. I have a fierce sense of urgency that many others don’t share.

Working for Centurion is not for the naïve or the fainthearted—we don’t tolerate young lawyers viewing Centurion as merely a job. Everyone has to give their maximum effort all the time.

The truth is, I am harder on myself. I am never satisfied, and I just believe I can win bigger and do the deal better. The most important outcome for me is to have people around me achieve more than they ever thought they could.

Lean in and take the heat for your client or causes you believe in, and for Africa

In 2021, you will have to visible, be vocal in defending the African energy sector from those that want to end it and you must capitalize on the opportunities that you see. One of the key things you must do in 2021, is take the heat for your clients. I have never had a problem being called an ambulance-chaser in the past. Today I am that ambulance that is being chased and many know i will always stand with them and I built a strategy of taking the heat for them. Don’t let them push on your client or kill your issue. Develop a thick skin and let them hit you. If I can’t take the heat, I have no business being in the kitchen.

I have been pushed, been kicked, sometimes been spat on, lied on, demonized, talked about and even derided in the media. Its does not bother me one bit, I always know I am going to outlast my distractors or competition. In 2020, we made more money than any other year with Centurion Plus, our latest on-demand service. I have also been invited to meet with Presidents, Ministers, CEO’s and even Royals. But I never lost my way.

Never take your eyes off the prize. Be patient, play chess, keep smiling, be ready to take a punch and definitely hit back and do it harder. Maybe a combination of Jabs, Uppercuts and Hooks. That’s going to be you in 2021. Its going to be a fight to stay alive, stay employed, stay in business, stay relevant and stay sane when everything and everyone around you is going crazy.

You are going to be tested. They are going to come after you. sometimes even your own friends and those who laugh with you then stab you in the back. You will be called a traitor to most of your liberal elitist friends who feel entitled, drink latte with soy or almond milk. They sometimes cannot believe that this kid who was their darling and their best boo does not buy into their tree hugging, cry me a river ideology. You and I will have to believe and fight for Africa first, against energy poverty, and for personal responsibility, free markets, limited government and yes we must not be ashamed of being people of faith.

The wisdom and advice my law school mentor and professor John Radsan, who used to serve as the CIA’s assistant general counsel and Ron Walters shared with me hold true for you today: each one of us has a mandate to use our education and skills to impact communities and to promote economic growth and empowerment.

So, yes, seek career success and prosperity in 2021. But, in the end, choose to do good: use your skills to make sure that everyday Africans receive their fair share of the benefits the continent’s natural resources can provide.

NJ Ayuk is Executive Chairman of the African Energy Chamber, CEO of Centurion Law Group, and the author of several books about the oil and gas industry in Africa, including ‘Billions at Play: The Future of African Energy and Doing Deals.’

Is Nigeria Finally Within Reach of a New Oil Law?

Section: Opinion · November 11, 2020 · No comments |

By NJ Ayuk, Executive Chairman, African Energy Chamber

This week, the African Energy Chamber will publish a report outlining its short-term predictions for the continent. That report, Africa Energy Outlook 2021, identifies Nigeria as the country with the most potential for increasing hydrocarbon production. But it also points out that Nigeria faced certain challenges with respect to realizing this potential.

Of course, some of the challenges have their roots in the events of 2020 — the coronavirus (COVID-19) pandemic, the dramatic fall in global energy demand, and the oil price war between Russia and Saudi Arabia that briefly sent crude prices into negative territory. However, the country is also facing a number of ongoing challenges.

One of these is the need for a new oil and gas regulatory regime.

‘Africa Energy Outlook 2021’ notes that Nigeria’s government has been working for years to meet this need. So far, all of its attempts have failed. In 2018, for example, members of the Senate voted to approve legislation known as the Petroleum Industry Governance Bill (PIGB), only to have President Muhammadu Buhari veto its version of the bill and send it back to the floor.

Buhari’s administration has not given up, though. Earlier this year, the president declared that his administration was determined to draft a new version of the oil and gas law and secure its passage through both houses of the National Assembly before the end of 2020.

Signs of Progress … But How Much?

