You have a 'once-in-a-generation' chance to become an African oil mogul: Grab it

The low oil prices may soon have investors will shedding their assets, and flurry of mergers and acquisitions is imminent, a new report by PwC says

OIL and gas explorers are scrutinising and scaling back their exploration and development budgets in the wake of the prevailing oil price environment, says a new report by PriceWaterhouseCoopers (PwC), a move that is likely to hush the oil hype, particularly in East Africa.

Mozambique, in particular, seems to be in dire straits. Not too long ago it was celebrating the biggest natural gas find in Africa in recent times, an estimated 200 trillion cubic feet – equivalent to 33 billion barrels of oil: nearly as much as Nigeria’s proven oil reserves.

But Mozambique’s modest infrastructure means that everything to exploit and transport the natural gas has to be built from scratch.

The total capital expenditure needed to build gas liquefaction projects in the Ruvuma and Mozambique basins - projects that are in the hands of US group Anadarko Petroleum and Italy’s ENI -  is a massive $2.4 million per billion cubic feet of net gas volume, PwC says, totaling an estimated $26 billion. Mozambican government estimates are even higher, putting the bill at over $30 billion.

“With such high stakes, it’s no wonder that investors may wait for some rebound in the oil/gas price,” the report states, as such a huge investment will be difficult to procure to produce a commodity that is currently losing in value.

Tullow Oil has reduced it global 2015 exploration budget to $200 million, an 80% cut on what it spent in 2014.

The unlikely woman who struck black gold

The analysts envision an imminent flurry of mergers and acquisitions of oil exploration companies, as players with strong balance sheets gobble up those with less liquidity, and assets up for sale as strategies are revised and implemented.

There is an opportunity here for an ambitious nobody to snap up some of these assets for a song. Agile, cash-rich companies have a “once-in-a-generation chance to pick up valuable assets at a bargain price,” says Chris Bredenham, the author of the report.

It has happened before. In 1985-1986 the price of oil collapsed to an average of $30 a barrel (in 2012 prices) and by 1993 the price was still lingering around $26. A former secretary turned fashion designer formed a company called Famfa Oil, which managed to get itself awarded an oil prospecting licence. 

That oil block later became one of Nigeria’s most prolific. That secretary turned fashion designer is Folorunsho Alakija, Africa’s richest woman and the second-richest black woman in the world, with an estimated fortune of $2.5 billion; set to unseat talk-show queen Oprah Winfrey, who is worth $3 billion according to Forbes Magazine.

Although Africa has recently been the El Dorado of oil and gas companies as the last frontier of hydrocarbon exploration – most of the rest of the world has been thoroughly scanned, poked and prodded by geologists, and nearly everything that could have been found has already been found – many African countries’ infrastructure challenges, regulatory hurdles, unclear legislation and outright corruption drive up the cost of exploration.

It means that Africa’s average finding costs are among the highest in the world, at $35 per barrel, only surpassed by the US offshore costs of $41.5 per barrel, meaning that explorers have little wiggle room once prices fall below $50.

In addition, the geological profile of many survey areas, as well as the nature of the finds themselves, has made the deposits expensive to exploit.

Tanzania, Mozambique and Uganda headaches

Drilling offshore is more expensive and technically challenging than on land, so Tanzania and Mozambique’s gas finds require a greater capital outlay than Kenya’s oil finds would.

Uganda’s has a different kind of technical problem – the kind of crude that has been discovered is waxy in nature, meaning that transporting it via pipeline becomes challenging, as it isn’t light enough to flow. It would require  a heated pipeline.

Furthermore, most of the offshore finds off the Atlantic Coast, including much of Congo’s and Angola’s deposits, sit beneath a bed of crystallised salt rock under the seabed (“sub-salt” in industry-speak).

It adds to the complexity of exploiting the finds.

A few bright spots

In Ghana’s case, although its reserves are offshore, its oil companies may be spared the cutting back of budgets because most of the infrastructure development has already been done and are now “sunk-costs”, so as long as the oil flows, they can remain profitable even at a low global prices.

But PwC sees delays for new projects for sub-salt Congo and Angola, offshore Tanzania and offshore and shale gas in South Africa.

But there are a few bright spots – Tullow seems to be focusing on its onshore, less demanding onshore finds, principally Kenya. The company recently announced plans to drill six basin openers in onshore Kenya during 2015, four of them scheduled in the first quarter. That’s a large portion of its $200 million exploration budget.

Kenya is also “seen to be a relatively stable and fast-growing economy, with its proximity to the markets of India and China being an added benefit,” the report states.

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