With coronavirus forecast to wreak economic havoc across Africa, oil-dependent nations in West Africa are expected to be some of the worst hit. As project delays and regulatory issues rock the sector, financing challenges are on the rise. Felix Thompson reports.
At the outset of 2020, there had been optimism among West African countries that international and local oil companies would plough money into new upstream projects and boost production. However, the dual blow of the oil price war and Covid-19 has put paid to those plans.
Some countries had seen an uptick in prospects in 2019, with Nigeria, the biggest oil exporter in the region and the continent, increasing production by nearly 10% that year, after French firm Total started pumping vast amounts of crude from the Egina offshore field in December 2018.
In Equatorial Guinea, the government had expected oil production to increase for the first time in years, driven in part by two offshore oil finds by Noble Energy and Kosmos Energy in 2019. Likewise, in Ghana, after Aker Energy Ghana made a sizeable discovery in the Pecan offshore field in early 2019, with estimated total reserves of 334 million barrels, the government had been aiming to more than double its oil production by 2023.
Yet, in the past six months, any immediate plans for future expansion have been put on hold. First the global oil sector reeled from the eruption of an oil price war waged between Russia and Saudi Arabia in March.
Then came the devastating impact of Covid-19, which helped push the US oil benchmark into negative territory for the first time ever.
While Africa as a whole will take an economic hit, likely to suffer its first recession in more than two decades, countries like Nigeria and Equatorial Guinea – which rely so keenly on oil for government revenues and foreign exchange reserves – are expected to feel the pain acutely.
In a speech made towards the end of June, Abebe Aemro Selassie, the director of the African department at the International Monetary Fund (IMF), said the “toll will be steep especially in African oil exporters”.
“We expect average real GDP growth per capita to reach -4.9% for the continent, and a staggering -7.4% in oil exporters,” he added.
While oil prices have now started to bounce back around the world as lockdowns ease in major markets like Europe and the US, it is likely that oil operations in West Africa will suffer lasting effects in the months and years ahead.
Projects on pause
In May 2020, Nigerian officials announced that bidding rounds for major oil fields would not be held until crude prices recover, and that some upstream projects would be completed much later than originally planned.
Major international oil companies (IOCs) operating in the country have put plans on hold, with Total suspending development of the deepwater Preowei field in April, and ExxonMobil halting its drilling programme with the Trident XIV rig, which was due to end in February 2021. Meanwhile, indigenous producers such as Seplat Petroleum have also cut back costs for their drilling and upstream plans, with chief financial officer Roger Brown telling Reuters in March that it would look to drill just three wells in 2020 instead of the 15 to 20 originally planned.
The picture is not much better in other West African nations, such as Equatorial Guinea, where in April hydrocarbons minister Gabriel Obiang Lima said in a press webinar that virtually all oil and gas projects and licensing rounds are on hold in the wake of the coronavirus pandemic.
In Ghana, Aker Energy has said it has delayed making a decision on the Pecan oil field indefinitely.
Meanwhile, Senegal’s President Macky Sall told the Financial Times that its first oil and gas projects will be delayed for a year or even two years because of the virus.
The Australian operator behind the country’s first offshore oil development has, however, refuted this. Woodside Petroleum released a statement in response to the claims by the president, saying the Sangomar project is still on schedule to be producing oil by 2023.
As announcements of delays roll in, lenders, including trade financiers, are adopting a wait-and-see approach to oil projects in these countries.
One trade finance banker at a major bank in Nigeria, speaking to GTR on condition of anonymity, says it has revised its risk appetite for embarking upon new projects in Nigeria’s oil sector.
“People are talking about the credit risk in Angola and Nigeria… For the moment it’s just a tricky issue,” they say.
Gbolahan Fasade, director for corporate finance at Citibank Nigeria, tells GTR that the bank is “applying more caution” to trade facilities in the country’s oil sector due to the current shortage of foreign exchange. The bank typically provides foreign currency trade finance – in the form of letters of credit, loans and guarantees – to downstream players.
Challenges to foreign investment
In terms of broader investment, Alexandre Raymakers, senior Africa analyst and lead Nigeria analyst at Verisk Maplecroft, says that Covid-19 has exacerbated funding issues in Nigeria’s oil sector.
He tells GTR that “IOCs were already skittish about Nigeria due to its regulatory security challenges, and Covid-19 has not helped”.
Problems with the introduction of the country’s Petroleum Industry Bill (PIB) predate the pandemic. “The fact is that Covid-19 isn’t the main barrier to any sort of future investments. The PIB has been promised for years but has yet to be passed,” he says.
For nearly two decades, successive Nigerian governments have been attempting to pass the PIB in various forms, in a bid to overhaul the way the oil sector is run and encourage foreign investment.
A major part of the push to pass the PIB has been the desire to restructure the NNPC, which has long been criticised for a lack of transparency and corruption.
And while the government claimed earlier in the year that the PIB would be passed by mid-2020, as of late July the bill is still yet to be voted into law. This “creates a level of regulatory uncertainty which means companies are not willing to invest,” says Raymakers.
Elsewhere, the Nigerian government’s overhaul of royalty rates for deep water production sharing contracts (PSCs) last year brought another “shock” for IOCs, he adds.
In November 2019, President Buhari passed into law various amendments to the way in which royalty rates are calculated, in a bid to boost government coffers.
“A combination of complicity by Nigerian politicians and feet-dragging by oil companies has, for more than a quarter-century, conspired to keep oil taxes to the barest minimum,” President Buhari said in a statement on Twitter announcing the passing of the bill.
