Negotiating Africa’s Oil and Gas Future: Role of Offshore, Deepwater and Human Capital Development
By Jerome Onoja
Africa used to be regarded as the Dark Continent, but over the years, the narrative has changed, especially with the exploits of the continent in the global economic landscape and the petroleum industry.
This article highlights the future of the African oil and gas industry and the major roles offshore, deepwater exploration, as well as local human capacity development, would play in the prospect of the industry. It also seeks to explore the strategy for the growth and development of the industry.
Decades after crude oil and gas exploration began in the Africa, it had been tales of mixed fortunes. In the early years of oil hydrocarbon exploration, the continent’s oil and gas industry had struggled initially, with international oil companies dominating and setting the pace in exploration and production activities.Over the years, multinational oil companies continued to dominate and dictate the pace of the industry, with the exception of a few countries that had taken up the gauntlet and had developed the capacity of their local companies to effectively compete and control their petroleum industries.
In another aspect, Africa struggled to grow its crude oil output to significant levels to enable it contribute meaningfully to global crude oil output. Specifically, data obtained from British Petroleum’s (BP) policy notes showed that in 1965, Africa’s oil output stood at an average of 5.09 million barrels per day (mbpd), accounting for 11.68 per cent of global crude oil output of 43.63 million.
In 1980, Africa’s contribution to global crude oil output dropped to 9.88 per cent, with an average of 6.22 million barrels of crude oil per day, compared to global average of 62.95mbpd.
In 2000, Africa’s contribution to global crude oil output rose slightly to 10.37 per cent, with an average of 7.77mbpd compared to global output of 74.93 million.
As at 2016, Africa’s share of global crude oil output dropped sharply to 8.56 per cent, with an average of 7.89mbpd, compared to global output of 92.15mbpd.
Notwithstanding the not-too- impressive fortunes of Africa’s oil output, analysts are of the view that the continent still presents enormous potentials and might become a hotspot and a major hub of crude oil exploration.
Energy analysts argue that for years, Africa's abundant natural resources have been playing a central part in the economic development of many of its constituent nations, stating that increased exploration activity by the global oil and gas sector had generated a raft of major hydrocarbon discoveries both offshore and onshore.
The International Energy Agency, IEA, had a few months ago, stated that almost a third of all oil and gas discoveries, especially deepwater discoveries, in the last five years across the world, were made in sub-Saharan Africa, a trend that analysts said was set to continue for the foreseeable future.
The analysts were also of the view that African oil and gas hotspots are becoming increasingly attractive to global investors and exploration companies.
Ernst & Young stated that the growth of resource exploration and production in Africa, especially in offshore and deepwater, had been the largest single magnet for much-needed foreign direct investment (FDI) in Africa over the last decade or more, with coal, oil and gas projects accounting for 40% of Foreign Direct Investment (FDI) capital between 2003 and 2010.
In addition, a report by a law firm, Berwin Leighton Paisner (BLP), pointed out that about half of the $1 billion raised in London's mid-market oil and gas sector in 2013, had been destined for projects in Africa.
BLP's report noted that all of London's mid-market fundraising for South American oil and gas projects was carried out at greater than a 10 per cent discount, a clear concession to perceptions of heightened geographical risk, while only half of fundraising efforts for African projects required the same discount.
Head of Africa Programme for Chatham House, Mr. Alex Vines, declared that oil and gas potential in Africa, as well as global awareness of that potential, is at an all-time high. Vines stated that although finding oil and gas in Africa can still be low cost, developing it needs deep financialn investment and long-term commitment.
He explained that African governments that manage better their regulatory and business environment are more likely to attract this type of investment that is needed to unlock their natural resource endowments, which in turn can generate revenue.
Describing Africa as a vast territory of untapped potential, Mr Adepetun Sola of ACAS Law believes the regulations and legal framework of the Nigerian oil and gas industry are quite robust enough to regulate its operations. Lamenting the overly ambitious plan to piece all legislations into one document as the PIB; Adepetun advised potential investors to take that plunge. “He asserted that the existing laws governing the industry have been tested and tried for over 50 years. Thus they’re reliable!” A couple of other African countries are collaborating with Nigeria to replicate these proven frameworks.
