Investing in Africa’s Hydrocarbon Industry: Prospects, Opportunities and Challenges
By Ikenna Omeje & Jerome Onoja Okojokwu-Idu (MEM)
Africa has about 125 billion barrels of oil reserves and about 600 trillion cubic feet (tcf) of proven gas reserves. Despite having these huge reserves, investment in the continent’s hydrocarbon industry has been minimal. Between 2015 and 2019, only $70 billion investments were made in Africa’s oil and gas industry, according to KPMG. Compare that to 2018 alone, the global energy investment was more than $1.8 trillion, a level similar to 2017.
“Among major countries and regions, India had the second largest jump in energy investment in 2018 after the United States. However, the poorest regions of the world, such as sub-Saharan Africa, face persistent financing risks. They only received around 15 percent of investment in 2018 even though they account for 40% of the global population. Far more capital needs to flow to the least developed countries in order to meet sustainable development goals,” said International Energy Agency (IEA) in its World Energy Investment 2019 report.
As at 2019, African continent possessed 7.5 per cent and 7.1 per cent of global oil and gas reserves, respectively, according to Deloitte. The continent accounted for more than 7.9 million barrels per day in 2019, which is about 9.6 percent of world output. This level of production is down somewhat from the heights of 2005 to 2010 when African production was nearly 10 million barrels per day. The major production declines between 2010 and 2015 were mostly due to lower global oil prices. Output stabilized between 2015 and 2019. However, the outbreak of Covid-19 pandemic and a production dispute between Saudi Arabia and Russia in the Q1, 2020, dramatically led to dip in oil prices. As a result, future levels of oil production in Africa and around the world were highly uncertain as of June 2020. Prices have, however, recovered following supply cut agreement reached by the Organisation of Petroleum Exporting Countries (OPEC) and its allies in April 2020.
Global population is estimated to increase from 7.3 billion in 2015 to 9.2 billion in 2040. The additional 1.8 billion people will mainly come from developing countries, according to OPEC in its World Oil Outlook 2040 report.
“Reflecting the underlying assumed developments of the key drivers, total primary energy demand is forecast to increase by 96 mboe/d between 2015 and 2040, rising from 276 mboe/d to 372 mboe/d. In relative terms, this represents a 35 percent increase compared to the base year of 2015, with an average annual growth rate of 1.2 percent during the forecast period,” OPEC stated in the report.
Although renewables are developing rapidly, the world’s economy is set to double, which experts say requires that all resources will be needed to meet this growing need. Between now till 2045, cumulative investment of $12.6 trillion in the upstream, midstream, and downstream is required in order to meet this need, according to OPEC.
Although renewables are developing rapidly, the world’s economy is set to double, which experts say requires that all resources will be needed to meet this growing need. Between now till 2045, cumulative investment of $12.6 trillion in the upstream, midstream, and downstream is required in order to meet this need, according to OPEC.
A data released in November 2021 by statista, an online portal which provides data on economies, industrial sectors and markets in over 50 countries, showed that the reserves in 17 African oil producing countries depleted by about 500 million barrels in 2021, due to under-investment in the continent’s oil and gas infrastructure.
Despite the current challenges with regards to investment in the continent’s oil and gas industry, most of the continent’s producers are now creating enabling investment environment for both local and foreign investors. This has led to the sanctioning of some big projects in countries like Angola, Equatorial Guinea, Mozambique, Nigeria, among others, which industry experts believe will unlock the continent’s huge hydrocarbon resources.
Opportunities and investments
Africa is gradually becoming a continent of influence. This time, not by its economic or military strengths, but by its population. Between now and 2050, more than half of global population growth is expected to occur in Africa. The continent has the highest rate of population growth among major areas. According to the United Nations (UN), the population of sub-Saharan Africa is projected to double by 2050.
“A rapid population increase in Africa is anticipated even if there is a substantial reduction of fertility levels in the near future. Regardless of the uncertainty surrounding future trends in fertility in Africa, the large number of young people currently on the continent, who will reach adulthood in the coming years and have children of their own, ensures that the region will play a central role in shaping the size and distribution of the world’s population over the coming decades,” the UN says.
