IN JANUARY 2020, SOUTH SUDAN had ambitious goals for its oil industry: The Ministry of Petroleum was aiming to bring its current production level, about 190,000 bbl, up to 200,000 bbl/d by year-end, and to 350,000 by 2025. When the ministry set those targets, there was more at stake than keeping state-run Nilepet in business and attracting new investors: For South Sudan, oil production represents a promising pathway from years of civil war and extreme poverty toward stability, economic growth and diversity, and a better life for residents.
But, as was the case for many countries, South Sudan’s plans for 2020 and the reality it experienced have turned out to be two very different things.
The COVID-19 pandemic essentially brought the global economy to an abrupt and painful halt by the end of the first quarter of this year. Governments ordered people to stay home to prevent the spread of the virus. Businesses were forced to close or dramatically change the way they operated. Schools and places of worship closed their doors. Lockdown policies varied by country, but, for the most part, the effects were the same: Entire economies were being shut down. The oil and gas sector was hit particularly hard. With huge swaths of the population staying at home, business travel canceled, and commercial and industrial transport down, demand for petroleum products plunged, and with them, so did oil prices.
So, instead of celebrating new levels of production this year, South Sudan’s petroleum industry has simply been trying to stay afloat. As of late July, oil production had dropped from 190,000 to 170,000 bbl. The pandemic also has delayed the commissioning of South Sudan’s 8,000 bbl/d Safinat refinery and led the Ministry of Petroleum to postpone a planned licensing round for more than 14 onshore blocks until 2021.
“We experienced prices that had never been there before, and we are running at a loss, along with private operators,” Awow Daniel Chuang, the undersecretary in the Ministry of Petroleum, told Bloomberg in July. “We have been affected much more than others because South Sudan, being a new country just emerging from war, has a lot of challenges.”
That said, South Sudan isn’t giving up on its economic goals, nor are Africa’s other oil-producing countries, which are also dealing with decreased production, delayed projects, job losses, and shrinking economies.
I’ll be honest, COVID-19 has been a nightmare, and I believe we’re going to see more difficulties before we’re through.
But I also believe that throwing up our hands and simply letting this economic devastation decimate Africa’s oil and gas industry is ill-advised. There are actions that can be taken, from tax breaks to new government regulations, that will help much-needed international oil companies (IOCs) move forward with planned projects and encourage them to do more business in Africa when the pandemic is over. South Sudan isn’t the only African country that stands to benefit from thriving oil and gas operations. As I will explain throughout this book, the strategic use of Africa’s natural petroleum resources can open the door to prosperity and stability for everyday Africans across the continent. We can’t let that opportunity slip away, and we don’t have to.
To better understand COVID-19’s impact on the global oil industry in general, and Africa more specifically, let’s look at oil prices. In 2019, the international benchmark, Brent crude, was averaging around $64 a barrel, about $6 higher than 2018 levels. In early 2020, however, the supply-and-demand balance that influences prices took two major hits. First, we had the Saudi Arabia-Russia oil war, when both countries abandoned previously agreed-upon OPEC+ production limits and flooded the global market with crude at the worst possible time. By April 2020, Brent crude prices had plunged below $20 a barrel, their lowest level since February 2002.
A new OPEC+ agreement implemented in May helped stabilize oil prices to some degree—Brent, for example, was trading for about $45 a barrel in mid-August—but the oil industry has continued to feel COVID-19’s dramatic impact on demand.
What has that looked like in Africa? Well, for one thing, between reduced production and lower prices, African countries—many of which rely on oil revenue for much of their budgets—are experiencing significant drops in oil revenue. Collectively, the continent’s oil-dependent economies could lose up to $65 billion in income. The result has been cuts in government spending, increased debt obligations, and job losses.
Look at Africa’s top-three oil producers: Nigeria, Angola, and Algeria.
In Nigeria, 57% of government revenues come from oil, and oil makes up 80% of the country’s exports. Earlier this year, the government predicted its economy would contract by 5.4%. “This comes at a time when fiscal resources are urgently needed to contain the COVID-19 outbreak and stimulate the economy,” a World Bank report states. “Meanwhile, the pandemic has also led to a fall in private investment due to greater uncertainty, and is expected to reduce remittances to Nigerian households.”
Angola relies on oil for 90% of total export revenues. Between April and May alone, the value of its oil exports dropped by nearly 50%. In another frustrating development, as this book describes, Angola recently put a new royalty and tax regime in place to attract IOCs and boost declining production. And while I am certain those efforts will yield long-term benefits—and other African governments should follow Angola’s lead—production will continue to decline in the short term while demand for oil is low.
