Oil and gas explorers have to rethink their capital expenditure (capex) budgets on exploration activity across the African continent in the wake of the significant drop in the global oil price, advisory firm PwC said on Tuesday.

“Oil and gas explorers will be relooking at their budgets and deciding where to allocate their limited capital spend given the substantial decline in the oil price. Overall, low oil prices could have an impact on production, undermining certain players in the market,” PwC Africa oil and gas advisory leader Chris Bredenhann warned.

Crude oil prices had dropped to record lows near $50/bl early this year, owing to an oversupply in the market.

According to PwC’s ‘Fit for $50 oil in Africa’ analysis, Africa had seen substantial successes in the exploration for hydrocarbons over the last decade, including the entry of new country players in East Africa joining the ranks of their West African neighbours.

In 2013, six of the top ten 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,” Bredenhann added.

The report noted that challenges facing oil and gas companies in Africa would continue to be diverse and numerous, fuelled by regulatory uncertainty, fraud and corruption, poor infrastructure and a lack of skilled resources.

Further, Africa had one of the highest average finding costs in the world at a $35.01/bl in 2009, surpassed only by the US offshore fields, which came in at $41.51/bl, according to the US Energy Information Administration.

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

“While oilfield services companies will venture to cut back on spending, they will also be under extreme pressure by the oil companies to drop their prices,” Bredenhann noted.

Further, the report found that frontier areas, host governments, major gas projects and oilfield service companies would be mostly at risk from the oil price drop.

“Frontier areas around the world are expected to suffer from delayed development in the near term. These include technically difficult projects that require more spend than conventional production such as deepwater, sub-salt, shale gas and enhanced oil recovery ventures,” it stated.

Countries that might see frontier project delays included 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 were also expected to be under increased scrutiny, as oil-linked liquefied natural gas (LNG) prices had 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,” Bredenhann said.

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

Oilfield service companies would be hit hard globally, but Africa might be an especially vulnerable portion of their portfolios, the analysis stated.

Africa could pose further challenges owing to difficult logistics and the lack of infrastructure. Overall exploration costs had already decreased significantly owing to cost pressures, in particular seismic surveying and drilling. This was expected to lead to idle rigs, as well as delayed and potentially cancelled projects.

However, not all was doom and gloom, as there were still investment opportunities in Africa. “The greatest opportunity seems to lie within onshore exploration. There are still risks, but onshore exploration is also significantly cheaper. Tullow Oil has certainly taken note of this opportunity as it has announced that it plans to drill six basin openers in onshore Kenya during 2015,” the report noted.

Aside from exploration, some players were moving ahead with development programmes, even though they do not have plans to expand with exploration drilling. “We also see that there could be significant potential for firms that are strong in research and development,” Bredenhann added.

There was also opportunity for new players with strong balance sheets to enter the African market, potentially at a low cost.

However, a number of issues still needed to be dealt with, which could be tackled by starting with an organisational stress test including strategic, financial, operational and commercial elements.

“In situations of low commodity prices, many companies respond with knee-jerk cost reduction programmes. This could be more effective if they took the time to understand what specific costs are, how they compare to peers and what reductions are truly possible. Cost reduction programmes need to be targeted and realistic,” Bredenhann concluded.