The increased speed of the Energy Transition continues to make headlines in Europe.
This is not necessarily good news for Africa. The greening of Europe could in the short and medium term have a boomerang effect in Africa, given the strong presence of the majors there.
Any argument that supporting Africa’s oil and gas industry is a step to helping bridge Africa’s energy transition becomes nul and void. The greening of Europe promised by the majors could in fact mean reducing oil and gas activities in Africa. For example, both BP and TOTAL have pledged to reduce considerably their oil and gas assets. Africa could be a prime candidate.
What is the Energy Transition doing for Africa’s Oil and Gas Industry?
Are Africa’s state oil and gas companies prepared to take on new exploration and developments as never before? Why? Simply because the oil and gas majors are choosing low carbon prospects and natural gas projects on a massive scale, leaving many potential prospects in Africa in doubt. TOTAL’s Mozambique LNG poject is expected to cost $20Billion and produce up to 43Million tonnes per annum. It will go ahead, but smaller oil and gas projects may not be treated so kindly.
Energy scenarios released by both BP and TOTAL are predicting a sharp decrease of oil production, adding to the view that exploration budgets of the majors will not be a priority item. Instead as TOTAL has explained low cost, high value projects are the goal. Squeezing more value out of its various African assets to ensure a prolonged life cycle.
For too long Africa’s new fledging state oil companies have been proxies to the international oil majors. In the process many of them have not developed technical knowledge, capability and expertise to manage and implement oil and gas projects.
Being hostage to the whims of the oil majors is no formula to ensure that a country’s oil and gas assets are to be developed. Certainly when the window of opportunity to develop oil and gas assets could be closing within the next 20-25 years.
Shuffling the Deck
A key aspect of the energy transition includes a serious analysis of company assets. Rystad, the Norwegian energy research company recently conducted a study that concluded that the world’s largest oil and gas firms could sell or swap oil and gas assets of more than $100Billion in order to adjust and transform to cleaner sources of energy.
The Rystad Energy Study, covers a wide geographical spread and includes ExxonMobil, BP, Shell, TOTAL, ENI, Chevron, ConocoPhillips, and Equinor. The eight companies may need to divest combined resources of up to 68Billion barrels of oil equivalent (boe), with an estimated value of $111Billion and spending commitments in 2021 totalling $20Billion.
The key criteria for determining whether a major would benefit from staying in a country are the company’s cash flow over the next five years, the potential growth in its current portfolio, and its presence in key E&P growth countries towards 2030. Based on this, Rystad claims that majors may seek to exit 203 country positions and, as a result, reduce their number of country positions from 293 to 90.
The Continued Need for Exploration and Development
The case for renewed oil and gas exploration has best been presented by Wood MacKenzie (Andrew Latham and Adam Wilson)who argue that whatever the pace of the energy transition, oil and gas exploration will remain critical well beyond 2040.
“Exploration will be critical in meeting this future demand. Yet exploration is widely perceived as discretionary, even unwarranted. Doubters see a world of risk, declining demand, enormous existing resources and a supply pecking order that ranks exploration squarely in last place. There’s even a public image problem in the false narrative that each new discovery somehow extends the fossil fuels era.”
The authors state that companies showing signs of fatigue with exploration are questioning their long-term commitment to upstream petroleum. Only about half the supply needed to 2040 is guaranteed from fields already onstream. The rest requires new capital investment.
Cumulative global demand for oil and gas over the next two decades will be at least 1,100Billion boe even in a 2°C scenario. It could be as much as 1,400Billion boe on their base case forecasts. Around 640Billion boe could be met by proven developed supply from onstream fields. This leaves a ‘supply gap’ of some 460Billion to 760Billion boe.
Lessons learned and some practical solutions
Of interest are lessons learned from Tullow Oil. In its 2019 annual report Tullow states that between 1999- 2009 Sub-Sahara Africa significantly increased its share of oil production and reserves.
With the oil shock of 2009 and the much deeper price collapse of 2014, larger African gas discoveries, and the US shale industry, oil discoveries have diminished on the continent.
Tullow further states that many African countries have adopted tighter fiscal terms, deterring exploration investments, rendering otherwise investable projects unviable at today’s oil prices.
Finally, decision-making has been slower, more complex as new institutions have been developed to govern the sector and governments have become more accountable to civil society. Tullow cites Uganda and Tanzania as examples of where increased industry participation was sought, but stalled because of a lack of market interest.
Additional practical measures:
- Clear definitions of regulatory power: does a country’s regulatory regime define what a Ministry of Energy does as opposed to the goals of the state oil company?
- Improved fiscal and tax incentives to encourage new exploration companies to participate
- High on the list of priorities for these fledging state oil companies should be knowledge transfer and development of local talent, which the majors should provide.
- Special teams consisting of the majors and state oil companies be set up to develop energy transition road maps.
- Extra monetary or tax incentives to ensure a speedy transfer of knowledge and developing local content.
- To date the international multilateral agencies- be that the World Bank, African Development Bank, or the International Monetary Fund- were reluctant to throw new petro-economies a life line, based on oil and gas potential. This should be re-evaluated so that both oil and gas and renewables can be used to evaluate a country’s financial needs. Perhaps an item for the agenda of APPO (African Petroleum Producers Organization).
- At the national level state oil companies and energy agencies which support renewables must better coordinate their national energy policies.
Gerard Kreeft, BA (Calvin University ) 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.