In addition, other energy experts are of the view that steadily rising foreign investment in African offshore deepwater is a reassuring indication that geographical risk on the continent is becoming less of an issue for many investors and exploration companies.
One of Shell’s policy briefs stated that, in the past decade, industry-wide production from deepwater fields had added more than 800,000 barrels per day to Nigeria’s total oil output. It noted that the Federal Government of Nigeria via its short and medium term priorities aimed at the development of Nigeria’s oil and gas sector, termed the ‘7 Big Wins’, had set ambitious targets to increase total oil production in the next few years with a plan to significantly increasing deep-water exploration and production.
In addition, in its review of the African petroleum industry, PricewaterHouse Coopers, PWC, disclosed that Africa is the last true oil and gas frontier with more than 4,200 oil and gas blocks identified, while almost half of these blocks are open, subject to force majeure or in the application phase.
In the report titled, ‘From promise to performance,’ PWC noted that more than 80% of the 1,300 blocks in North Africa are licensed, while in sub-Saharan Africa it is estimated that only about 30% of 2,900 blocks are licensed.
It argued that in the sub-Saharan regions it is evident that many new opportunities still exist, especially for exploration and production (E&P) companies involved in deepwater activities and the like, that are willing to take risks.
It said, “There are many key opportunities within Africa due to: new exploration blocks being opened for competitive bidding; port development and management; pipeline engineering and construction, both subsea and onshore; onshore and offshore maintenance; LNG plant engineering and construction; carbon dioxide (CO2) reduction and gas-powered electricity generation.”
Other opportunities, PWC said, exists in gas monetisation projects for local use, methanol, fertilisers, urea; stability of supply and security of supply with a reduction in exports; foreign exchange inflows; distribution of wealth – a benefit for all citizens; infrastructure development mega projects; and new refinery development or upgrades.
PWC disclosed that the booming oil and gas industry is seeing greater interest in all regions, including frontier states such as Namibia, Togo, Liberia and areas where exploration and production had been diminishing over the last few years. This, it said, includes countries such as Ghana, Côte d’Ivoire and South Sudan, and the new players on the east coast, particularly Mozambique and Tanzania. It maintained that Africa is seeing continued growth, with East Africa emerging as a new source of gas and oil, stating that significant gas finds in excess of 127 trillion cubic feet (TCF) in Mozambique have created the potential for another African super player.
According to the report, with further exploration and development, it is expected that Mozambique could overtake Nigeria and Algeria as the African country with the largest gas reserves and the country is expected to become the second-largest exporter of Liquefied natural gas (LNG) by 2025, as the country steps up production from 10 million tonnes per annum (Mtpa) in 2017 to an envisaged 50Mtpa.
It further stated that access to the lucrative Asian LNG market has significant economic benefits for the East African region and could act as a catalyst for meaningful economic development.
It added that developments in Ghana have demonstrated the possibilities within Africa to the world, stating that the Jubilee field was hailed as the fastest ever deepwater development, taking just 24 months from development to production.
“With growing interest and investment from India, China and international oil companies operating in Africa, there has been increased competition for exploration acreage in recent years.
“As some of the traditional multinationals divest from areas in Africa, opportunities for new independents will emerge, causing the trading mix and diversity of the companies trading in Africa to change. This will cause established energy companies to become more agile in order to respond to greater competition and emerging trends.
“African nations and consumers are starting to focus more and more on securing adequate supplies of crude oil and liquid fuels to satisfy growing local demand. The pressure on governments will cause changes to pricing structures and regulatory frameworks as some countries move to a more deregulated trading environment.”
In addition, PWC said, “Other countries are enacting regulations to increase tax revenue and foreign exchange inflows. Although this may be achieved in the short term, there is a possibility that such measures will cause a decrease in investment with long-term implications.