The AEC’s report expresses some doubt about Buhari’s ability to get that far with the new Petroleum Industry Bill (PIB). I see this skepticism as understandable, given that Nigeria has been trying — and failing — for nearly two decades to effect change on this front. But I also want to point out that Abuja has made some genuine progress this year.

First, the government completed the draft version of the PIB and submitted it to the National Assembly in August.

Second, the government secured pledges from both houses of the legislature to expedite discussions on the PIB so that it can be passed before the end of the year.

Third, the bill passed its first reading in the House of Representatives and the Senate on Sept. 30.

Fourth, the bill passed its second reading in the House of Representatives and the Senate on Oct. 20.

Fifth … well, is it reasonable to list a fifth sign of progress? Perhaps not. Almost immediately after the PIB passed its second reading, Nigeria’s Senate suspended plenary sessions until Nov. 24 so that it could focus exclusively on drawing up the federal budget for next year. Additionally, it gave the relevant Senate committees eight weeks to make the required legislative inputs into the bill.

Short on Time

Because of these developments, the timeline for securing passage for the bill has shifted.

As I mentioned previously, President Buhari has said he wants to sign the PIB into law before the end of this year. But if the Senate continues to focus exclusively on the budget until Nov. 24, it will have just over a month to meet that deadline — or even less, if the committees take the full eight weeks allotted to them for making legislative inputs. Either way, it will have a great deal to do in a short time. It will have to wrap up committee discussions, pass the new oil and gas law in its third reading, secure the assent of both the House of Representatives and the Senate to the final version of the legislation, and then send it to the president for signature within just a few weeks.

In theory, the PIB could lose momentum during any of these stages. If the committee discussions run for the full eight weeks, they will end on Dec. 15, leaving very little time before the end of the year. If legislators propose amendments during the third reading, they may need extra time to debate and vote on their proposals. If the House of Representatives and the Senate turn out different versions of the PIB and are unable to come to terms quickly, the initiative could stall. If President Buhari takes exception to any changes made during earlier steps in the legislative process, he could veto the bill.

If any of these things happen, the government may find itself ending 2020 without a new oil and gas law in place.

But would that really be such a bad thing?

More than Money

Yes, I think it would.

For years now, uncertainty about the legal regime has been discouraging companies from making commitments to the West African state’s oil and gas industry. According to Nigeria’s Department of Petroleum Resources (DPR), the repeated failure of attempts to adopt a new oil and gas law costs the country about $15Billion each year in lost investments. It’s therefore reasonable for Buhari and his government to seek passage for the PIB as soon as possible. After all, Nigeria can ill afford to keep losing so much money — especially at a time when its oil and gas industry is under extra strain because of the extraordinary events of 2020.

But it’s not just about the money. I believe there is an objective need for reform — and that the PIB can meet that need.

Nigeria’s oil and gas sector has earned the reputation of being corrupt, non-transparent, and inefficient. This reputation drives potential investors away, thereby depriving the country of money — and, what’s more, depriving it of jobs (in both the industry itself and in related sectors such as construction and transportation) and also of opportunities for partnerships, training, technology transfer, and other things that help support and amplify economic growth.

In other words, without the PIB, Nigeria can’t use its vast oil and gas reserves to optimal effect!

Needed Reforms

The PIB does try to address the deficiencies of the current system.

For example, it calls for dismantling state-run Nigerian National Petroleum Corp. (NNPC) and dividing its functions up among three separate entities. It provides for NNPC’s regulatory and administrative functions to be transferred to two new government agencies: one to supervise upstream operations and another to supervise midstream and downstream operations, including domestic gasification programs. At the same time, it assigns the company’s commercial functions to a new entity that will be known as NNPC Corp.

This one change has the potential to make a big difference. With respect to transparency and efficiency, the bill draws a clear line between Nigeria’s need to monitor and regulate the companies that work in the oil and gas sector and its need to have the capacity to develop its own resources. It also calls for NNPC Corp. to be audited annually by an independent company — rather unlike the current version of NNPC, which has come under fire in the past for its less-than-transparent accounting practices. And with respect to corruption, it establishes NNPC Corp. as a purely commercial entity with no access to the federal budget — and, therefore, fewer opportunities to function either as an instrument of state policy or as a shady space in which government officials can move money around for their own purposes.

