Just as the more oil-dependent economies in Africa were starting to recover from the ravages of the oil-price slump of 2014-16, they have now seen oil prices dip to new historic lows through a combination of over-supply and a significant drop in demand in a COVID-19 affected world. 

That creates huge challenges for countries such as Nigeria, Angola and Algeria. Having budgeted for 2020 on the basis of oil at US$50-60 a barrel, prices for Bonny Light are currently below US$25 a barrel. Agreement by OPEC+ to reduce production by 10 million barrels a day has not caused prices to recover meaningfully; the reduction in supply does not offset the precipitous fall in demand. National budgets are being recast and financial pain will be real. Both Nigeria and Angola derive 90 percent of export earnings and more than two-thirds of government revenue from oil sales.

Within the oil and gas value chain, there will be a number of direct consequences of the current environment, including:

  • force majeure across multiple contracts – this has already been seen across a wide range of agreements
  • financial distress leading to potential:
    • deferral of capex, relating in project delays, and cancellations for more marginal projects – for example Shell has already announced a 20% reduction in capex globally for 2020
    • reductions of opex
    • restructuring of debt
    • distressed sales to raise cash
  • COVID-19 related issues affecting project developments and operations - for example Total has had to manage an outbreak of the virus at its LNG project in northern Mozambique
  • constraints on storage – this is a feature across the globe and Africa is no different, with a number of vessels being used as an alternative to storage terminals 
  • delayed sale processes – current depressed prices, coupled with reduced demand on the buy-side of transactions, means that those who wish to sell upstream assets but are under no immediate pressure to do so (e.g. IOCs) will likely delay the process until there is some recovery, and stability, in oil prices 
  • huge liquidity constraints and reduced flexibility for NOCs. 
  • exploration programmes put on hold – for example Exxon Mobil and Eni have delayed drilling of frontier exploration wells offshore Mozambique from 2020 to 2021 
  • delays in licensing rounds – this has already been seen in Senegal, for example, where the licensing round due to kick off in April 2020 has been delayed by 3 months

What is difficult to gauge is for how long prices will stay low. Despite the global drive towards reduced emissions, the fundamental drivers for hydrocarbons remain strong in the medium term. As COVID-19 restrictions are lifted, demand for oil and gas will grow and ease the short term constraints on supply. But the exact timing and shape of that recovery remain unclear currently. For example, while industrial demand for hydrocarbons in China should start to show healthy recovery in the coming months, the impact of COVID-19 on mobility/transport is likely to be felt for a significant time with a consequential impact on demand for ground and aviation fuels.

At current prices, many projects are simply uneconomical. Clearly, the longer the price remains at or around current levels, the more significant the impact will be in terms of delays, cancellations, and restructurings.

The oil and gas industry is highly resilient and resourceful and will come through the current crisis as it has survived a number of price shocks in the past.  The price crash of 2014-16 is recent enough that the playbook on how to respond is still fresh in the memory; market participants had not become bloated or comfortable as some perhaps had in the lead up to the previous crash.  

As always, the current challenges will create opportunities, particularly for those with resilient balance sheets who are able to take a longer term view. There will be opportunities to pick up favourably priced assets to help further strengthen the portfolios of ambitious independent, indigenous e&p companies. The trend of IOCs reducing their upstream activities in Africa is one that will continue. By leveraging favourable assets and a skilled and motivated workforce, as well as deploying technical innovations, the most focused and strategic indigenous oil and gas companies will continue to emerge into substantial and formidable players. 

Governments understand the continuing strategic importance of the oil and gas industry. This should mean that there will be support for the industry through what will be a challenging period. It will be important for work to continue on optimising regimes to support investment, in particular from indigenous companies, as the market recovers, and also to continue the ongoing reform and restructuring of NOCs, where some progress has been made in recent years, to drive operational efficiency and improve liquidity to help drive further value creation in partnership with indigenous and international e&p companies. 

Angus Rollo

Angus Rollo

Partner, Mergers and Acquisitions
United Kingdom

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