Africa is the world’s youngest continent with almost 60 percent of its population as of 2019 under the age of 25. The UN’s demographic projections predicted the median age in the continent to be 19.8 in 2020. On the continent, Mauritius was expected to have the highest median age, 37.4, and Niger was expected to have the lowest, 15.1. In 2019, more than 1/3 of the population was aged between 15-34. The UN also projected that by 2100, Africa’s youth population could be equivalent to twice Europe’s entire population
Meanwhile, the African Energy Chamber (AEC) in its 2020 outlook on Africa, stated that the gigantic discoveries made over the past decade in Mozambique, Tanzania, Senegal and Mauritania have revealed a total of 200 trillion cubic feet (Tcf) of gas reserves, enough to supply two-thirds of current world demand for 20 years.
In 2018, sub-Saharan Africa provided 10 percent of the global production of liquefied natural gas (LNG), equivalent to 28 million tonnes per annum (mtpa). Analyst Akap Energy forecasts that by 2025 this African production capacity will have increased by 150 percent to reach 84 mtpa, which is 15 to 20 percent of the world market. Also in 2018, Nigeria’s production accounted for 7 percent of globally traded LNG and ranks the country among the world’s top five LNG exporters behind Qatar, Australia, Malaysia and the United States.
Nigeria for instance, has over 37 billion barrels of proven oil reserves, the largest gas reserves in Africa, and ranks 9th in the world. The country’s proven gas reserves as of January 1, 2022 is 209.5 tcf, according to the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA).
In June 2020, Nigerian government kicked off the construction of the 614km Ajaokuta-Kaduna-Kano (AKK) gas pipeline, which is part of the Trans-Nigerian Gas Pipeline (TNGP) projects. Other parts of TNGP projects includes the Escravos Lagos Pipeline System (ELPS) 2,
Ajaokuta-Kaduna-Kano (AKK) gas pipeline
and the Obiafu-Obrikom-Oben (OB3) gas pipeline. The completion of these projects are expected to deepen gas utilization in-country and create investment opportunities in the power sector and the petrochemical industry.
In March, the Nigerian National Petroleum Corporation (NNPC) announced that the Ajaokuta-Kaduna-Kano (AKK) gas pipeline has reached 73 percent completion. It is expected to commence operation in the first quarter of 2023.
“We have so far made tremendous progress as the project is about 73.3 percent completed, with only about 23.5 percent remaining.
“We have split the project into two to make sure it is completed at the earliest time possible since we are working within the timeline of 2022.
“The immense opportunities are that Kaduna will have access to 900 megawatts of power generated by the time the AKKP is completed and have enormous access to gas that can support the springing up of industries and petrochemical plants,’’ said the Group Executive Director, Gas and Power, NNPC, Abdulkadir Ahmad, while speaking at a public lecture in Kaduna.
Upon completion, the pipeline is expected to provide 900 megawatts of power generated to Kaduna and its environ as well as enormous access to gas that can support the springing up of industries and petrochemical plants.
In March 2021, the country launched the Decade of Gas initiative, which intend to make Nigeria a gas powered economy by 2030. The country also has a new petroleum law known as the Petroleum Industry Act (PIA).
“Through the Decade of Gas initiative, which I recently launched, we will transform Nigeria into a major gas and industrialised nation with gas playing the key role as revenue earner, fuel for industries and necessary feed for petrochemicals and fertiliser plants,” President Muhammadu Buhari said at the launch of the programme.
Speaking at the 2021 Nigerian Oil and Gas Opportunity Fair (NOGOF), the Chief Executive Officer/Group Managing Director of the NNPC, Mallam Mele Kyari said, “In line with our aspiration towards becoming net exporter of petroleum products, opportunities abound in the rehabilitation of our existing refineries as well as the construction of greenfield condensate refineries. As we strive to deepen domestic gas utiliisation, it has created more opportunities in the downstream sector especially in LPG and CNG plants across the country. There are also opportunities in the pipeline and storage tank construction; as well as developing Shipping Capacity.” However, the country needs about $40 billion to achieve the Decade of Gas target.