Of course, these aren’t the only good things the PIB could do. For example, the bill also contains provisions that might settle investors’ questions about the Deep Offshore and Inland Basin Production Sharing Contract Act, a controversial piece of legislation that some energy companies have described as little more than a revenue grab. Additionally, it eliminates two state bodies that haven’t been doing the best job at monitoring the downstream fuel sector: the Petroleum Products Pricing Regulatory Agency (PPPRA), which oversees fuel pricing, supplies, and distribution, and the Petroleum Equalisation Fund (PEF), which distributes cash with the aim of making motor fuel prices uniform throughout the country. Moreover, it puts a single agency — the new midstream and downstream agency mentioned above — in charge of domestic gasification initiatives. This makes sense, given that gasification depends on the construction and expansion of transportation and distribution networks. It could also help coordinate the process by putting all activities under a single umbrella.

Don’t Stop Pushing

There are other attractive features to the PIB, but I don’t have the time or space to list them all here.

I do want to emphasize, though, that I think Nigeria needs this new law, both in general and with the particular details included in the government’s draft version. Buhari is therefore right to push the National Assembly to pass it as quickly as possible — and he should keep pushing, even if legislators miss his Dec. 31 deadline.

In other words, the president should hold members of the National Assembly to the commitment they made earlier this year to accelerate this process! If he does, he should see the PIB pass soon — and once it takes effect, it can lay the foundation for a more efficient, less corrupt, and more transparent oil and gas sector in Nigeria. And, equally important, Nigeria can start capitalizing fully on its oil and gas resources.

(https://EnergyChamber.org)

Insecurity and No Diversity of Supply

Section: Opinion · March 19, 2020 · No comments |

By Gerard Kreeft

Security and Diversity of Supply: Two golden rules of the energy sector, have been dashed.

The new credo is ‘Insecurity and No Diversity of Supply’.

What started as an oil war between Saudi Arabia and Russia to gain or maintain market share has produced uncertainty and destabilization across the entire energy sector. Add the corona virus to the mix and you have the perfect storm.

How long will traders and end users tolerate such a situation? Yes, traders on the spot market can gain a few windfall moments but in the long term this disruption could herald an established entry for renewables. End users want stability and more now than ever are willing to pay a small premium to ensure stability of their fuel supply.

How will this volatility affect Africa? Here’s a place where the oil majors have key assets and control major portions of the value chain; where little attention has been given to renewable energy.

Here’s a continent which the World Energy Outlook 2019 forecasts to have unprecedented growth in the next 20 years.

In its “Stated Policies Scenario” The World Energy Outlook 2019 declares that energy demands woud rise by 1% per year to 2040. Low-carbon sources led by solar photovoltaics (PV) supply more than half of the growth, and natural gas, boosted by rising trade in LNG accounts for another third. Oil demands flatten by the 2030s and coal use edges lower. The key is “the momentum behind clean energy technologies is not enough to offset the effects of an expanding global economy and growing population. The rise in emissions slows but with no peak before 2040, the world falls short of shared sustainable goals.”

A second scenario entitled “Sustainable Development Scenario” maps out a way to meet sustainable energy goals in full, requiring rapid and widespread changes across all part of the energy system. These scenarios are fully aligned with the Paris Agreement by holding the rise in global temperatures to well below 2 ⁰C and pursuing efforts to limit it to 1.5 ⁰C.

Back to the Future

Prior to the ensuing energy dispute, the “Sustainable Development Scenario” might have sounded like a birthday wish. Something to give you a feeling that your good intentions will indeed save the planet. And then get on with the business on hand. Now the future has arrived and in harsh terms. Do we really think that the oil majors will act as a white knight and come to the rescue? Pursuing projects with the hope of adding on some symbolic renewable energy projects? The real fear is not changing from fossil-based fuels to renewables. Rather it is the fear of not being to see or totally fathom how a renewable future will look. We should have no illusion about the state of paralysis of the oil and gas sector.