“Exploration and refining capacity in Africa will continue to increase, in contrast to what is happening in the developing world, as countries strive to have a greater security of supply and increase export earnings from the sale of refined products.
“At the same time, uncertain regulatory frameworks, political intervention and the nationalisation of resources will be key issues that will affect the oil and gas industry in the coming years.”
Again, in its overview of the African deepwater terrain, Haliburton stated that deepwater and offshore developments in Africa date back to the 1960s, adding that today, it ranks as one of the most significant deepwater provinces in the world with Nigeria and Angola leading the region with the largest number of proven reserves, estimated at over 45 billion barrels.
“In addition to Africa’s West coast activity, the East coast is gaining momentum and visibility by operators both large and small pursuing exploration activity. Areas most revered are countries, such as Kenya, Tanzania, Mozambique, and Madagascar,” it noted.
Furthermore, the International Energy Agency, argued that Western and Central Africa is one of the most active offshore petroleum fields in the world and is by far, the world’s most active deepwater sector. “Biggest players include Nigeria, Angola and Ghana, but almost all the marine waters off Africa’s Atlantic coasts are currently divided into blocks open for oil and gas exploration or exploitation,” it explained.
In its analysis of the African deepwater petroleum sector, Deloitte stated that in terms of supply, Africa had become a significant player in the industry over the last 10 years with research showing that the continent’s contribution to global crude production had trended between 9.4% and 12.1% over the last 5 years with an increase of 2.1 million b/d from 2013 to 2014.
Similarly, in a report titled, ‘Localisation in Africa’s oil and gas industry’, Analysts at Deloitte, further stated that Africa’s share of global gas production has been between 6% and 7% over the same period with an slight decrease of 0.1 trillion cubic feet (Tcf) year on year to 2014.
It said the most significant growth in oil and gas investment on the continent had occurred in East Africa with discoveries in Kenya, Uganda, Ethiopia, Madagascar, Mozambique and Tanzania.
On its country-by-country analysis of East Africa activities, Deloitte stated that significant oil discoveries in Kenya show estimated oil reserves in this basin amounting to 600 million barrels, adding that the overall potential for the basin would be fully assessed over the next two years through a large programme of exploration and onshore and offshore appraisal wells, expected to be in excess of one billion barrels of oil.
The report said exploration interest in Kenya had surged since the announcements of significant first oil strike discoveries in the past three years, resulting in a rush by international oil and gas companies to snap up what remains of Kenya’s 46 exploration licences.
In the case of Uganda, the report stated that the exploration programme in Uganda’s Lake Albert Rift Basin has delivered successful well appraisals that had boosted Uganda’s proven reserves from zero in 2010 to 6.5 billion barrels of oil and 0.5 trillion cubic feet (Tcf) of non-associated gas.
Uganda’s Cabinet, the report noted had recently approved plans to open up six exploration blocks in the oil-rich Albertine Basin for licensing in the country’s first competitive bidding.
As a result, Deloitte disclosed that Uganda and Kenya were on track to becoming oil exporters by late 2018 or early 2019.
However, the report declared that in Ethiopia, there was currently, no commercial production of hydrocarbons, though there had been significant natural gas discoveries with an initial estimate of 4 Tcf deposits.
“Hydrocarbon shows in the South Omo basin wells have given the indication of a working petroleum system, and therefore the acreage in southern Ethiopia remains prospective,” it argued.
In the case of Madagascar, the report said, “Oil and gas exploration in Madagascar has been ongoing for over 100 years. The country’s most promising asset, the Tsimiroro oil field, has a current estimate of 1.7 billion barrels contingent resource base. There are plans to build an export terminal on site, a pipeline to transport the oil to the coast, a marine terminal and an offshore mooring facility.
“The offshore Morondava basin is believed to contain large untapped deposits of hydrocarbons with estimates of undiscovered technically recoverable resources of 10.8 billion barrels of oil, 167 Tcf of natural gas, and five billion barrels of natural gas liquids.”
The report said there is significant further opportunity for exploration, as Madagascar has a total 249 exploration blocks, of which 24 have so far been licensed to exploration companies.