Like Angola, Algeria derives 90% of its export revenue from oil, which funds 60% of the country’s budget. In May, Algeria’s federal government said it would have to cut its 2020 budget by 50%. Mansour Kedidir, an associate professor at the Higher School of Economics in Oran, is calling for economic stimulus measures, from lower interest rates and tax cuts to government-funded infrastructure development. Otherwise, Keddir said, a “Pandora’s box will be opened” accompanied by “riots, irredentism, religious extremism.”
Also problematic is that one of the impacts of the oil downturn we’re experiencing today is its potential to hurt the petroleum industry tomorrow. Rystad, an energy consultancy based in Norway, predicted in April that 50% of the licensing rounds scheduled around the world would be canceled this year. “The unlikely upcoming lease rounds represent around 54%—a worrisome sign for global exploration. A number of factors together make these rounds unlikely to go ahead, including the oil-price drop, a global cut in investments by almost 20%, a lack of skilled manpower due to the COVID-19 pandemic, fiscal regimes that are proving unattractive in the current environment, and a lack of interest among potential participating companies,” Rystad’s senior upstream analyst Aatisha Mahajan said.
In Africa, in addition to licensing round cancellation in South Sudan, rounds in Côte d’Ivoire, Algeria, Tanzania, Senegal, Somalia, Liberia, Ghana, Equatorial Guinea, Angola, and Nigeria may go on the back burner in 2020, Rystad said.
Rystad also is projecting an increase in stranded resources in Africa. “Non-OPEC countries account for the lion’s share of ‘lost’ recoverable resources, with more than 260 billion barrels of undiscovered oil now more likely to be left untouched, especially in remote exploratory areas,” said Rystad Energy’s head of analysis, Per Magnus Nysveen.
Another COVID-19 side effect likely to impact the sector’s growth: Midstream development is at risk. Pipeline operations throughout the continent have been halting or delaying avoidable projects. “With uncertainty looming large on the prospective projects, pipeline companies are compelled to make tough decisions to keep operations running,” said oil and gas analyst Haseeb Ahmed of UK-based data analytics firm, GlobalData. Ahmed cited suspended construction on the 1,980-kilometer Niger-Benin pipeline project, which was expected to be completed in 2021.
How are COVID-19 and the oil industry downturn impacting African countries that import petroleum products? Well, lower oil prices are certainly better news for them than they are for petroleum exporters, but not necessarily enough to offset COVID-19’s negative economic impact. Sectors from manufacturing to tourism are taking a hit. “Lockdowns and border closures have caused immense hardships, particularly on those that depend on informal employment, such as vendors or small-scale farmers and traders,” the World Bank recently reported.
Even energy-importing countries that had growing economies before the pandemic are struggling this year. In Zambia, for example, the economy was projected to grow 4% at the start of the year; now, it’s expected to shrink 5% because of the double blow of COVID-19 and drought last year. COVID-19 has hurt the country’s manufacturing and mining industries and cut tourism revenue.
In South Africa, which implemented the strictest pandemic lockdowns in Africa, economic activity is projected to contract 7.2% in 2020. The International Monetary Fund (IMF) reported that the most affected sectors are construction, personal services, trade, catering, hospitality, transport, storage, and communications. The manufacturing and mining industries have come to a complete halt.
Not only is the petroleum industry downturn impacting countries across Africa—and the world—it’s also creating tough times for oil and gas companies, from international majors to independent, indigenous operations.
This is how Austin Avuru, CEO of independent Nigerian oil and gas firm Seplat Petroleum, explained the company’s plans to reduce operational spending this year. “Overall, our target is to get close to a neutral cash flow position in 2020. So the main target of our budget restructuring is to be able to survive FY 2020, with the hope that during 2021 prices will climb back, and we will manage to resume our planned investments. Meanwhile, in 2020 the key word is survival.”
International oil companies seem to have a similar perspective. Eni and Total, both very active in Africa, are each cutting back on 2020 E&P projects by 25%. And next year, Eni has said, it likely will cut its investments from $2.5 billion to $3 billion. Since Eni is Africa’s leading oil producer—it extracted about 1.13 million bbl/d of crude in the third quarter of 2019—that is troubling news.
And Eni and Total are not alone. A number of companies, simply striving to get through the downturn, have been postponing or canceling investments.
In June 2020, at least 13 major projects awaiting final investment decisions were under threat, from Shell’s $10 billion deepwater Bonga Southwest Aparo oil and gas project off the coast of Nigeria to Aker Energy’s Pecan Field project offshore Ghana. In Senegal, the Sangomar offshore oil project, sanctioned in January, is now facing delays. And in Angola, BP’s Platina Field Development and its Palas, Astaea, and June (PAJ) projects could be delayed. There’s also a possibility that the Zinia 2 Development, an Angola-based Total/ExxonMobil project, will be postponed.
The 13 projects’ combined losses could reduce African oil production by as much as 200,000 barrels a day for the next 5 years, and eventually lead to cuts of more than a million barrels a day, Rystad predicted.