He said that the new rules would change this, and that “Nigerians will start to receive a fair return on the surfeit of resources of our lands. Increased income will allow for new hospitals, schools, infrastructure and jobs.”
In one move, the regulatory changes enforced a flat offshore fee of 10% for production from fields with a water depth of greater than 200 metres. Previously, the rates were graduated and based on the depth of the field, with any projects carried out in areas deeper than 1,000 metres exempt from royalty fees.
Yet, analysts had warned the change in royalty rates could see IOCs shift investments elsewhere.
In findings shared with Reuters in February, consultancy firm Wood Mackenzie noted that cost increases and uncertainty over oil reform could lead to a 35% decline in the country’s oil output in the next 10 years, as companies invest in countries with clearer and more competitive terms.
The United Nations Conference on Trade and Development (UNCTAD) notes in a June report that foreign direct investment (FDI) in West Africa fell by 21% to US$11bn in 2019, driven largely by “the steep decline in investment in Nigeria due to new investment regulations for multinational enterprises in the oil and gas industry”.
FDI is a concern for Equatorial Guinea too, which had adopted a more aggressive “drill or drop” approach with foreign firms pre-Covid-19, telling IOCs that they would have to invest and drill in any fields that they buy licenses for, or risk losing them.
But the onset of the pandemic has seen a change in tack, with Equatorial Guinea’s minister of mines and hydrocarbons announcing in May that it would extend exploration licenses for two years, while also relaxing capital expenditure requirements for exploration and production (E&P) companies.
Dallas-based Kosmos Energy, for instance, has been given an extension to analyse regional data and continue geological surveys of its interests in four offshore exploration blocks with a view to resume drilling programmes and yield discoveries in 2021.
The mines and hydrocarbons minister has explained that the country is looking to avoid a repeat of the 2014/15 price drop crisis by helping exploration firms save cash.
“Liquidity is very important right now. The last thing we want is for [companies] to decide that it is not economical to operate in-country,” he says.
Local bank fallout
Liquidity is a concern for indigenous oil producers in West Africa too, whose levels of output are smaller than IOCs, but still substantial.
In Nigeria, the passing of the Nigerian Oil and Gas Industry Content Development Act in 2010 saw the sector open up to local producers.
Seplat Petroleum purchased its first oil blocks in 2012 and since then has increased its production from around 30,000 barrels of oil a day to over 45,000 in 2019.
Going forward, indigenous producers’ access to finance is likely to be impacted by the pandemic. Tom Longmuir, partner at international law firm Ashurst, notes that before Covid-19 indigenous producers would source financing from a mix of local, regional and international banks – and increasingly from commodity traders in recent years. Nevertheless, while trader-provided finance is still available for local oil producers in the wake of Covid-19, he tells GTR that “we should see terms becoming tighter and maturities becoming shorter”.
There are also concerns that local banks could be affected by any impact on indigenous oil producers.
Nigerian banks had made attempts in recent years to limit their exposure to native oil firms, having been badly stung during the 2014/15 oil price crisis. After rushing to finance indigenous operators’ acquisitions of IOC assets, they were lumped with non-performing loans when the oil price fell suddenly.
In spite of this, local banks’ exposure to indigenous companies remains high in Nigeria, which could pose problems for the sector.
According to Fitch Ratings, banks are at “severe risk” from the oil price slump, with the oil and gas sector representing about 30% of Nigerian banks’ gross loans at end of Q3 2019.
It adds: “Impaired loans have decreased since 2017 due to rising oil prices as well as recoveries and write-offs, but the current shock could lead to a significant increase. Any closures of oil fields due to a collapse in global oil demand would exacerbate the impact.”
A boost for LNG?
Before coronavirus struck, Nigeria’s President Buhari had talked up the need to boost other sectors such as mining, manufacturing and agriculture in order to diversify the country’s oil-dependent economy.
Gas has emerged as another alternative singled out by Buhari as a potential bright spot, and a way to support the country’s recovery from the Covid-19 crisis.
Speaking in June, Buhari pointed to the fact that ‘‘Gulf countries that have similar levels of gas reserves as Nigeria have a strategy centred around gas industrialisation as their foundation towards export diversification”.
In fact, LNG has proven to be a source of hope for Nigeria in the past few months, despite the economic and financial effects of coronavirus, Raymakers notes.
In June, for instance, Nigerian LNG secured a US$3bn loan to develop its Train 7 Project from export credit agencies, development finance institutions and over 26 international and local commercial banks.
Construction of the new liquefication facility at the Bonny LNG plant in the Nigeria Delta is expected to increase output from the plant to 30 million tonnes per year, from the current output of 22 million. In all, the project is forecast to boost Nigeria’s total LNG output by nearly a third.
But despite such plans and talks of future promise from Buhari, the fact remains that Nigeria – along with Equatorial Guinea and Ghana – continues to be hugely reliant on oil. Statistics from the Observatory of Economic Complexity, an online data platform, show that petroleum oil accounted for 75% of Nigerian exports and was worth US$44.8bn in 2018.
With the International Energy Agency (IEA) forecasting that demand for oil is set to remain below pre-Covid-19 levels in 2021 and beyond due to a weak recovery in air travel, concerns will no doubt remain for West Africa’s oil sector.
As Equatorial Guinea’s hydrocarbons minister Obiang Lima, speaking about his own country’s oil sector, puts it: “We need to be very realistic: the year 2020 and the year 2021 are lost years.”