Mozambique, the report added has a proven natural gas reserves greater than 100 Tcf, and is set to rank as the fourth-largest exporter of Liquefied Natural Gas (LNG) in the world.
The final investment decision, the report noted, is expected during 2015 for its giant LNG project, with plans to construct a five-train LNG plant with a 25-million-tonne-per-year capacity.
“Due to the large reserves and geographic proximity to Asian markets, Mozambican natural gas is expected to have a promising future,” it averred.
Going further south, the report said South Africa had also been identified as a country with significant shale gas potential, and had attracted increased attention from international oil companies (IOCs) since the Karoo Basin’s shale gas potential was first identified as comprising 600 000 square kilometres of thick, organic-rich shales. South Africa, the report noted, is thought to hold 390 Tcf of technically recoverable shale gas resources.
However, the report said shale gas development has been met with significant opposition from anti-fracking organizations due to the perceived risk of groundwater contamination, which led to a moratorium on shale development between 2011 and 2012.
“This has subsequently been lifted. There has also been much activity off-shore, with state-owned electricity utility Eskom announcing that it will enter into commercial negotiations for the supply of natural gas from the Ibubesi field off South Africa’s west coast for power generation purposes,” it argued.
Confirming Deloitte’s claims, analysts at Gulf Intelligence, in a special report on the global petroleum industry, disclosed that East Africa is elbowing its way under the spotlight and will change Africa’s energy map in the years ahead – a move easily justified by its wealth of oil and gas assets.
For example, the report said Tanzania hopes to use its 55 trillion cubic feet of natural gas reserves to become a LNG exporter by 2025, while Tullow and Canada’s Africa Oil have identified 600 million barrels of oil reserves in Kenya’s South Lokichar basin.
However, to reap the huge benefits inherent in the future, PwC is of the view that National Oil Companies (NOC) across Africa have an enormous opportunity to secure a more sustainable future by transforming into ‘national energy companies’ (‘NECs’), escaping the economic trap of a lower oil price and embracing the disruptive forces unleashed by climate change and a low carbon world.
According to the global consulting firm, a new era of lower oil prices is challenging business models that have long relied largely on exploration and production of hydrocarbons, particularly ‘black gold’ oil, adding that this is likely to prompt African countries that have for decades depended on their NOC as a key source of revenue to rethink the ‘nation-building’ role that their NOCs have played.
PWC emphasised that the sustainability of NOCs would depend on their ability to transform into NECs, responding to the demands placed on them by consumers, governments and non-governmental organizations (NGOs) to respond to climate change and a new energy future.
Chris Bredenhann, PwC Africa Advisory Oil & Gas Leader, said: “Globally, the energy sector is experiencing significant change and upheaval. Whether it is in oil & gas or utilities, we are witnessing tectonic shifts in strategies, business models and ways of working.
“Whether we are talking about fledgling NOCs with limited hydrocarbon resources or established NOCs sitting on large reserves, all of these companies will need to work out how to seize the opportunities emerging from this disruption.”
Again, regardless of size, these operators would need a drastic shift in operations model to stay sustainable and to efficiently transform to NEC, the use of cutting edge technologies.
Mr Sam Olotu, the Chief Technical Officer of Lekoil believes reliance on technology is central to unlocking the wealth offshore and deep offshore Africa. Narrating the Lekoil experience, he explained that improved technology was deployed right from Seismic data acquisition, to re-entry of the Otakikpo well, and the subsequent evacuation activities in Niger Delta, Nigeria.
“At the moment production has ramped up from about 5,000 bpd to 7,400 bpd, still with 10,000 bpd as a target; relying strongly on the use of modern technologies.”
In the area of local and human capacity development in the continent, multinational companies had been struggling to transfer knowledge from various projects to indigenous companies and individuals, with little success.
Shell said, by bringing in outside experience, its Nigerian subsidiary, SNEPCO, had helped created the first generation of Nigerian deepwater oil and gas engineers. It disclosed that the Bonga North West oil and gas field is not only unlocking new energy resources in Nigeria, it is also unlocking new skills.
