African Mining May 2020 | Page 49

AFRICA’S GAS STILL REPRESENTS OPPORTUNITY By NJ Ayuk Globally, the lockdowns as a result of the Covid-19 pandemic has made conditions dire and triggered global economic shutdowns. For the oil and gas market, it has been an especially trying time. Demand for oil and gas has plummeted. April 2020 saw a massive drop in oil demand (almost a third of the world’s daily use). Add to that an oil price war that resulted in Saudi Arabia and Russia increasing oil production and battling for market share since March 8, and you have a perfect storm. In March, the benchmark West Texas Intermediate (WTI) and Brent each fell more than 50%. In the first quarter overall, WTI fell 66% and Brent dropped 65%. The once-prolific shale operations across the US are now seeing abandoned projects that have little to do with social distancing. The hydraulic fracturing (fracking) process that has become the industry standard in shale production is expensive – meaning the ultra-low oil prices make the process cost-prohibitive. Whiting Petroleum in North Dakota’s Bakken is today’s poster child for the current state of that segment. After topping USD150 a share just a few years ago, the producer’s stocks took a nosedive to close at 67 cents on March 31. The following day, the former shale giant filed for bankruptcy. Although the situation is grim, it is not a reason to panic. The oil and gas industries are cyclical by nature, and downturns come with the territory. While the situation we find ourselves in now is unusual, there certainly is precedent for recovery. Already, we are seeing reasons to be hopeful. Russia and Saudi Arabia reached a tentative deal on production cuts during an April 9 OPEC meeting, and other producers may soon follow suit with cuts of their own. The situation is still fluid, but it looks promising. As for the lack of demand caused by Covid-19 lockdowns, no one can say how long it will last. What we do know, however, is that it won’t last forever. For now, I have some advice for the US drillers striving to get through this challenging period: This could be a good time to take a fresh look at Africa. When I wrote my book, Billions at Play: The Future of African Energy and Doing Deals, I explained how the American shale boom affected the presence of American oil and gas companies in Africa. By that time, 2019, many US companies had exited or reduced their footprint in Africa to focus on US shale production. It could be that the factors that made shale a more profitable option than production in Africa no longer exist. I realise overseas operations may sound counter-intuitive to companies that are slashing their budgets, but there are sound business reasons behind my recommendation. In particular, the low cost of production should be considered. Deepwater wells have been drilled for less than USD50-million in Angola. Plus, Africa’s rich resources still represent opportunity, including a wealth of natural gas waiting to be discovered. Lower Profit Price Point Oil produced in the US needs to sell for at least USD30 to USD50 to be profitable. In contrast, I believe that it is possible to make a profit selling African oil for USD25 to USD30. Quite simply, it is cheaper to obtain assets like oil and gas mineral rights and oil field licenses in Africa. Furthermore, the revenue that can be obtained from the assets is higher. The cost of production is typically much cheaper. As I noted in my book, the past few years have seen significant drops in E&P costs in Africa. Rig rates have come down, and the efficiency of drilling has improved. In addition, drilling is undertaken in more favourable conditions. Drillers are avoiding high pressure, high temperature, and ultradeepwater plays. Less red tape US Independent producers doing exploration and production activities have fewer regulations in Africa, which potentially could make operations less costly. Plus, one positive ‘side effect’ of our current economic challenges is a renewed dedication on the part of several African petroleum and energy ministers to strengthen cooperation, promoting synergies, intra-African trading, and knowledge exchange. This could spell significant ease for multinational efforts in Africa. Africa is underexplored Possibly the best case for encouraging activity among African fields is all this untapped potential. The continent is truly one of the last promising regions for both offshore and onshore oil production. Four years ago, the US Geological Survey estimated that were 41 billion barrels of oil and 319 trillion cubic feet (tcf) of gas waiting to be discovered in sub-Saharan Africa. It is still waiting. Even during times of economic difficulty, including the Great Recession, natural gas consumption has increased. Although natural gas prices are down as we speak, the situation could change quickly. Social distancing and shutdowns won’t necessarily impact demand for natural gas in the long term, since it is widely used to generate electricity; for heating, cooling and cooking; waste treatment and incineration; and as feedstock for a wide range of chemicals and products from butane and propane to fertilisers and pharmaceutical products. What’s more, the current low prices might actually foster its demand in a post-virus market where we see power generation www. africanmining.co.za African Mining Publication African Mining African Mining • May 2020 • 47