Nigeria aims to become a net exporter of petroleum products, and is putting up measures to address regulatory challenges as well as issues around laws and administration in the country’s oil and gas industry. Some of these measures includes the establishment of the Nigeria Oil and Gas Excellence Center (NOGEC), to speedy dispute resolution. Another one is the launch of the Nigerian Upstream Cost Optimization Programme (NUCOP) — an industry-wide initiative designed to optimize Nigeria’s upstream operating expenses through process enhancement and industry collaboration to ensure improved and sustainable profitability for all stakeholders.
Mele KyariIn Mozambique, gas has been identified by the government of the country as a veritable tool for industrial growth across energy, agriculture and manufacturing sectors. The country currently has about 85 tcf of gas reserves and the potential to reach 180 tcf with its offshore discoveries.
There are three leading gas projects in Mozambique. They are: Mozambique LNG, Rovuma LNG and Coral South floating LNG (FLNG). The Mozambique LNG Project began with the discovery of a vast quantity of natural gas off the coast of northern Mozambique in 2010, leading to a $20 billion Final Investment Decision in 2019. Now, through cooperation and responsible project planning, the project is expected to be completed in 2024.
Operated by TotalEnergies, the project will help to meet the world’s increasing demand for sustainable, reliable and cleaner energy sources.
“For now, our plans for the approximately 65 trillion cubic feet of recoverable natural gas include a two-train project with the ability to expand up to 43 million tonnes per annum (MTPA)..” TotalEnergies says about the project.
“The Project is committed to collaborating with Mozambican communities and government officials to safely develop these resources in a manner that protects the environment, encourages additional foreign investment, and contributes to the long-term social and economic stability of the country.”
The Coral-Sul Floating LNG ship is the first floating LNG facility ever to be deployed in the deep waters of the African continent. The project achieved financial closure in December 2017, for total funding of $4.67bn. The 432m long and 66m wide vessel which weighs around 220,000 tons, and has the capacity to accommodate up to 350 people in its eight-story living quarters module will be moored at its operating site at the Coral South field in Area 4 of the Rovuma basin and production startup is expected in the second half of 2022.
The FLNG treatment and liquefaction installation has a gas liquefaction capacity of 3.4 mtpa and will put in production 450 Bcm of gas from six subsea wells located in the giant Coral discovery. The FLNG fabrication and construction activities started in 2018 and were completed on cost and on time, despite the pandemic.
According to the Director of Development, Operations, and Energy Efficiency at Eni, Stefano Maione, “The Coral Sul FLNG is a world-class feat of engineering, construction know-how, and technology, suited to kick off the development of Mozambique’s world-class resources.
“The project fits integrally with and within Eni’s energy transition strategy, as we move toward a decarbonized energy future in which gas is playing an essential and transitional role.”
Partners in the Coral-Sul FLNG project have implemented an energy optimization approach, integrated in the design via a systematic analysis of energy efficiency improvements. These include zero flaring during normal operations, use of thermal efficient aeroderivative gas turbines for refrigerant compressors and power generation, use of dry low- NOx technology to reduce NOx emission and waste heat recovery systems for gas processing.
Once the FLNG facility is in place, the installation campaign will begin, including mooring and hookup operations at a water depth of around 2000 m by means of 20 mooring lines that weigh 9,000 tons in total. Eni operates Coral Sul on behalf of its partners ExxonMobil, CNPC, GALP, KOGAS, and ENH.
The Coral Sul FLNG is scheduled to begin production in 2022. Upon completion and operation, it is expected to deliver 3.4 mtpa of LNG entirely to British Petroleum (BP). The FLNG vessel was constructed in South Korea with Samsung Heavy Industries.
