Gas increasingly more important for African energy mix

30th August 2013

By: Ilan Solomons

Creamer Media Staff Writer

  

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The gas industry is grappling with the pressure of a challenging economic and political environment on the African continent, fuelled by poor infrastructure, corruption, an uncertain regulatory framework and a lack of skills.

This is according to audit, tax and advisory firm PricewaterhouseCoopers’ (PwC’s) ‘From promise to performance: Africa oil & gas review’, published in June, which analyses the oil and gas industry and the major African markets from the second half of 2012 to the first quarter of 2013.

“The challenges facing gas companies operating in Africa are diverse. Political inter- ference and uncertainty and delays in passing laws, energy policies and regulations are stifling growth, development and investment in several African countries such as Namibia, Mozambique, Uganda, Kenya, South Africa, Tanzania, Ghana, Côte d’Ivoire, Nigeria and Morocco,” PwC Southern African energy industry leader Chris Bredenhann tells Engineering News.

Major challenges noted by organisations in the oil and gas industry have remained largely unchanged, he says, with the top four issues identified in PwC’s previous oil and gas review, published in 2010, remaining the most pressing challenges, according to the 2013 review.

Bredenhann adds that poor infrastructure and an uncertain regulatory framework were the two top challenges identified by the new emerging players and markets, particularly those operating in Uganda, Ghana, Tanzania, Nigeria and Kenya.

“Governments in Africa are reviewing or developing their energy policies. Many countries are investigating changes in the government mining royalty systems, taxation regulations and State participation,” he says.

According to PwC, South Africa was, until recently, regarded as a country that has a transparent and independent process, with the Petroleum Agency of South Africa (Pasa) regulating the industry and the marketing of local acreage and assets.

However, Bredenhann says proposed amendments to the Mineral and Petroleum Resources Development Act (MPRDA) will result in Pasa’s functions being devolved to the Department of Energy.

“This could create an uneven playing field for competitors and allow for State inter- ference,” says the Africa oil & gas review.

Conversely, amendments to laws in some countries, such as Uganda and Tanzania, are intended to provide a more transparent process to reassure international investors that corruption is being addressed.

Additionally, the review highlights that skills shortages and localisation present challenges for exploration and production companies, as they are required to comply with national participation and local content obligations contained in production-sharing agreements and legislation.

Further, other challenges, such as tax disputes and the training or recruitment of local talent at the levels required by legislation and government quotas, still remain a concern for businesses in the industry, says PwC.

Financing

According to the review, gas companies indicated that their operations will largely rely on their own cash flows to fund their businesses over the next 12 months, owing to the lingering effects of the financial crisis.

Bredenhann says companies note that equity has also tended to become a preferred source of financing for business operations.

“The gas industry has become one of the biggest sectors for merger and acquisition activities in Africa. “On average, a deal was struck every four days during 2011 and 2012, amounting to a total (deal value) of $19.4-billion,” he says, adding that more activity is expected, as new licence rounds are opened up.

Combating Fraud and Corruption

No less than 95% of organisations indicated that they have antifraud and anticorruption programmes in place, states the PwC review, of which only 55% believe that their programme is “very effective” in preventing or detecting fraud and corruption.

“Although respondents were more likely to have anticorruption programmes in place in 2012 than at the time of our previous survey, the effectiveness of these programmes needs improving. “Management acknowledge that their anti- corruption programmes have not been as effective as they would have liked,” Bredenhann points out.

Health, Safety and Environment

Bredenhann says, surprisingly, the commit- ment to environmental expenditure has been declining since 2010, with no respondents committing more than 20% of their forecast capital expenditure to environmental concerns.

Moreover, about 80% of organisations expect their safety, health, environment and quality costs to increase in 2013 and 2014.

“One in six respondents believe costs will increase substantially in 2013, primarily owing to the expected introduction of new regulations – such as the stricter enforcement of gas- flaring regulations – new legislation and, in South Africa, cleaner fuel requirements in 2014,” he says.

Developing Local Skills and Business

The 2013 Africa oil & gas review notes that, given the trend towards local-content requirements, it was surprising that the percentage of expatriates comprising the African oil and gas industries workforce had increased from 10% to 25%.

“This was partly owing to a greater percentage of the respondents being from the new developing markets of Uganda, Ghana and Tanzania, where there is a shortage of skills in the sector,” explains Bredenhann.

A quarter of the respondents indicated that more than half of their workforce comprised expatriates, of which 35% were in senior- and middle-management positions, with 25% occupying specialist technical roles, such as drilling supervisors.

Only South Africa had expatriate figures below 10% in all categories.

“It is a concern that the total workforce has not transformed and that local-content requirements have not been fully addressed,” laments Bredenhann.

Sustaining Growth

Bredenhann says the review shows that the oil and gas industry in Africa is poised for momentous growth, owing to recent large gas finds in East Africa.

“Large gas finds in Mozam-bique and Tanzania, and oil potential in Uganda and Kenya have sparked a flurry of exploration activity across Africa,” he says.

Further, Bredenhann highlights that Africa supplies about 12% of the world’s oil, boasting significant untapped reserves estimated at 8% of the world’s proven reserves. The continent has natural gas reserves of 513-trillion cubic feet (tcf), with 91% of the continent’s yearly gas production of 7.1 tcf stemming from Nigeria, Libya, Algeria and Egypt.

However, he states that gas companies have identified uncertainty as a key constraint to sustaining growth. Political intervention is regarded as restrict- ing growth, delaying projects and monetising assets.

Further, the review warns that the proposed changes to the MPRDA in South Africa will be of concern to exploration and production companies, as it could allow government to partially nationalise licence blocks.

Bredenhann adds that, while oil and gas companies would like to see a relaxation of local-content regulations, governments are instead making these regulations and policies more stringent. Investments in skills development and training are, therefore, an ongoing requirement.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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