According to a recent study by the Institute for Energy Economics and Financial Analysis the largest oil and gas companies for years have lived beyond their means and paid more money to investors than they can reasonably afford. Analysis found that the five largest Big Oil majors — Exxon Mobil, Chevron, Royal Dutch Shell, BP and TOTAL— spent $536Billion on shareholder dividends and stock buybacks since 2010 while bringing in just $329Billion in free cash flow.

“The oil majors are consistently under-performing the market and may believe that shareholders won’t notice, as long as they receive generous dividends,” said Tom Sanzillo, co-author of the report and director of finance for the institute, a think tank that supports renewable energy. “As these companies continue to sell off assets and acquire more debt, they reveal a sector in disarray.”

This study covers the period of the last oil bust from 2014 to 2017, when a lot of companies limited their reductions in dividends in buybacks — as revenues fell more sharply — to stop investors from abandoning their firms. BP also was a shrinking company during most of the last decade, selling off many assets after the 2010 Deepwater Horizon tragedy in the Gulf of Mexico.

Rystad is predicting that if the price of oil remains at the $30 level this could lead to cuts of $100Billion production and exploration budgets. In 2021 there could possibly be cuts of another $150Billion, leading to bankruptcies in the oilfield sector.

Africa’s Requirements

The World Energy Outlook 2019 notes that under “the Stated Policies Scenario”, the rise in Africa’s oil consumption to 2040 is larger than that of China, while the continent also sees a major expansion in natural gas use.

WEO-2019 continues:” The big open question for Africa remains the speed at which solar PV will grow. To date, a continent with the richest solar resources in the world has installed only around 5 gigawatts (GW) of solar PV, less than 1% of the global total. Solar PV would provide the cheapest source of electricity for many of the 600Million people across Africa without electricity access today.”

By 2040 Africa’s urban population is slated to grow by more than half a Billion, much higher than the growth seen in China’s urban population between 1990 and 2010. China’s production of steel and cement sky rocketed. Africa’s infrastructure will probably not follow this course but the energy implications for the urban growth will be profound. For example, air conditioning or other cooling services.

Total external debt for sub-Saharan Africa jumped nearly 150% to $583Billion in 2018 from $238Billion ten years earlier, according to the World Bank. This could become unsustainable as the average public debt increased from 2010-2018 to 59% GDP up from 40%.

The World Bank has operations of some $20Billion on the continent, while the African Development Bank has commitments of some $10Billion. Both banks have a wide variety of financing tools at their disposal for a variety of projects: be that wind, solar, or geo-thermal. Yet the problem is not one of financial engineering nor technical competence. Both banks have these resources available.

Rather what is required is the vision and strategy to create an African Energy Transition Roadmap coordinated by the World Bank, African Development, IMF and Africa’s national governments. Such a roadmap should also include public-private partnerships in order to leverage project economics, Instead of a Joseph’s coat of many colours in which only regional, national or project interests are featured. Such a roadmap should meet the criteria of the “Sustainable Development Scenario” set out by WEO 19. Certainly when the energy value chain is being totally re-invented its time to make the quantum jump to bring Africa to the frontline where economic innovation and technical breakthroughs are being done.

Gerard Kreeft, BA ( Calvin University, Grand Rapids, Michigan, USA ) and MA (Carleton University, Ottawa, Ontario, Canada), Energy Transition Adviser, was founder and owner of EnergyWise. He has managed and implemented energy conferences, seminars and master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe. He writes on a regular basis for Africa Oil+Gas Report.

The Future of Oil Companies: A Clearer Outline

Section: Opinion · March 12, 2020 · No comments |

By Gerard Kreeft

Dogger Banks is in a large sandbank in a shallow area of the North Sea.

It is sited about 100km off the east coast of England.

During the last ice age the bank was part of a large landmass connecting Europe and the British Isles. It has long been known by fishermen to be a productive fishing bank. It was named after the doggers, the medieval Dutch fishing boats especially used for catching cod.

In the next 25 years Dogger Banks will undergo a remarkable face over, becoming a key infrastructural hub for northern Europe’s Energy Transition.

