African oil and gas extraction operations are dealing with the effects of a lower oil price – at $46.90/bl as opposed to $139.05/bl in 2008 – high operational costs because of accessibility, the slowdown in economic activity and, consequently, lower oil and gas demand.
Professional services firm KPMG energy economist Requier Wait says upstream exploration spending has been cut significantly as companies adjust to focus on lower risk and lower cost projects. “In particular, this has had an impact on higher-cost and riskier deep-water offshore projects, such as drilling rigs in Nigeria’s Benin-Dahomey basin.”
Upstream exploration involves a high level of risk and, although research and technology help in the exploration process, there is no certainty of commercial discoveries, Wait comments.
KPMG points out that challenges that the oil and gas industries in Africa face include the lack of infrastructure, for example, oil refineries and transport infrastructure.
Regulatory uncertainty, demanding fiscal terms, infrastructure shortcomings and stringent local-content requirements pose further challenges for Africa’s upstream industry and do not promote investor confidence in countries where civil unrest has compounded delays in the past, he explains.
Access to infrastructure, political uncertainty and illegal oil bunkering, among other challenges, add risks and costs to operations, Wait states.
“African countries should focus on providing an environment that is conducive to investment by focusing on regulatory and fiscal tax transparency and certainty. There is a trade-off between attracting investment and securing tax revenue for oil-producing countries – this is a very fine balancing act.”
Countries worldwide want to enhance the benefits derived from natural resources by improving their resource tax revenues, Wait says, adding that, in designing their policies, countries should consider not only tax revenue but also the broader economic impacts created from oil sector investment. “Improved fiscal and revenue management policies could help increase the benefits from oil sector tax revenues,” he suggests.
With the drop in oil prices from 2008, yearly growth in Nigeria has slowed down significantly. Last year, the gross domestic product growth of the country was only 2.8%, leading to taxes on oil being raised and the Nigerian government locking down the naira.
However, the challenges faced by the oil and gas industry, Wait says, have opened the door for businesses from countries like South Africa to develop new cost-effective and efficient solutions. Services companies can leverage technical innovation to provide efficiency gains that lower costs; the industry could also leverage and transfer skills on the back of South Africa’s success in the renewable-energy sector in terms of the upstream oil and gas industry.
Meanwhile, advances in drilling and extraction technologies have helped make previously uneconomical oil and gas resources in Africa accessible, providing access to resources that could previously not be extracted, explains the company.
Technology has allowed for mining and drilling at oil and gas reserves to go deeper and be more stable; exploration technology has also improved and has allowed for larger oil and gas reserves to be detected at increasingly deeper levels.
The company explains that some of the deepest gas reserves are more than 12 000 m underground, with many new ventures focusing on deep-water offshore drilling rigs.
Unconventional resources on the continent, such as tight gas, shale gas and coal-bed methane, can potentially be exploited cost effectively by leveraging technological advancements developed in the US shale gas industry. Technology improvements can help to achieve greater efficiencies and more flexibility in ramping up production.
In terms of skills development, Wait explains, the education and technical skills needs that upstream companies have are being met through the introduction of in-house skills development programmes, as traditional educational institutions do not cater for the professional skills required.
He highlights the importance of retaining skills, as the skills of senior employees need to be transferred to junior employees before senior staff retire for the industry to be remain successful.
Skills retention, along with the application of best practice standards, Wait emphasises, is crucial to mitigating potential risks and, thereby, improving the sustainability of operations in Africa.