How can Africa commercialise its upstream resources and compete for capital?

African oil and gas resources still attract considerable investor interest, but upstream investment is set to trend downwards from 2025. We explore what governments and companies can do to remedy this.

4 minute read

Africa’s upstream sector has gained increasing attention from investors over the past two years. The continent is a key resource region, with around 200 billion barrels of oil and gas recoverable resources. Undrilled prospects offer upside potential. And if exploration continues apace, there is no doubt that more volumes will be found in the region’s prolific basins.

Most of Africa’s resources remain untapped, as less than 40% of its remaining volumes are deemed commercial. More deliberate action is needed to monetise its resources, both to benefit the population and to drive economic growth.

Africa retains its allure for explorers, though. Exploration drilling has kept pace with other regions and we see more drilling plans announced. The question is whether discoveries can translate into commercial opportunities.

In a recent presentation at Africa Energy Week, we addressed these issues. Fill in the form for a complimentary copy of the presentation and read on for an overview.

Investment in upstream oil and gas set to decline after 2025

While upstream investments have recovered following the Covid-19 pandemic, total investments in oil and gas are likely to decline after 2025 across all of Africa’s sub-regions. Investment, once dominated by Nigeria, Angola, Algeria and Egypt, is diversifying to other countries where new discoveries are being developed. Namibia, Senegal, Uganda and, notably, Mozambique, with its proposed onshore liquified natural gas (LNG) projects, are on the cusp of developing their hydrocarbon resources and will require significant financing.

However, Africa is only set to account for 6.5% of global upstream investments between 2024 and 2030, despite the richness of its resources. Governments and oil companies, therefore, need to focus on attracting more investment dollars to deliver projects in the region.

Africa’s huge gas potential remains constrained

Africa has huge potential to capitalise on gas a transition fuel amid strong global demand. However, a significant amount of its discovered gas resources are not considered economically viable. The above-ground issues and investment challenges that oil is facing also hold for gas.

Complicating the monetisation of gas is the fact that it requires long-term agreements across the entire value chain before an upstream gas project moves ahead. This means that sustainable offtake markets must be identified and gas sales agreements with attractive prices must be signed early on.

What is more, for Africa to benefit from the monetisation of gas, there needs to be a balance between meeting domestic needs in-country, supplying regional markets across Africa and exporting gas in the form of LNG. Investors want to make a return, governments need to generate revenue, while the people need to benefit from greater domestic supply, which will fuel economic growth.

Project lead times are too long

Long lead times are a pinch point for Africa. Companies are prioritising upstream investments to take advantage of high oil and gas prices and strong demand, so short-cycle projects that will generate quick cash flows will be more attractive. Africa is suffering longer than average lead times compared to the rest of the world.

Part of the challenge is getting projects to final investment decision (FID). From a government perspective, swift approvals will help reduce project times, while from a company perspective, commitments to appraise, evaluate and declare commerciality will help progress discoveries more quickly. Collaboration between governments and oil companies is key to ensuring that Africa’s resources are developed in a timely manner.

Taxation is a crucial issue

In addition, governments need to ensure that their fiscal terms are globally competitive and stable enough to entice multi-billion-dollar investments. Typically, governments offer competitive terms in frontier areas, attracting explorers who take higher risks in unproven basins. As discoveries are made and the basins are de-risked, terms tend to get tougher, because the risks are lower.

However, as fields mature and industry activity wanes, governments forget to incentivise late-life incremental developments that have marginal economics under prevailing terms. This is when we see divestments and relinquishments as companies struggle to justify continued investment in mature basins, especially as other regions offer better prospects. So, fiscal evolution is within the gift of government, and it is crucial to support late-life activity.

How can Africa remain competitive?

To remain competitive, Africa must be agile and transparent. To be agile, governments need to understand the global energy sector and its emerging trends. They can thus respond by collaborating with investors, implementing regulatory improvements, and hastening approvals. Investors want to progress quickly but can only do so with a supportive government.

Europe and North America still offer oil and gas development opportunities despite the energy transition narrative. Africa cannot afford to be left behind. Offering competitive fiscal terms that deliver value to both investors and host governments will encourage investment.

Investors also want certainty and transparent fiscal and regulatory environments, especially when billions of dollars are at stake. Governments, therefore, must respect the sanctity of contracts, with clear terms and regulations, especially for gas.

The good news is that reforms are happening; and Africa is likely to remain an important oil and gas player in the coming decades.

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