The Norwegian player Equinor, has announced that the world’s biggest offshore wind farm off Dogger Bank, could be just the start of a renewable mega-hub with potential for more than 20GW of power production in the North Sea – enough to supply one third of UK electricity demand.

The Equinor announcement is a follow-up of the North Sea Wind Power Hub (NSWPH) study outlining the possibility and conditions required to build one or several wind power hubs in the North Sea. The consortium comprising a nucleus of Danish, Dutch and German companies has conducted a wide range of studies, investigated a number of different scenarios and conducted intense engagements with policy makers, leading offshore wind farm developers and Non-Governmental Organisations (NGOs).

By 2045, the consortium is confident that 180GW or the equivalent of 1.2Million barrels of oil equivalent per day (1.2MMBOEPD) of fuel can be produced. Such production figures should gain the attention of the major oil companies in their quest for energy transition and projects having economies of scale.

Certainly, a candidate of merit is BP, strategically located in the heartland of the North Sea. BP’s new CEO Bernard Looney announced that it will be a “net zero company” by 2050 or sooner, opening the door to participation in new renewable mega- energy projects. Currently BP produces 3.7MMBOEPD. Adding a possible 1MMBOEPD of renewable energy to the company’s reserve count can only bring a smile to the face of a BP shareholder ensuring that the 6+% annual dividend is safe. How to arrive there is not his problem. This can be delegated to BP’s Management!

Looney’s management team is faced with a classic Catch-22: To safeguard the shareholder’s dividend the company must know with some certainty that any decision it takes must be given the green light by its shareholders. If not shares will be dumped. When is it a good time for management to introduce a new and forward looking policy? BP has chosen now. Will the shareholders back this? Will they decide that moving into a new strategic direction-taking renewables on board in a massive way- will guarantee in the long term their golden dividend ? Possibly avoiding that BP’s oil and gas assets be viewed as stranded assets.

Following the renewable route is not a guarantee for BP that it can maintain its golden dividend policy. Among Europe’s energy companies dividend results show a mixed bag : Orsted 1.5%, RWE 3.7% and Enel and Iberdrola both with 5%. Oil companies must still test what their future will be! Yet what is certain is that their oil and gas assets, formerly the mainstay of the dividend, is now in freefall and in need of life support.

For these reasons and more, the reserve count must be strengthened.

The reserve count is an important tool to ensure that oil and gas assets have a longer life span. The Reserve Replacement Ratio(RRR) is currently at an all time 20 year low. Currently the RRR count is based on only fossil-based fuels. Why? Because the SEC has deemed this on the advice of the oil and gas industry. Is it not time that the Oil and Gas Sector begins to understand that if they now include renewables as part of their reserve count their oil and gas assets could have their life cycles extended? Extending the life cycle of these assets should surely be used as a currency to invest in renewables!

Crossing the Rubicon

Perhaps it is too early to discuss the demise of the oil and gas sector. But that its footprint is dwindling is obvious. According to BloombergNEF investments in renewable energy in the period 2010-2019 was $2.6Trillion. Through 2025 $322Billion per annum will be spent, almost triple the $116Billion invested in fossil fuels.

While the oil and gas sector may find a protective umbrella in the shade of the Renewable Revolution there may come a time, very soon, that oil and gas assets will be dumped. This may create much like what happened in the financial sector: Good Bank vs Bad Bank scenario. The Bad Bank scenario will see sector-wide mergers and acquisitions to ensure a last-minute reprieve before the assets are written off as liabilities. The timeframe? Perhaps 10 -15 years but certainly by 2050.

Possibly the countdown has already begun. Repsol was the first oil company to commit itself to become a net zero emissions company by 2050. The company also adjusted it’s 2019 net income to reflect the new reality. In 2019 it suffered a net loss of $4.10Billion primarily because of impairment charges on its assets in North America due to its climate targets. Can Repsol, given its pole position, utilize its oil and gas reserves to help strengthen its renewables? For example the company has Windfloat, the world’s first semi-submersible floating windfarm with the capacity to provide enough power for 60 000 people in Portugal. Repsol also has hydropower plants which provide 700MW of installed capacity, enough to supply power to every household in Madrid for a year. Finally it also has two photovoltaic parks in Spain for generating solar power.