Also in Angola, there are investment opportunities for investors in free areas and in new exploration zones in sedimentary basins, where the government says it is necessary to quantify the potential of hydrocarbon resources.
Stefano MaioneTo eliminate regulatory bottlenecks, the Angolan government unbundled its national oil company, Sonagol, and established the National Agency of Petroleum, Gas and Biofuels (ANPG), as a concessionaire and regulator of the upstream, and the Regulatory Institute of Petroleum Byproducts (IRDP), with the function of regulator of the mid-downstream.
Sonangol now focuses on activities in the oil sector value chain, that is, prospecting, research, evaluation, development and production of crude oil and natural gas, refining, transport, storage, distribution and marketing of oil derivatives products.
Angola as of October 2021, produces around 1.3 million barrels of oil per day and 2.7 billion cubic feet of natural gas per day, but the activity of exploration and production of hydrocarbons has been essentially limited to crude oil.
To economically explore the country’s natural gas potential as well as the eliminate flaring, the country is currently on a project to build the Angola LNG factory — a partnership between Sonangol, Chevron, BP, Eni and TotalEnergies, which aims for the production of liquefied natural gas.
The project is targeted at increasing efficient use of gaseous hydrocarbon deposits as well as promoting the diversification of the Angolan economy.
There are also plans to implement the New Gas Consortium, which is targeted at developing non-associated gas with a view to allowing the continuous supply of gas to the Angola LNG plant and, consequently, the supply of gas to Combined- Cycle Power Plant in Soyo and the fertilizer industry, within the scope of the diversification of the Angolan economy.
Speaking at a plenary session of the IV International Forum “Russian Energy Week”, which took place in Moscow, Russian Federation, in 2021, Angolan President João Lourenço, said that the development of the gas sector is an opportunity for Russian companies to invest in the country, taking into account the experience they have in this field, to contribute to the creation of steel mills, fertilizer factories, power generation and others.
“To complement and reinforce this strategy, the Government also approved the Regime of Permanent Offer of (oil exploration) blocks, an instrument aimed at the promotion and permanent negotiation of non-awarded blocks, free areas of concession blocks and concessions awarded to the national concessionaire, opening up here too, an opportunity for Russian companies,” he stated.
According to him, Angola is promoting the implementation of construction projects for three refineries, namely in Cabinda, Soyo and Lobito, which will increase the country’s refining capacity of around 425,000 barrels of crude oil per day”.
“Here is an investment opportunity for Russian companies, in the construction of the Lobito refinery, since the international public tender for partnership is still taking place, which ends in October of this year”, he said.
Similarly, in the Republic of Congo, Eni is investing heavily in the country’s gas sector. The company in April signed a letter of intent in Brazzaville with the government to increase gas production and export.
“The agreement provides for the acceleration and increase of gas production in Congo, primarily through the development of a Liquefied Natural Gas (LNG) project with start-up expected in 2023 and a capacity of over 3 million tons / year (over 4.5 billion cubic meters / year) once fully operational. LNG exports will allow to valorize the production of gas that exceeds Congo’s internal market needs,” Eni said in a statement.
“The Republic of Congo and Eni have also agreed to define initiatives to promote decarbonisation and sustainable energy transition in the country, in particular in the areas of renewable energy, the development of an agricultural supply chain to produce feedstock for biorefining without competing with the food chain, the conservation and sustainable management of forests, the adoption of clean cooking systems, the capture, use and storage of CO2.”
Eni is the only company, currently committed to developing the huge gas resources of the country; presently supplies gas to the Congo Power Plant (CEC), which guarantees 70 percent of the country’s electricity production.
Challenges
Despite positive developments in the Africa’s oil and gas industry, especially in the area of discoveries, the industry still faces challenges around regulatory uncertainty, insecurity, climate change as well as poor infrastructure.
For instance, TotaEnergies withdrew all Mozambique LNG project personnel, and declared a force majeure in April 2021, because of rising insecurity in the north of the Cabo Delgado province of the country.