“Today, 96% of SNEPCo’s staff is Nigerian, with significant levels of Nigerian staff trained or going on assignments overseas, further increasing local capacity for the future. SNEPCo has also provided specialised training for semi-skilled Nigerians to work in the energy industry, for example, as welders and scaffolders,” it stated.
It added that Bonga also stimulated the growth of support industries vital to deepwater projects, noting that these benefit the wider Nigerian economy by boosting demand for a range of goods and services including offshore vessels and platforms, materials, floating hotels, helicopters and manpower, creating jobs and providing a range of training and maintenance services to the industry locally.
Shell also declared that Bonga had the first, largest and most technologically advanced polyester moored deep-water buoy to be built in Nigeria.
“The SPM buoy that was installed at Nigerdock in Nigeria is one of the world’s largest. With the fabrication and installation of this SPM buoy, Shell demonstrated that its logistics base in Nigeria can support other deepwater developments in other regions,” it added.
However, Ghana’s Tullow Oil stated that due to the capital and technology intensive nature of the petroleum industry, only a relatively small number of highly technical and specialised personnel are needed by our operations.
Despite the challenge, Tullow Oil said it has a commitment to hiring locally and have set internal targets for increasing the proportion of our staff represented by the nationals of our host countries.
It added that there are also employment opportunities in its supply chain, particularly in its onshore operations.
The company said, “We try to maximise these by requiring our international suppliers to employ and source goods and services locally, as part of their contract with us. We also work closely with our host governments to ensure that their expectations around skills localisation are balanced with operational and labour market realities.
“We maximise opportunities for local businesses and our local content strategy helps local businesses to develop so they can secure work from the wider industry. We reinforce this work through our contracting strategy by requiring international suppliers to set out in their tender documents their commitment to developing local companies within their own supply chains.”
Despite the efforts of a few indigenous companies, a major concern in the African petroleum industry is the aging workforce, and with the rising youth unemployment, only a few young people are currently being employed into the sector, thereby creating a huge skill gap.
Fears among stakeholders in the industry is that if this skills gap is not addressed urgently, in the future, when the aging workforce eventually retires, the individuals to take over their duties would be ill-equipped and ill-prepared to drive the growth of the industry.
Speaking to Orient Energy Review in Cape Town recently, Dr Danisa Baloyi, first female President of Black Business Council, South Africa, frowned at the level of effort put into human resource development of indigenes by multinational companies. She opined that the attitude of Africans should be: “nothing happens for us without us getting involved.” Decrying the continued capital flight and exploitation of Africa’s natural resources, she demands that all foreign-owned businesses in African countries should be inclusive in their plans, making room for the deliberate capacity development of youths and women …considering the fact that the youth age range amounts for over 60% of its population, the African continent should be more intentional in its approach towards the youth”, she said.
Mr. Claudine Sigam, Project Officer for Optimization of Natural Resources Management in Africa for the United Nations Conference on Trade and Development (UNCTAD), argued that human capital under-development may be one of the root causes of poor performance of resource-rich economies in developing countries, particularly in Africa
He added that capturing more value in the local economy should be a priority for resource-rich developing countries in their quest for leveraging natural resources for development objectives.
He stated that in many resource-rich developing countries, particularly in sub-Saharan Africa, less than 20 per cent of total transnational corporations’ (TNCs) investments in the mineral sector remain in the host country.
“In Nigeria, for example, an estimated $15 billion is spent annually on servicing operations in the oil and gas industry. However, only very little proportion of this amount and the accruable profit is available to indigenous oil servicing firms or spent in developing Nigeria’s industrial base.
“As a consequence, the sustained rise in mineral commodity prices has led to record profits for the energy and mining industries without commensurate reduction of poverty in host countries,” he maintained.
He recommended that the capacities of resource-rich developing countries needed to be strengthened while mineral wealth should be invested in the creation of knowledge for economic innovation, and in human, social and physical capital formation, including infrastructure for development.
