Oil and Gas Exploration in Africa: Time to Get Things Back on Track

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rob-tims

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| By Rob Tims |

THE discovery of oil off the coast of Ghana in 2007 – and subsequent hydrocarbon finds in Uganda, Kenya, Tanzania and Mozambique – sparked an exuberant international response, with oil and gas investors and companies initially flocking to what many saw as a new frontier for the energy industry.

The excitement was understandable. The oil and gas finds in Mozambique had the potential to increase its GDP five-fold by 2040. Ghana’s economy, too, was being transformed. Commodity prices were booming and the ‘Africa Rising’ narrative that was taking hold across the world was changing investor perceptions.

Nine years on with the oil price having been more than halved, and the enthusiasm of those early days has faded somewhat. While there have been significant successes in oil and gas exploration in Africa, many of the discoveries have yet to make it into production. Ghana is the one notable exception where discoveries are now generating revenues for the country.

Africa’s ‘above ground’ risks, such as political complexity, insecurity, fiscal instability and regulatory change put the continent at a distinct disadvantage compared to established markets. When the oil price is high, and capital abundant, investors are able to balance these risks with the potential of outsized returns. However, at low oil prices, many investors look for less risky geographies to commit their scarce capital.

Yet for some reason the low oil price environment has not yet brought about a realisation for the need to create a more collaborative and investment-friendly environment in Africa, one that will benefit both host governments and industry players. When prices were at USD100 a barrel, some governments (particularly those new to oil) were lulled into a false sense of security and assumed they had the upper hand in negotiating inward investment. Today, with little movement on things like licence terms – which in many cases just don’t work in a low price world – the pace of investment in oil and gas has continued to slow.

With the low oil price looking to persist for the foreseeable future there now is an even more pressing need for African governments to do what is necessary to make the investment climate as conducive as possible.

Despite these tough times in the market and continued regulatory obstacles, there are some companies out there that see this as an ideal time to invest in Africa, such as Dallas-based Rhino Resources. These companies are taking advantage of the low oil price environment to aggressively build a portfolio of high quality frontier exploration assets through direct negotiation with host Governments.

Governments need to recognize that new entrants like Rhino represent the future of oil and gas exploration in Africa and. do everything possible to welcome them. Leaving acreage with terms that only work at USD100 a barrel in the hands of companies without access to capital isn’t going to contribute to the growth of Africa’s economies or benefit its people.

This is the fourth oil price slump I have witnessed in my career. The timing of the recovery is unclear, but when it does happen, and the dust settles, the winners in Africa will be the countries that were able to attract investment dollars despite the downturn while the losers will be those inflexible destinations who stuck to the old rules that worked in a USD100 a barrel world.

Africa’s nations need to use this time to secure their position among the winners by creating a robust investment environment, avoiding the ‘feast and famine’ scenario that all too often accompanies oil price cycles.

About the Author: Rob Tims is Chief Financial Officer for Rhino Resources, a privately owned early stage oil and gas exploration company focused on Africa. A 25-year veteran of the oil and gas industry who has advised a number of landmark transactions in Africa, Tims’ experience spans operations, finance, banking and consulting.

— Oct 31, 2016 @ 18:30 GMT

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