“Considering the evolution of the security situation in the north of the Cabo Delgado province in Mozambique, Total confirms the withdrawal of all Mozambique LNG project personnel from the Afungi site. This situation leads Total, as operator of Mozambique LNG project, to declare force majeure.
“Total expresses its solidarity with the government and people of Mozambique and wishes that the actions carried out by the government of Mozambique and its regional and international partners will enable the restoration of security and stability in Cabo Delgado province in a sustained manner,” TotaEnergies had said in a statement.
With energy transition in focus, investment in Africa’s energy sector has taken a nosedive. Reducing global carbon dioxide (CO2) emissions to net zero by 2050 is consistent with efforts to limit the long-term increase in average global temperatures to 1.5˚C. Energy transition is a global push towards cleaner energy from fossil fuels, which are harmful to the climate.
The energy sector is said to be the source of around three-quarters of greenhouse gases emissions as at today and will be central in preventing possibly the worst effects of climate change, according to IEA.
To achieve net-zero by 2050, the IEA has articulated several dramatic milestones that would be necessary including: no approvals of new oil and gas field development and no new coal mines or mine extensions by this year; electric vehicles reaching 60 percent of global car sales by 2030; and nearly 70 percent of global electricity generation produced from solar and wind by 2050.
As part of their commitment to net-zero target, most oil and gas exploration and production companies are diversifying into renewable energy and slashing their investments in fossil fuels related projects. This was further worsen by the impact of Covid-19 pandemic, which led to price crash in 2020.
On the infrastructure side, there are concerns for investors. However, efforts are being made to address it. In February, Nigeria, Niger, and Algeria signed an agreement to begin the development of Trans-Saharan Gas Pipeline project, at the third edition of the Economic Communities of West African States (ECOWAS) Mining and Petroleum Forum (ECOMOF) in Niamey, Niger.
There are also plans to resume the West African Gas Pipeline by some of the countries in the West African sub-region. Also, Uganda, Tanzania and oil firms TotalEnergies and CNOOC in April 2021, signed agreements that will kickstart the construction of a $3.5 billion crude pipeline to help ship crude from fields in western part of the country to international markets.
According to the Petroleum Authority of Uganda, the country’s oil sector regulator, the signing unlocks new investment into Uganda’s economy, which includes the implementation of the Tilenga Project (approx.$4billion), the Kingfisher Project (approx.$1.5billion); and, the EACOP (approx. $3.6bn).
Notwithstanding the challenges, industry experts believe that Africa does offer plenty of opportunities in the form of unexplored hydrocarbon demand fueled by population growth, urbanisation and the emergence of a growing middle class.
Prospects
Capital expenditure within Africa’s oil and gas sector is projected to increase to $30 billion in 2022 after a decline from $60 billion in 2014 to $22.5 billion in 2020, according to AEC in its report titled, “The State of African Energy 2022”.
“From the peak in 2014 at about US$63 billion, capital expenditure in Africa steadily declined to about US$35 billion by 2019. This decline is a result of lower activity from new projects, general cost compression in the industry and friction in getting new projects sanctioned due to external influences such as export route disagreements and fiscal parameters. Going into 2020, expenditure dropped further to below US$24 billion, representing an almost 35 percent drop versus 2019. The impact of COVID-19 is the main culprit as the pandemic deferred investment decision on many projects. As some greenfield investments return, 2021 is expected to be better than 2020 but still under 2019, with overall capital expenditure estimated to be US$30 billion,” AEC stated.
“It is expected that currently under development projects will lift capex in 2022 to US$33 billion. The spending level is expected to stay relatively flat for the years 2022 – 2023 and any growth in 2024 – 2025 is expected to come from contingent expenditure. Ensuring such contingent investment takes place is in the hands of the decision makers capable of incentivizing projects through innovative deal structuring and collaboration efforts. The fruits of such labor could reward the continent with an additional $40 billion of investment, critical for sustaining the longevity of the oil and gas industry.”