With African livelihoods and businesses in jeopardy, not to mention major oil and gas projects that have the potential for far-reaching economic benefits, it’s time for decisive action. And I’m convinced that responsibility falls to Africa’s government leaders. They need to act now, not only to get Africa through the hardships COVID-19 is inflicting but also to safeguard our path to a better future. That’s why I worked with the African Energy Chamber’s leadership to develop our Call to Action, a commonsense energy agenda for Africa that we released in late April 2020. In it are 10 recommendations for helping Africa recover—and ultimately, thrive. Most were developed with the goal of cooperating with IOCs so we can break the pattern of postponed and canceled projects in Africa.
Here’s a summary of what we’re proposing.
Exploration and Extensions of Product Sharing Contracts (PSCs): A 24-month extension on all exploration projects would make it possible for companies to reschedule drilling projects that have been put on hold or canceled. We need to be realistic. It is very difficult to have drilling during lockdowns, curfews, and airport closures.
Work Programs Adjustments: Waiving some of exploration companies’ work program commitments is the kind of tangible support we need to show to ensure healthy, long-term business relationships and resumed E&P activities as soon as possible. Instead of putting companies in a difficult position, we should offer flexibility.
Petroleum and Natural Gas Fiscal Regimes: Now more than ever, it’s vitally important that governments take steps to provide transparency, predictability, and consistency through regulatory and fiscal policies. What’s more, we’re calling for stronger public-private conversations about revising fiscal terms within PSCs, especially for contracts over producing areas and fields where operating costs are higher. By providing better fiscal terms, governments will allow operators to meet their commitments and continue to raise capital. Africa must remain competitive to survive. Gone are the days when Nigeria competed for oil and natural gas investment against Algeria and Angola. Today, new players like Senegal, Mozambique, and Uganda are giving the bigger players a run for their money. We face an even bigger challenge with Suriname and Guyana, where fiscal regimes and enabling environments for doing business are more competitive, helping them attract more capital.
Go Bold on Tax Relief for Services Companies: To preserve employment within the services industry, which represents a majority of the sector’s jobs, the Chamber is calling for a series of tax relief and deferral measures. These include reducing and/or waiving income taxes on service companies for at least two years, along with giving service companies the option of meeting their income tax obligations in installments.
Financial Support and Patient Capital with Banking: The banking sector and financial institutions must look at providing no-interest loans and loan guarantees to local service companies that have ongoing projects and commitments with foreign majors. We also recommend a single window or special program to facilitate foreign exchange, which would make international transfers easier and local companies more competitive.
Cutting Non-operational Fees: The Chamber urgently requests a reduction in social fees and other fees due to the state, such as surface rental fees or fees related to training funds. Corporate social responsibility (CSR) expenditures, for instance, should be reduced according to a company’s level of operations and be cut by 50% for services companies, 40% for exploration companies, and 20% for producing companies. In addition, the obligations for local small-to-midsized enterprises (SMEs) to execute social projects should be suspended until 2022.
Promotion of Upstream Investments: African states should actively promote joint ventures on current farm-in projects. The extension of exploration periods, along with the revision of PSCs’ fiscal terms, would strengthen farm-in and farm-out opportunities across the continent. Africa is competing aggressively for exploration dollars against very attractive regions such as the Middle East and the Americas, and its environment needs to become more attractive to ensure capital injections and technology transfers.
Incentives to Critical Infrastructure Projects: Beyond the upstream sector, the Chamber believes governments should offer the necessary state support and government incentives to critical infrastructure projects in the midstream and downstream industries, including refining and LNG projects.
Regional Content Development: The Chamber is calling for a commonsense approach to local content. Governments should review local content regulations and revise or drop inefficient requirements. More importantly, the time has come for African jurisdictions to harmonize their local content regulations and push forward an African regional content approach that will encourage joint ventures and regional expansion within the upstream and services industries. Women’s empowerment must be at the front and center of the new approach.
Subsidies Removal: The timing is perfect for subsidy reforms across the continent. The Chamber is encouraging all governments to follow the steps of Nigeria and remove fuel subsidies when applicable. This will allow the saving of several billions of dollars a year and provide better macroeconomic stability for African economies to recover.
As I’ve said, the oil and gas industry will only work for Africans when we set fair policies and treat oil and gas companies as partners who drive our progress.
Market-Driven Local Content and Making Energy Attractive: We have to embrace local content more; we have to be ready. For example, those operating in the Republic of the Congo or Equatorial Guinea can’t move people in or out. They are going to require locals to do the job and keep the platforms and fields going. And if they want to bring in expats or services, it might be too expensive. This creates an urgent need to empower skilled Africans and implement programs to bring them back home.
