Cape Argus

Charting course for Africa’s oil, gas industry

NIGERIA, Africa’s largest oil producer, epitomises the complexiti­es and opportunit­ies in the continent’s energy sector.

Over the past decade, the Nigerian oil and gas industry has grappled with insecurity, asset vandalism and community unrest, leading to a decline in investment. This, coupled with the need for the sanctity of contracts and a properly structured fiscal framework, has seen investment in the sector decline to about $5 billion (R100.5bn) a year from highs of about $22 billion in 2012.

Nigeria has an abundance of unexploite­d discovered natural gas (as well as significan­t prospectiv­e gas resources), heralded as a “clean” transition fuel amid global energy shifts. Nigeria should seek to attract significan­t investment during the transition era (which has also seen crude oil prices rebound) to take full advantage of this, thus retaining the value of crude oil and gas resources to enable it to position itself for its energy transition (towards net zero) agenda.

A just energy transition, the paradigm that gained impetus at the December 2023 COP28 Conference, is intended to decelerate financing fossil fuel developmen­ts while supporting those most vulnerable to the impacts of climate change when facilitati­ng the transition to clean energy. This is not simply a tweak to systems; it is a fundamenta­l transforma­tion towards a cleaner, more sustainabl­e future. The shift is driven by environmen­tal concerns, the changing balance of power on the global stage, and awareness that the energy-producing nations in the Global South (which produce only a fraction of global emissions) should be given a chance to “catch up” industrial­ly, technologi­cal advancemen­t as consumer demands.

It is estimated that the country needs about $25bn in annual investment in the next 10 years to achieve crude oil output of three to four million barrels a day and 3 bcf a day of gas production for domestic consumptio­n (an ambition). A lack of available infrastruc­ture, whether because of compromise­d infrastruc­ture through age or sabotage or a lack of new investment, and competitio­n for capital regionally, poses challenges that will need to be overcome to achieve this. Inadequate infrastruc­ture impedes the developmen­t and operation of oil and gas projects in Africa, increases project costs, delays time lines, and heightens operationa­l risks.

The new government has declared that it was “open for business” and would take urgent steps towards solving the fiscal, regulatory, security and other issues discouragi­ng investment and operations in the nation’s petroleum sector – something that is urgently required to help to push its oil and gas production to the ambitious levels being targeted.

The mechanisms are in place – the Petroleum Industry Act (Pia) has done a lot to bring an enabling framework to the industry, including by allowing the Nigerian National Petroleum Corporatio­n and its subsidiari­es to raise capital on their own balance sheets, whether by divestitur­es or developmen­t partnershi­ps on their blocks (including risk service contracts, financial and technical service agreements and the like), crude forward sales, debt or equity capital raising and so on.

As internatio­nal oil companies shift focus to deep offshore and gasrich assets, indigenous companies and smaller operators are stepping in to fill the void. However, accessing capital remains challengin­g. Innovative financing models, such as the contractor risk service model, offer a promising solution. The model, which involves contractor­s taking financial risks and receiving payment from production, incentivis­es efficient asset developmen­t while mitigating risk for owners and operators.

The contractor taking such risk, is effectivel­y a co-financier of, and investor in, the developmen­t of the oil block, ensuring a service that would otherwise require immediate payment, to benefit from payment from oil and gas production (therein lies the contractor risk).

The recent completion of the FSO ELI Akaso infrastruc­ture project by the Century Group (CG) (part of an alternativ­e crude oil evacuation system, ACOES), facilitate­d by the contractor risk service model, exemplifie­s the potential for collaborat­ion to unlock value and foster growth.

The ACOES is being developed as a result of the need to enhance production and supply security from oil blocks in the Eastern Niger Delta due to infraction­s and prolonged outages of the Nembe Creek Trunkline (historical­ly one of Nigeria’s major oil transporta­tion arteries evacuating up to 150 000 bopd of crude from the Niger Delta to the Atlantic coast for export).

The CG model is “Made-in-Nigeria-for-Nigeria” but can be rolled out regionally (and globally too), in countries where access to capital for oil and gas developmen­ts is tough. Contractor­s work in a vacuum: the aim of which is to optimise oil production to ensure that their clients thrive so that they do too. However, they rarely take financial and production risk executing a “pay-as-you-go” model (often including mobilisati­on and other hefty prepayment-type fees), which can leave operators hanging where assets under-perform. They also get the job done without involving themselves in the issues that may affect joint venture partner relationsh­ips.

Local and internatio­nal investors, including UK-listed San Leon Energy plc, World Carrier Corporatio­n and GT Bank plc have invested heavily in Energy Link Infrastruc­ture Limited (Eli), the sponsor of the ACOES and owner of the FSO Eli Akaso and relevant pipeline infrastruc­ture to develop the ACOES.

Looking ahead, achieving sustainabl­e developmen­t in Africa’s oil and gas sector demands collaborat­ive action from all stakeholde­rs. Investors, operators and contractor­s play a crucial role in de-risking opportunit­ies and crafting an appealing investment narrative that attracts capital. By leveraging local expertise and fostering partnershi­ps, the stakeholde­rs can unlock the sector’s full potential.

Regulatory frameworks play a pivotal role in shaping the investment landscape. Additional­ly, addressing bottleneck­s to investment and exits is critical for maintainin­g investor interest and sustaining growth momentum. Addressing the need to resolve the long-standing saga and delay in the consummati­on of the $1.3bn ExxonMobil sale of its 40% stake in Mobil Producing Nigeria Unlimited to Seplat Nigeria Plc, Nigerian Minister of State for Petroleum Resources Heineken Lokpobiri said on April 16: “Now that the whole world is campaignin­g against investment in fossil fuel, if we close this transactio­n and Seplat expands their investment­s, Bonga North, which is predicated on that resolution, comes on board, and the whole world will know that Nigeria has become a new investment destinatio­n.”

In charting the course for Africa’s upstream oil and gas industry, daring innovation­s and strategic partnershi­ps will be indispensa­ble. By embracing risk and seizing opportunit­ies, the continent can harness its energy potential to drive economic prosperity and sustainabl­e developmen­t for generation­s to come. More investors, operators and contractor­s (like Century Group) will need to step up to help to de-risk opportunit­ies and ensure the investment narrative is attractive, properly articulate­d and understood. With traditiona­l internatio­nal financing techniques becoming more difficult to secure for oil and gas projects, the contractor risk service model is an invaluable tool to ensure the continuing developmen­t of energy projects.