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March 3, 2015

Investing in Africa’s growing offshore sector

African oil and gas hotspots are becoming increasingly attractive to global investors and exploration companies. While trends are generally on the up in terms of interest in the continent’s established and emerging oil and gas regions, what are the factors driving the flow of investment? Three national case studies – Nigeria, Ivory Coast and Mozambique – offer an insight into the pitfalls and possibilities for overseas investors looking for opportunities in Africa’s burgeoning oil and gas sector.

By Chris Lo

Niger delta

For years, Africa’s abundant natural resources have been playing a central part in the economic development of many of its constituent nations. Increased exploration activity by the global oil and gas sector has generated a raft of major hydrocarbon discoveries both offshore and onshore. Since the International Energy Agency’s figures confirm that almost a third of all oil and gas discoveries in the last five years were made in sub-Saharan Africa, this is a trend that looks set to continue for the foreseeable future.

The growth of resource exploration and production in Africa has also 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 FDI capital between 2003 and 2010, according to Ernst & Young.

A more recent encouraging sign for the attractiveness of Africa to oil and gas investors comes in the form of a November 2014 report by emerging market-focused law firm Berwin Leighton Paisner (BLP), which found that almost half of the $1bn raised in London’s mid-market oil and gas sector in the last year has been destined for projects in Africa.

Attracting investment

This is a reflection of an investment shift in the industry – including majors but especially mid-level frontier exploration companies – to gradually disengage from mature markets with strict regimes and move towards high-potential emerging resource regions in the hopes of making a big find. Perhaps the clearest exemplar of this trend is Tullow Oil, which in January 2015 was considering cutting its presence in the North Sea as it continues to push its investment in Africa.

Steadily rising foreign investment in African offshore is a reassuring indication that geographical risk on the continent is becoming less of an issue for many investors and exploration companies. 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% discount, a clear concession to perceptions of heightened geographical risk, while only half of fundraising efforts for African projects required the same discount. Companies offering a smaller discount on shares during fundraising rounds seem to suggest the market has increasingly come to accept offshore Africa as a less risky and more lucrative option than many of its emerging market counterparts.

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Still, challenges and risks still exist in Africa, especially in the form of regulatory uncertainty as countries, some of which are new entrants to the oil and gas sector, work to establish regimes that will attract foreign money while also spreading a fair share of the economic benefits to people at a local and national level. Country by country, examples have emerged that provide insight into what to expect for overseas investors looking for opportunities in Africa’s burgeoning oil and gas sector.

Nigeria: West Africa’s oil giant at a crossroads

Nigeria has long been an energy titan in Africa, leading the continent in oil production and attracting exploration companies to increasingly move into deepwater blocks. The country’s Egina deepwater field, a co-development between Total, CNOOC, Petrobras and South Atlantic Petroleum which is due to start production in 2017, is a flagship project for Nigeria’s deepwater ambitions.

The field, which according to Total will have a production capacity of 200,000 barrels of oil per day (b/d), will employ an advanced subsea production system and a floating production, storage and offloading (FPSO) vessel in what should be a demonstration to potential future investors of the country’s rapidly developing offshore industry and capability to tap resources more than 100km from the coast and in water depths of 1,750m.

Despite the impressive accomplishments being made offshore Nigeria, now is a crucial and arguably precarious time for the nation’s oil sector. The controversial, long-gestating and oft-delayed Petroleum Industry Bill (PIB) reflects Nigeria’s desire to create a more modern, reliable and stringent set of regulations for oil producers. Certainly, a stable regulatory framework can help reduce the uncertainty of potential investors, but the PIB has proven a sticking point for industry players.

Although the bill incorporates tax incentives to encourage onshore and shallow water projects, increased tax rates for deepwater projects could drive investors away. The exact form that the PIB takes whenever it emerges could have a decisive influence on Nigeria’s prospects as an oil and gas investment hotspot, especially as onshore and shallow water projects – those set to receive a boost under the PIB – are most vulnerable to security threats like oil theft and output disruption, which have cost the industry billions in lost revenue in 2013 alone.

