The oil and gas industry is grappling with the severe stresses of a challenging economic and political environment on the African continent fuelled by poor physical infrastructure, corruption, an uncertain regulatory framework, and a lack of skills, according to a review issued by PwC today. Chris Bredenhann, PwC Africa Oil & Gas Advisory Leader, says: “The challenges facing oil and gas companies operating in Africa are diverse and numerous. Political interference, uncertainty and delays in passing laws, energy policies and regulations are stifling growth, development and investment in a number of countries around Africa.”
PwC’s ‘Africa oil & gas review’ analyses what has happened in the last 12 months in the oil and gas industry and in the major African markets. The survey draws upon the valuable experience and views of industry players in Africa, including international oil companies operating on the continent, national oil companies, service companies, independent oil organisations and industry commentators, to provide insight into the latest developments affecting the industry.
The review shows that the oil and gas industry in Africa is poised for momentous growth due to recent large gas finds in East Africa. “Large gas finds in Mozambique and Tanzania, and oil potential in Uganda and Kenya, have sparked a flurry of exploration activity across Africa,” says Bredenhann.
Africa currently supplies about 12% of the world’s oil, boasting significant untapped reserves estimated at 8% of the world’s proven reserves. The continent has natural gas reserves of 513 trillion cubic feet (Tcf) with 91% of the annual gas production of 7.1Tcf coming from Nigeria, Libya, Algeria and Egypt.
Developing the business
The major challenges identified by organisations in the oil and gas industry have remained largely unchanged with the top four issues in 2010 continuing to remain the biggest challenges in 2012. Poor infrastructure and an uncertain regulatory framework were the two top challenges identified by the new emerging players/markets, particularly in Uganda, Ghana, Tanzania, Nigeria and Kenya.
“Governments around Africa are reviewing or developing their energy policies. Many countries are investigating changes in the government take, taxation regulations and state participation,” says Bredenhann.
South Africa has until recently been regarded as having a transparent and independent process with the Petroleum Agency of South Africa (PASA) and marketing of local acreage and assets. However, proposed amendments to the Mineral and Petroleum Resources Development Act will see its functions devolved to the Department of Energy. This could create an uneven playing field for competitors and allow for state interference, states the report.
The perception that corruption remains one of the most significant challenges remains. Amendments to laws in some countries, such as Uganda and Tanzania, are intended to provide a more transparent process to reassure international investors that corruption is being addressed.
A lack of skills and localisation in fourth and fifth place indicate that people skills are a challenge for Exploration & Production (E&P) companies as they are required to comply with national participation and local content obligations contained in production sharing agreements and legislation.
Tax disputes still remain a concern for the business in the industry, as well as the training or recruitment of local talent at the levels required by legislation and government quotas.
Respondents indicated that their companies will largely be relying on their own cash flows to fund their own businesses over the next 12 months due to the lingering effects of the financial crisis. Equity has also tended to become a preferred source of financing business operations. The industry has become one of the biggest sectors for merger and acquisition activities in Africa. On average a deal was struck every four days during 2011 and 2012, amounting to a total deal value of US$19.4 billion. More deal activity is expected as new license rounds are opened up.
Combatting fraud and corruption
No less than 95% of organisations indicated that they have some anti-fraud and anti-corruption programmes in place. Of these, only 55% believe that the programme is ‘very effective’ at preventing or detecting fraud and corruption.
Bredenhann says: “Although respondents were more likely to have anti-corruption programmes in place in 2012 than at the time of our previous survey, the effectiveness of these programmes needs improvement, since management acknowledges that their anti-corruption programmes have not been as effective as they would have liked.”
Health, safety and environment
Surprisingly the commitment to environmental expenditure has declined since 2010, with no respondents committing more than 20% of their forecast capital expenditure (capex) to environmental concerns.
Over 80% of organisations expect their safety, health, environment and quality (SHEQ) costs to increase in 2013 and 2014. One in six believe costs will increase substantially in 2013, primarily due to anticipated introduction of new regulations such as the stricter implementation of gas flaring regulations, new legislation and cleaner fuel requirements in South Africa in 2014.
Developing local skills and business
Given the trend towards local content, it was surprising that the percentage of the workforce made up of expatriates had increased from 10% to 25%. This was partly due to a greater percentage of the respondents being from the new developing markets of Uganda, Ghana and Tanzania where there is a shortage of skills in the sector.
A quarter of respondents indicated that more than half of their workforce comprises expatriates, of which 35% were in senior and middle management positions and 25% specialist technical roles, such as drilling supervisors. Only South Africa had expatriate figures below 10% in all categories.
Adds Bredenhann: “It is of concern that the total workforce has not transformed and that local content requirements have not been fully addressed.”
Oil and gas companies have identified uncertainty as a key constraint to sustaining growth. Political intervention was described as an issue that restricted growth and delayed projects as well as the monetisation of assets.
Proposed changes to the Mineral and Petroleum Resource Development Act in South Africa will be of concern to E&P companies in the country as it could allow the Government to partially nationalise license blocks, states the report.
Bredenhann concludes: “While oil and gas companies would like to see a relaxation of local content regulations, governments are instead making regulations and policies more stringent. Investments in skills development and training are therefore an ongoing requirement.
“Strategic and long-term planning is important in today’s uncertain environment. Oil and gas companies must control costs while continuing to weigh up the risks and benefits of new projects, new products and evaluating how much capital to invest.”