Equinor has pledged ‘that by 2050 each unit of energy produced will, on average, have less than half of the emissions compared to today. The ambition is expected to be met primarily through significant growth in renewables and changes in the scale and composition of the oil and gas portfolio’.

Oil and gas subcontractors also face a grim future. Dayrates for the drilling contractors, even for the deepwater floaters, are at cutthroat levels: varying between $175 000 – $250 000. This range is less than half the US$500 000 needed to meet 15% unlevered internal rate of return.

The grim reaper is also knocking on the doors of Halliburton and Schlumberger. Share prices in both companies have since 2018 more than halved : Halliburton’s share price in January 2018 had a high of $55.61 and in February was down to US$21.95; Schlumberger share price in January 2018 had a high of $76.42 and in February 2020 was down to $34.29.

Conclusions

The oil and gas carbon footprint will shrink in the coming decade and probably include mergers and acquisitions to ensure specialization and economies of scale.
Shrinking the oil and gas sector will also have a drastic effect on the sector’s sub-contractors such as the drilling contractors and service providers.
Oil and gas assets should be used as a currency to invest in the energy transition.
Translating renewable energy units from GW (Gigawatts) to Barrels of Oil Equivalent is a strategic tool to buttress up a company’s oil and gas assets and it’s RRR .
Becoming a player in the renewable sector-be that wind or solar- requires special skills not necessarily found in the toolbox of the oil majors.

6 Orsted now a windfarm powerhouse company and Equinor with its diverse portfolio of windfarms and gas pipelines have a wide variety of tools and policy options to plan and implement their energy transition strategies.

The shrinking of the oil and gas sector and emergence of renewable energy is a global happening, and Africa will not be excluded in these developments.

Africa’s Life after OPEC+

Section: Opinion · March 12, 2020 · No comments |

By NJ Ayuk

Underneath the panic caused by Coronavirus and the fall out of OPEC+ lies opportunity for African oil producers

Sometimes it is easy to forget how interconnected human lives across the globe have become. Perhaps we no longer talk as much about globalization as we used to in the 1990s because it is no longer an issue to be discussed or protested against, it is simply the reality that surrounds us. And there is no cruder evidence of that than the Coronavirus.

Despite the fact that the virus hasn’t yet affected African nations in anyway as seriously as other regions of the world, a fact the World Health Organization is still unable to explain, forecasts already indicated that just through reduced demand for African exports, the virus was expected to wipe at least USD$4 billion in revenue from the continent’s economy. Most of that was simply because China in particular, and Asia and Europe in general, were reducing oil and gas consumption dramatically as transport and economic activities came to a standstill in light of the epidemic that already forced several dozens of millions of people to be put under quarantine.

Last week, news reports indicated that oil traders in Africa were unable to find buyers for fifty-five Nigerian oil cargoes as global demand crashed. By last Friday morning, the virus had wiped the equivalent of USD$5 trillion in value from the global stock markets. That’s two and a half times the GDP of the whole African continent.

And all that was before OPEC+’s Friday meeting in Vienna. Wasn’t that one surprising?

I believe it is safe to say that few people could have expected this outcome. After all, for the last three and a half years, the world, and the oil industry in particular, had learned to trust the alliance of OPEC countries with Russia and other oil producers to work together to stabilize the markets and guarantee a sustainable price for the barrel of crude.

Through their decision to cut down oil production to address reduced demand and balance out the effect of the US shale play, all together, they were keeping 1.7 million barrels of oil per day away from the market, a landmark decision of cooperation like we had never seen in history. Perhaps also because of its novelty, of its width and because it was dependent on the will and cooperation of so many, it also fell victim to the infestation this virus has brought.

The Saudi-led consortium of nations was proposing a combined further cut of 1.5 million barrels per day to continue to match the decline in global demand. The Russia-led group was not going to go further than 600 thousand. The conclusion… no new cuts at all and no renewal of the previous cuts. The OPEC+ alliance that saved the industry from collapse in 2016 has, at least for the moment, come to an end. All bets are off. At the end of April, when the current agreement ends, all restrictions will be lifted and the world is bracing for an oil flood.