"Interest and investment has been picking up in East Africa over the last 10 years."

Ivory Coast: a true up-and-comer?

Nigeria is facing increased oil and gas competition in West Africa, from established and well-developed rivals like Angola and Ghana to offshore wildcards like Mauritania and Sierra Leone, all of which (especially the former two examples) hold significant investment potential.

Ivory Coast, nestled between Liberia and Ghana on Africa’s western coastline, stands as an example of the increased stability and economic productivity that has characterised many African nations in recent years. Racked by post-election civil war as recently as 2011, Ivory Coast has sustained peace and steady economic growth rates that have been approaching 10% in the years since the conflict.

In common with the likes of Kenya and others, Ivory Coast is looking to diversify its primarily agricultural economy by further exploiting its offshore oil resources. The country was producing around 60,000b/d at its peak in 2008, although technical issues have reportedly reduced this figure to 30,000b/d in early 2014. Nevertheless, the country’s waters are busy with exploration activities and significant discoveries have been made by companies such as Russia’s Lukoil and French supermajor Total, which made a "very promising find" at its deepwater (2,300m) Saphir-1XB exploration well in April 2014.

The Ivorian government is confident about the nation’s hydrocarbon future, and aims to rival neighbouring Ghana (the success of which may make Ivory Coast a more attractive proposition to oil and gas investors) by increasing production to 200,000b/d by 2019. "We have about 50 oil blocks of which half have been awarded," said Ivory Coast Prime Minister Daniel Kablan Duncan at the outset of 2014. "We expect to add at least five wells a year."

Duncan joined a high-profile Ivorian delegation to Houston, US in October 2014 to promote its deepwater licences, which could push the country’s offshore industry into a new league, as long as Ivory Coast’s newfound period of peace and prosperity can continue uninterrupted.



What can the offshore oil and gas industry expect in terms of CAPEX spending, regional hotspots, oil prices and potential challenges in 2015?


"These are exciting times," said Drillinginfo’s Africa manager Andrew Hayman in November 2014. "Côte d’Ivoire has been a modest oil producer since Espoir started in 1980; later, production stepped out off the shelf with Baobab. Now the country is on the cusp of deeper-water commercial success on a bigger scale, maybe even in both the Ivorian Basin and the (western) San Pedro margin."

Mozambique leads East Africa’s gas discoveries

Hydrocarbon development has generally been slower in East Africa, which doesn’t share its western counterpart’s beneficial geology and its similarities to hydrocarbon-bearing formations in South America. Nevertheless, interest and investment has been picking up in East Africa over the last 10 years, with major offshore gas discoveries putting the region on the map.

Alongside news of considerable gas discoveries in Tanzania and Kenya, Mozambique has emerged as the star of East African offshore gas. Major discoveries by Italian multinational Eni at its Agulha and Coral 1 exploration projects in the Area 4 licence offshore Mozambique were rated as the industry’s biggest oil and gas discovery in 2013 at 700 million barrels of oil equivalent each, and taken alongside the previously-discovered Mamba complex, Area 4 as a whole has provided an astonishing level of success.

Almost certainly as a result of the richness of discoveries like these, there has been a surge of interest in Mozambique’s upcoming Fifth Licensing Round, which will make new exploration acreage available. The country’s National Petroleum Institute announced in January 2015 that the deadline for bids has been extended from 20 January to 30 April 2015, reportedly due to the high level of interest and to allow companies more time to consider their bids. The round incorporates 15 new exploration blocks comprising more than 70,000km², 11 of which are deepwater blocks.

There is no doubt that oil and gas potential in Africa, and global awareness of that potential, is at an all-time high. But resource potential is only half the story in these developing and sometimes unpredictable markets, especially during a period of historically low oil prices. Countries that can achieve both well-balanced regulatory regimes and stable security environments are likely to attract the lion’s share of investment and capital expenditure.

"Although finding oil and gas in Africa can still be low cost, developing it needs deep financial investment and long-term commitment," wrote Chatham House’s Africa programme head, Alex Vines, in a September 2014 article for CNN.

"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."

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