Local companies have to be ready. They can’t just play the game of setting up a company and taking commissions from international players. That has to stop: African companies have to become more accountable and responsible during these moments. That is the only way forward. We must move away from being agents and towards being entrepreneurs. This is how we will survive the next phase of oil and gas; local content has to have a major role in it. We need a corrective course.
The Chamber is very focused on seeing incentives put in place. Countries cannot legislate and regulate themselves to prosperity. They cannot continue to tell international companies that they must do A, B, C, and D. It is all about sticks and carrots. On top of that, you cannot love new jobs but hate those who create them.
We need rules that create changes. So, we proposed a tax incentive for services companies that will train, prepare, and qualify locals to replace expats. We might see some revenue being lost today, but in the long term, this will create local taxpayers. We will have more contracts being created and more services offered locally. This is what we see as the future of local content. Of course, there have to be some regulations, and they have to be carefully worded and drafted to fit within the market and ensure that market forces work with them.
So, we look for the fundamentals of local content such as training and development. We can look at how Oman, Nigeria, and Ghana have been able to do something in that area and learn from them. When we talk about procurement contracts and domestic supply chains, we need to look at what has not worked in the past.
We like to have rights, but what about responsibilities? Governments have a responsibility to set up fundamental frameworks like education. We cannot expect the IOCs to be the ones who are going to train, develop, and prepare our people to serve the industry. It is not their job; we have to set up our education and ensure schools are ready and competitive globally. Once that base is established, every African child can compete. It is about rights and responsibilities.
We celebrate the implementation of the African Continental Free Trade Agreement, but it cannot come without African content. In a small country like Gabon or Equatorial Guinea, when companies can’t find qualified people, they immediately go to Europe or the U.S. to source talent. We need to think in terms of African content: If a company can’t find staff in the local community, it should look within Africa. We can’t be people that do not employ, promote, and contract Africans to compete for projects around Africa.
We also have to consider the role of Black women in local content. While they represent 40–50% of the African population, only 5% of workers in Africa’s oil and gas industry are Black women. This is a time for us to make a paradigm shift. For the Chamber, there is no real, local content without a concrete role for women in oil and gas.
Women should be at the forefront of African oil and gas. Women have proven to be better managers and employees and more ethical workers, and they deserve a great place in Africa’s energy industry. This industry is not just about prices and stocks; it is about being a catalyst for our economy to become what we dream of.
Many of the old white males that championed the industry are retiring, and young people need to be brought into the industry. However, young people are not looking at working at Exxon or Chevron, but rather for Amazon or Google. If the industry doesn’t act, it will lose talent. This is a chance for Africa to succeed by bringing in young Africans, who are already more technology-driven and who will be able to shape the oil industry of the future. The industry of old is gone—it is not going to be oil and gas, but the energy industry.
Even during the pandemic, we should still be striving to connect trained, qualified Africans with well-paying oil and gas sector jobs: There may be fewer positions available in Africa at the moment, but many are still out there.
That’s why the Chamber, in addition to releasing our Call to Action, has launched an energy jobs portal. Our goal is to make sure that local jobs are filled by local people. We also want to play a role in helping African energy markets bounce back as quickly as possible after the COVID-19 crisis by providing a free, reliable pipeline to qualified talent.
The portal will help local and international companies find local employees across 30 skill sets in the oil, gas, power, and renewable energy sectors. And the Chamber will operate and vet job postings to prevent fraud.
As I said when we launched the portal, local content has always been the number one priority of the African Energy Chamber when advocating for an energy industry that works for Africans and builds sustainable business models.
Almost immediately after COVID-19 infected the global petroleum industry, I started hearing calls to use the oil industry downturn as an opportunity to usher in a new era—one where petroleum products are phased out and replaced with sustainable energy sources.
And, as I’ve said numerous times, I agree that protecting our environment is of great importance. When the timing is right, I’m convinced that Africa’s energy transition will be a positive one for everyday Africans.
That said, despite the difficulties COVID-19 has created for the oil and gas industry, it is still very much alive. Forcing its premature death means the end of its potential to create economic growth. What’s more, Africa desperately needs its natural gas resources to address widespread energy poverty. Currently, about 840 million Africans, mostly in sub-Saharan countries, have no access to electricity. That’s why this book advocates so strongly for gas-to-power initiatives. Instead of flaring gas and exporting Africa’s abundant natural gas reserves, we need to use that gas to power electricity generation. Not only would the increased access to reliable energy contribute to better health and safety for everyday Africans, but it would also provide a necessary piece of the puzzle when it comes to growing African economies. Businesses, schools, organizations—they all need energy to thrive and grow.
As I recently told The Energy Year, this has been a tough time, but we are resilient people, and I firmly believe that we can come out of this stronger. I don’t see this pandemic as a time to bury heads in the sand; instead, it is an opportunity to start planning our comeback and determining how we can make Africa better and stronger.