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Low oil price to hit African exploration groups

19 February

Oil and gas explorers must rethink their capital expenditure on exploration activity across Africa in the wake of the significant drop in the global oil price, according to an analysis on the oil and gas industry in Africa released by PricewaterhouseCoopers (PwC).

"Overall, low oil prices could have an impact on production, undermining certain players in the market," warns Chris Bredenhann, PwC's Africa oil and gas advisory leader.

The multinational professional services network released the analysis on 17 February. The West Texas Intermediate price for crude oil recently plunged below US$49 a barrel.

According to Fit for $50 Oil in Africa, Africa has reported substantial successes in the exploration for hydrocarbons over the last decade, including the entry of new country players with East Africa joining the ranks of their West African neighbours. In 2013 alone, six of the top 10 global discoveries by size were made in Africa – including some of the largest discoveries in the last decade in East Africa.

The key to surviving the ups and downs of the cyclical oil and gas market is to learn how to adapt quickly. "Oil and gas companies now need to plan for the upturn that is sure to follow to ensure that the potential boom does not go bust."

The drop in oil prices is expected to have a significant impact on Africa, which has been grappling with various challenges. It also has one of the highest average finding costs in the world at $35.01 a barrel in 2009, surpassed only by the US offshore fields, at $41.51 a barrel, according to the US Energy Information Administration.

Africa also holds a number of technically challenging hydrocarbon prospects. Examples include deepwater sub-salt exploration activity in West Africa, waxy oil in Uganda as well as offshore exploration leases in South Africa.

"While oilfield service companies will venture to cut back on spending, they will also be under extreme pressure by the oil companies to drop their prices," Bredenhann says.

Frontier areas, host governments, major gas projects and oilfield service companies are expected to be most likely at risk from the drop in the oil price.

Countries that may see frontier project delays include offshore South Africa, sub-salt Congo and Angola, offshore Tanzania and shale gas in South Africa. Shale gas, in particular, could move forward if the gas price were not 100% fully indexed to oil.

Major African gas projects are also expected to be under increased scrutiny, as oil- linked liquefied natural gas (LNG) prices have dropped significantly. "While we don't envision that the major LNG projects in Mozambique and Tanzania will be cancelled outright, costs are a major concern for investors."

At this time, governments would do well to place regulatory, legislative and fiscal policies in order so that they are seen as attractive regimes when the price recovers.

Oilfield service companies will be hit hard globally, but Africa may be an especially vulnerable portion of their portfolios, states the analysis. Africa could pose further challenges due to difficult logistics and the lack of infrastructure. Overall exploration costs have already decreased significantly due to cost pressures, in particular seismic surveying and drilling. This is expected to lead to idle rigs as well as delayed and potentially cancelled projects.

However, not all is doom and gloom. There are still numerous opportunities to invest in the industry within Africa. The greatest opportunity seems to lie within onshore exploration.

"We also see that there could be significant potential for firms that are strong in research and development." Lastly, there is opportunity for new players with strong balance sheets to enter the African market, potentially at a low cost.

Source: APO