According to Sigam, a quick human capital formation can occur through vocational training programmes, adding that as part of their corporate social responsibility, companies can emphasise human capital formation areas where they have comparative advantages.
He said policy strategies to achieve higher local content can be achieved by consciously building local capability development, noting that this strategy would involve considerable undertakings from the oil companies such as providing direct and prolonged assistance to indigenous firms to improve their quality and reliability.
Sigam further noted that evidence from several resource-rich countries – Angola, Botswana, Brazil, Chile, Equatorial Guinea, Nigeria and Trinidad and Tobago suggested that addressing the skills shortage in the industry would entail creating an educational base, to support development in the long run, and by improving the direct participation of the local workers with companies in the industry value chain.
“With regard to the educational base, the training of personnel, the provision of relevant education, the development of Research and Development (R&D) programmes, and the collaboration between major companies, local universities and training institutes is paramount to design programmes with an appropriate syllabus to meet the skills requirements of the industry.
“In Chile, the government created an environment that generated positive synergies between the government, universities, mining firms and local companies, which resulted in mining clusters,” he explained.
Continuing, Sigam said, “The introduction of local content provisions for training and hiring national workforce, and the creation of industry linkages and extensive supplier development programmes, including training, product development, testing and factory auditing are some of the ways governments can involve local workers in the value chains.
“Several resource-rich countries have applied hiring quotas or targets for training of local workers. Countries like Nigeria and Angola have even set targets of participation, to increase local staffing in oil companies.
“However, companies have encountered difficulties in achieving these targets, especially for more specialised staff. These policies are more effective when complemented with training programmes supported by the extractive industries and intended to ensure the availability of skilled workers, in accordance with the sector’s changing requirements.”
Furthermore, making a case for local and human capacity development in Africa, Deloitte said a localised supply chain has the benefit of improved security of supply, allowing for ease of procurement and reduction of lead times for specialised part ordering and machine downtime resulting from component breakdowns.
It added that with local and human capacity development, local service would also significantly be more efficient and cost effective than long-distance support and would bring about improved responsiveness with better communication and agility of supply, resulting in lower stock level requirements.
It noted that lower costs are achieved due to lower logistics costs, cheaper building of capital equipment and government incentives aimed at stimulating local manufacturing, adding that it would bring about additional competition in the local market and reduction on foreign exchange exposure will result in more cost-effective procurement for oil and gas companies.
Deloitte argued that business development in Africa would improve company perceptions of the continent, resulting in increased foreign direct investment (FDI). It also stated that other African countries will also see the benefits of localisation, and they will wish to imitate the same in their own economies, thereby setting a precedent on the continent for further local content initiatives.
Other benefits, it said include, “Investments will realise great economic rewards for the host countries, with benefits and added value significantly exceeding costs; upliftment of local industrial capabilities that benefit the host country and the value chain required by the oil and gas companies.
“Greater availability of sought-after skills in country for oil and gas projects, research and development and support of operations; self-sufficient local industries that can support the oil and gas sector and the host country’s economy as a whole.
“Improvement of local community environments, through reduced unemployment levels due to higher economic activity and opportunities – A move from unskilled to semi-skilled workforce will lead to better productivity and increased diversity in work, resulting in skills retention.”
From the foregoing, it is obvious that the offshore and deepwater potential of the African petroleum industry is enormous and though, it is presently struggling to find its foot, it is the next frontier for the global oil and gas landscape.
Given the immense potential that the African oil and gas industry holds, it is critical that all stakeholders be committed to sustainable local content development. Analysts were unanimous in their views that localisation offers such an opportunity, adding that with the nature of the oil and gas industry, namely the long-term high capital expenditure (CAPEX) spend projects, offers the opportunity to explore local manufacturing capabilities (enterprise and supplier development) by leveraging on the forecasted spend.
Therefore, it is agreed that the future for the industry is brighter, now, more than ever before, and businesses and individuals that would benefit from the industry in the long run, are those that would start taking position today.