Also, the ongoing invasion of Ukraine by Russia is seen by some industry analysts as a reality check. They argue that it is an indication that the world is not yet ready for energy transition without fossil fuels, which accounts for larger percentage of global energy consumption. The war has led to astronomical increase in prices of petroleum products, including coal.
According to the Executive Chairman of AEC, Mr. NJ Ayuk, Russia accounts for about a third of Europe’s crude oil imports and about 50 percent of natural gas supplies per year. And with plans by the European Union to place embargo on petroleum products import from Russia, it will require a producer with sizable resources to take Russia’s place. He thinks that African oil producers can fill in the gap with Russia’s forceful exit from the European market.
“But getting there will be tough. African countries will need months to ramp up their gas production, especially since until very recently, Western leaders and environmental organizations were aggressively pushing for a rapid halt to African gas investment in the name of climate protection — an effort that sent foreign companies running for cover,” Ayuk noted in an op-ed.
“Reducing the time required to get natural gas flowing and exported will require speedy action on the part of European and African stakeholders.
“For one thing, while Africa has a wealth of natural gas reserves, it is considerably lacking in gas infrastructure. Without a prompt and significant uptake in investments by European countries, financial institutions, and energy companies, there’s no way Africa will have enough pipelines, storage capacity, or processing facilities to adequately meet Europe’s gas needs.”
He called on African leaders to act decisively and smoothen the way for European entities “to successfully invest in African oil and gas infrastructure projects, make deals rather than engage in unreasonable delays, and get gas production and transportation in motion. And, at the same time, African governments must do as much as possible to consider African needs, even as they attempt to meet Europe’s.”
Over 600 million people on African continent do not have access to modern energy and by 2035, energy demand in Africa is projected to increase by 40 percent of what it is currently. This growth will be driven by industrialisation, increase in population, and expansion in economic activities.
“Africa’s energy transition should be anchored on maximising fossil fuels, especially gas utilisation, and investment into renewable energy projects. With over 600 million people living without access to modern energy, African energy demand in 2035 will be 40 percent higher than it is today, compared to 10 percent higher for global energy demand. This growth will be driven by industrialisation, population and expansion in economic activities,” said Nigeria’s Minister of State for Petroleum Resources, Chief Timipre Sylva at a forum recently.
Nigeria recently sought help from the United States government for funding of some critical energy projects in the country. Nigeria lacks infrastructure and requires funding and investments from both local and foreign investors to close the gap.
Timipre Sylva“We have access to gas but access to funding has been the problem,” Nigeria’s Minister of State for Petroleum Resources, Sylva told the U.S. Secretary of Energy, Jennifer Granholm on the side-line of the CERAweek 2022, in Houston, Texas, United States.
“Our desire is to be able to take gas from Nigeria through Algeria to Europe. We have already kick started the AKK gas pipeline project and if we have the required funding we can complete that project in two years.”
However, upcoming projects like the Greater Tortue Ahemyim Floating LNG project offshore Senegal-Mauritania; the TotalEnergies-led Tilenga project in Uganda; the Sonatrach-led AT (Isarene) project in Angola; the TotalEnergies-led Cameia-Golfinho project in Angola; and the Eni-led Quiluma/Maboqueiro project in Angola, are evidence that African oil producers are getting it right with regards to regulatory, governance, fiscal and administrative laws in the industry.
“Our focus should be opportunities and driving the cost down, so we are able to keep investment coming in and to find and devote our industries to be able to produce more. We need to be competitive in the global market because the oil industry is a global industry. We need to develop regulations that are flexible enough to adjust to the market. In these risky times, we need more clarity between the different entities within the industry; we have also implemented reforms to make clear what our plans are for licensing, exploration and activities.
Regulatory frameworks need to have clear regulations in order for stakeholders to know what to expect. In terms of measuring the success of what we have done, from the reforms that were implemented over the last few years, we can say that we are moving in the right direction. Some of the reforms that we have implemented, we are seeing those projects developing and coming online. In terms of measuring success, we are seeing good results,” said the Director of Strategic Planning of ANPG, Alcides Andrade at the African Energy Week 2021.