The markets have already factored that in, with the Brent and the WTI registering its biggest daily crash since the beginning of the first Gulf War. While oil seems to have rebounded slightly today, it will take time to make up for Monday’s 25% crash. That is, if the recovery is anywhere in sight, since Saudi Arabia announced it was ramping up production and selling its oil discounted by as much as USD$8 per barrel, on a barrel priced at little more than USD$30.

In all honesty, the situation looks bleak. If Saudi Arabia and Russia do go on having a price war, a USD$20 barrel is possible, if not probable.

But what does this mean for Africa?

Several African petroleum and energy ministers were in Vienna last Friday, both as members of OPEC and as members of APPO. Shortly before the announcement on the fall of the agreement, they had decided to strengthen cooperation between African oil producers, promote synergies, intra-african trading, and knowledge exchange. Surely, we need that more than ever.

For the moment, however, there is no reason to panic. Surely, things might get worse before they get better, as the world battles this rapidly spreading virus. And surely, some oil dependent African nations will suffer with reduced revenue. Angola’s state budget, for instance, was designed for an oil price of USD$55 not USD$35. But we have survived the oil price crisis of 2014, and we will survive this one two. Further, most African producers have learned from the past experience and have adjusted themselves to respond to price crashes. The progressive economic diversification the continent has witnessed in recent years will also contribute to minimize the impact of this situation. Yes, final investment decisions might be slightly delayed until the situation stabilizes, but they will come in due time.

So what’s next?

If 2020 is showing itself challenging for African energy, 2021 will be a year of opportunity, but for that to happen, we have to start adapting now, laying down the policies that will allow us to take advantage of the future opportunities. It is in moments of crisis that true leaders have the opportunity to shine.

While it is difficult to predict the future, there are a few deductions and inductions we can try to make with some certainty.

One, is that neither Russia nor Saudi Arabia want a low oil price and there is a limit to how long they are willing to sustain it. No one gains from it and if anyone has the capacity and funds to sustain it for a longer period of time is Saudi Arabia. So, it is not really a price war, since it can’t really be a war if you already know the winner at the head start. Already, Russia has suggested it might be open to negotiate coordinated cuts within OPEC+ during the group’s next meeting in May/June.

What seems likely that will happen, is that the first to suffer from this will be American shale producers. This sector was already finding it hard to finance itself in recent years but continued to unbalance the market with its rapid response times to price fluctuations. These producers are highly leveraged, and it is likely that most will go bust in the present situation. This is something Russia and Saudi Arabia tried to do back in 2015/2016. While it did not succeed at the time, it might have better chances now.

Further, in three months time, at the time of the next OPEC+ meeting, the virus situation might also be very different. This week, president Xi Jinping visited Wuhan, the epicenter of the epidemic, for the first time since the beginning of the outbreak, in a clear demonstration of a strong response to a rapidly evolving situation that seems to be stabilizing. China itself is an extremely leveraged economy and can not afford to slow down for much longer. It can be expected that demand in the country will start rising again in the foreseeable future. If that happens in a scenario when the US shale sector is no longer able to respond, it might just be that the price will climb higher than it was before the virus, and with Saudi Arabia securing for itself a much larger slice of the global marketplace. Again, things will get worse before they get better, but they will certainly get better.

So, for African nations, this is the time to position ourselves correctly, and that will require close attention to international developments and close cooperation, to be able to take advantage of new opportunities. The African Energy Chamber will be instrumental in that, but so will be the African members of OPEC. The time to show statesmanship and stay close to Saudi Arabia and the decision-making table is now. To grow Africa’s relevance in the international oil stage by showing level-headedness and cooperation in face of a global crisis. If we take that route, we will come out of this stronger than ever.

NJ Ayuk is Executive Chairman of the African Energy Chamber, CEO of pan-African corporate law conglomerate Centurion Law Group, and the author of several books about the oil and gas industry in Africa, including Billions at Play: The Future of African Energy and Doing Deals.