PwC’s ‘Africa oil & gas review’ analyses what has happened in the last 12 months in the oil & gas industry within the major African markets
JOHANNESBURG, South-Africa, July 23, 2014/ — The challenges facing oil & gas companies operating in Africa continue to be diverse and numerous fuelled by fraud, corruption, theft, poor infrastructure and a lack of skilled resources, among others. Regulatory uncertainty and delays in passing laws are severely inhibiting sector development in many countries around the continent. “Some key players have delayed or cancelled projects until further clarity can be sought in their respective jurisdictions as they cannot move forward with doubts given the long-term nature of the needed investments,” says Chris Bredenhann, PwC Africa Oil & Gas Advisory Leader (http://www.pwc.com).
“As a result of the number of challenges in the market, meticulous planning is required,” adds Bredenhann.
PwC’s ‘Africa oil & gas review’ analyses what has happened in the last 12 months in the oil & gas industry within 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, services companies, independent oil organisations and industry commentators, to provide insight into the latest developments affecting the industry.
The Review shows that the oil & gas industry in Africa continues to show substantial growth, with new hydrocarbon provinces developing at a significant pace. “Large gas finds in Mozambique and Tanzania have caused the world to take note of East Africa as an emerging player in the global industry,’ says Bredenhann.
Africa has proven natural gas reserves of 502 trillion cubic feet (Tcf) with 90% of the continent’s annual natural gas production of 6.5Tcf coming from Nigeria, Libya, Algeria and Egypt.
Developing the business
The major challenges identified by organisations in the oil & gas industry have remained largely unchanged with the top three issues of uncertain regulatory framework, corruption and poor physical infrastructure also identified as the biggest challenges in 2010 and 2012.
While uncertain regulatory frameworks remain a concern across the industry, Nigeria was one of the few countries where respondents did not consider it to be of the top-three challenges to developing the industry. According to the Review, this suggests that companies have accepted the lack of ratification of the Petroleum Industry Bill (PIB), which has been in the process of implementation for six years.
In other countries where uncertainty exists concerning the development or revision of energy policies, such as South Africa, DRC and Tanzania, respondents indicated that the uncertain regulatory framework was a significant impediment to developing an African oil & gas business.
The inadequacy of basic infrastructure also ranked much higher in the current Review than in prior years. Respondents are concerned about the lack of infrastructure in developing countries and the negative consequences this may have for their businesses, especially those operating in Nigeria, Namibia, Madagascar and South Africa. Taxation issues have also become a concern to companies across Africa as uncertain taxation as well as new tax laws have created an additional financial burden for companies.
Financing and Investing
Respondents indicated that their companies will largely be relying on their own cash flows to fund their own businesses over the next 12 months. E&P companies are funding their operations differently from the other industry players with less than 40% of funding coming from cash flow. This can largely be attributed to blocks and regions yet to come into production. For E&P companies, farm-outs are the second-most common form of financing in Africa, with around 100 farm-out deals being made across the continent during 2013.
E&P companies also stated that equity funding was more difficult during the course of 2012 and 2013; however, it has started to pick up momentum as investors look to Africa as a good place to invest despite a difficult year in the market. The industry has become one of the biggest sectors for merger and acquisition activities in Africa. On average, transactions worth USD1 billion occurred every 17 days in the oil & gas industry during 2013, with more activity expected as new licence rounds are opened up and regulatory uncertainty is removed.
Combatting fraud and corruption
No less than 90% of respondents indicated that their companies have anti-fraud and anti-corruption programmes in place. Of these, 54% believe that the programme is very effective at preventing or detecting fraud and corruption. Six percent of organisations indicated that their anti-fraud and anti-corruption programmes were ineffective, the same level as the 2012 research. More worrying is that 9% of the companies stated that they had no programmes in place at all.
Safety, health, environment and quality
Organisations identified safety, health, environment and quality (SHEQ) as the most significant factor that would affect their companies’ businesses over the next three years. “This is not a surprise as companies recognise the environment and human health and security as a pressing issue which, when viewed in conjunction with regulatory changes and poor infrastructure, will have resulted in their carefully assessing the risk and financial burden of working in certain areas,” adds Bredenhann.
Developing local skills and socio-economic growth
The mandate for local skills development has become a concern for businesses operating in the oil & gas sector throughout Africa. In 2012, the survey showed that 25% of the total workforce at respondents’ companies comprised expatriates. This year, the proportion of expatriates has dropped significantly – down to a mere 10.6% of the workforce surveyed.
Fortunately, most companies have been able to fill middle to senior management as well as specialist technical roles with locals from their host nations. Over 70% of companies acknowledged that skills, people training and development are among their top-five strategic priorities over the next five years. Bredenhann says: “This shows the importance that industry is placing on local content initiatives and the significance that skills development has on executive-level agendas.”
New, small and agile, E&P, service and other companies as well as large multinationals should continue to find opportunities to operate efficiently and effectively, reduce cost and create stakeholder value through operational excellence. Insufficient planning was noted as the most important internal factor hindering operational excellence for a business in the oil and gas industry. In Africa the reduction in the number of surprises, the need for good governance and realistic schedules were deemed necessary for cost management and improved operational efficiencies.
Sustaining growth and development
Governments and national oil companies play a significant role in sustaining growth and development in Africa’s oil & gas sector. Many African countries have a host of stringent laws and regulations that create challenges for companies and international investors to overcome. “Operational planning therefore needs to be carefully thought out, taking into account demand growth, infrastructure requirements, investment needs and potential, long-term strategies and the role of government if companies and countries want to sustain growth and development in Africa,” concludes Bredenhann.
PricewaterhouseCoopers LLP (PwC)