FROM MAGAZINE: Plunging oil prices: Africa feels the pinch
Although there is demand for oil and gas from markets in Africa, low crude prices combined with poor physical infrastructure, inadequate logistical solutions and burdening government regulations have blunted investment in oil and gas field development.
The world’s oil and gas industry is in the midst of turbulent times since the infamous oil crisis of 1973. Despite severe oil shortages, the current market turmoil is inversely proportional - Middle East and African oil wells pumping at maximum capacity at concomitant low prices.
Africa holds at least 8 per cent of world oil reserves and represents 10 per cent of global production.But low crude prices combined with poor physical infrastructure, inadequate logistical solutions and burdening government regulations have blunted investment in oil and gas field development. As a result, some African governments such as Tanzania and South Africa are reappraising their oil and gas legislation.
“Oil & gas business in Africa is currently down as with most regions operating in this sector throughout the world but we are ready and waiting for when this sector grows,” said Jamie Peters, cargo head at Hunt & Palmer, which offers charter services for oil & gas logistics.
The traditional large producers of Nigeria, Algeria and Angola where economies are very oil and gas dependent have seen significant negative impacts on their economy at the new market prices. These economies are in the process of realigning government expenditure to match their new income levels, seeking to diversify their economies from the historic dependence on oil and gas and focusing on reducing their production cost and price to market.
However, the energy resources remain in place and significant. In the medium term, these producers will recover and again become amongst the strongest economies in Africa. However, the position currently for these traditional producers remains very challenging so there is currently limited progression in new projects in these markets.
“With the halving of oil prices to current levels, there has been a clear reticence to invest in building new capacity globally. In Africa, capital projects that were already committed to are progressing towards completion but exploration and the FDI for new developments have seen the momentum slow down and be delayed,” said Geoffrey White, CEO for Africa at global logistics services provider Agility.
Other countries that started producing more recently have seen less impact, as their economies are not dependent on oil revenues. As a result, the overall growth of 4-5% for sub Saharan African GDP in 2016 is a figure that has a wide variance from country to country. Kenya, Cote D’Ivoire, Ghana, Tanzania, and others continue to be growing at world leading rates some with double digit growth. These economies continue to attract FDI and develop their natural resource programs although with a noticeably slower momentum than when oil was at $100.
Overall, industry activity on the continent has slowed given the reduced oil price. Exploration activity has been the hardest hit, though Kenya has seen marginal onshore success over the past year. The focus still seems to be on East Africa and developing its significant gas projects, while some players are turning to South Africa as hopes for favourable legislation are renewed.
Despite a slack off in activity, Africa continues to grow as governments and players alike plan their next moves. It is clear through our interactions that many companies are taking a different perspective on the challenges they face. They are being looked at as realities that can and must be dealt with if they wish to enter African markets. Strategies are therefore being implemented to handle the new African reality. This lull in activity is giving the industry a moment to make plans for the execution of large-scale projects while also formulating a strategy that will make them more competitive for the future in the new African market.
New frontier for exploration
This continent has been the new frontier for making exploration and oil production investments. Planned investments in the offshore sector (oil and gas) in Africa are estimated at 50 billion Euro over the 2013-2017 period.New oil and gas discoveries during the past decade mean that Africa is now estimated to hold up to 15 percent of global energy reserves and most of it is available at globally competitive prices.
Aside from the historic large producers, Nigeria, Algeria and Angola, there are ever increasing number of African countries producing and exporting oil and many more in the exploration/development phase.
For instance, the proven liquefied natural gas(LNG) resources off the East Coast of Africa of over 380 trillion cubic feet of gas will make Mozambique and Tanzania one of the top three regional producers of LNG in years to come. Elsewhere on the continent,countries such as Kenya, Uganda, Ghana, Cote D’Ivoire, and the DRC are all seeing benefits from joining the increasing list of African energy producers.
Carrying oversized equipment
Providing logistical support to the upstream oil and gas industry is not an easy task. The nature of its projects obviously mean that oversized, heavy loads have to be delivered quickly, mainly to remote areas, and the financial impact of downtime is extremely high.
“The volumes of freight required to support the industry can be split into three separate phases. First, exploration, followed by the development of production capacity and bringing the resources to market and,finally, the requirements for supporting ongoing production and maintenance,” explains White.
The largest project freight volumes are in relation to the development of the production capacity. This includes pipelines, processing plants, refineries, storage, and distribution facilities. It also requires the entire ancillary infrastructure to support this burgeoning new industry as it moves from exploration to production which requires ports, terminals, railways, airports, housing and everything else needed to support the industry and its workers.
Production facilities come in all sizes, but as an example, a typical LNG train will require one million tonnes of project freight and 500,000 tonnes of construction materials to be delivered. These materials are sourced from all around the world and need to be consolidated, shipped and scheduled to meet the EPC’s project requirements. This requires meticulous planning and deep knowledge of the industry and its operational standards.
“The integrated logistics solution, to have the right components imported, customs cleared and available on site when needed, not too soon and not late, is critical to the EPC achieving the project budget and development schedule,” White said.
“We have in-depth experience, working with many of the major oil and gas companies globally and directly with the EPC companies developing projects. Agility’s unique track record of understanding the industry standards and compliance requirements are an essential part of providing logistics solutions and services to our customers,” said White.
Agility provides logistics services across Africa and is specifically aligned with the oil and gas industry demand through our offices in Nigeria, Angola, Algeria, Mozambique, South Africa, and Kenya, who have strong local insight and knowledge on the ground. These African operations compliment and work hand in glove with our oil and gas industry experts based in the Agility Houston, Singapore, Aberdeen, Dubai, and Abu Dhabi operations. As a combined skill set, this enables the logistics player to provide a source to site insight of the full logistics chain that is vital to improving project efficiency.
Much of the new development in Africa is located in green field locations, where there is little or no infrastructure or existing workforce.
The biggest challenge is not delivering from around the world to Africa – rather, it is developing the capability to deliver from the point of arrival in Africa to the project site. This often involves starting from nothing and establishing the necessary infrastructure, systems, good practice and compliance standards to be able to provide the solutions.
Agrees Jamie Peters, “The main challenges we see in some African countries are the lead times for permits at short notice, this can delay the potential to arrive cargo more quickly to the end user, especially in a time sensitive situation.”
The lack of appropriately experienced labour is another frequently a major challenge, and Agility has significant focus on the transfer of skills to local workers through on-the-job training and by giving trainees the opportunity to gain experience working with other Agility operations around the world. This is essential to develop local staff skills to meet the operational demands.