analysisBy Eliot Pence, Nathaniel Adams And Zenia Lewis
Global energy markets are changing at a staggering pace. In less than three years, the debate has shifted from how to deal with energy scarcity to how to deal with energy abundance.
Though the consequences of this shift are complex and multifaceted, there are ominous signs that Africa’s frontier markets in particular may have found oil and natural gas at exactly the wrong time. An energy boom in North America, depressed growth in emerging markets, cash-strapped investors and competing liquefied natural gas (LNG) projects globally may mean Africa will be in for a fight to monetize its new discoveries.
Even as G8 countries discuss the very real challenges of transparency in extractive industries, the real resource curse may not be managing revenues transparently, but securing revenues in the first place.
The U.S. is drastically reducing energy imports from Africa. Because of the shale revolution and other domestic developments, US crude oil production grew by more than one million barrels a day - equivalent to 14 percent of output - in 2012, the biggest increase ever. As a result, U.S. imports from three of OPEC’s African members — Nigeria, Algeria and Angola — have fallen to their lowest level in decades, dropping by over 40 percent last year, according to the U.S. Department of Energy. U.S.
Imports from Nigeria fell to their lowest levels in over 20 years, which has already resulted in Nigerian barrels selling for around 40 cents lower than its official selling price. The drop in demand is especially problematic for countries like Nigeria, whose largest client by far is the U.S. (buying approximately a quarter of the country’s output).
Depressed growth markets leaves demand uncertain. With the U.S. becoming energy independent, Chinese and Indian growth is expected to fill the demand gap. But global demand for oil is tapering (as percentage of total energy use) and despite still high consumption rates, China remains a far second behind the U.S. in net oil imports (for the time being). Analyses also underscore the potential for China to fuel itself either through finding shale gas and oil or finding deep-water offshore oil. And, even though Africa’s own oil demand is growing at 6 percent year-on-year, consumption levels are still too low for it to constitute a substantial regional market. In many ways, the U.S. created the market for African oil (even if China has sustained it). After 9/11, Africa’s energy imports to the U.S. jumped from 2 percent to 11 percent in less than 10 years. That its demand from Africa may drop to half that will be uniquely disruptive to Africa’s emerging energy exporters.
Mounting NOC debt is making upstream frontier plays even more risky than usual. The debt mountain at CNOOC, CNPC and Sinopec, coupled with capital expenditure, is straining the short-term capacity for investment by national oil companies (NOCs). Though the recent bond issue by CNOOC was five times oversubscribed, this was largely to pay off the debt acquired through various purchases, as others have noted. Some analysts have noted that CNPC and SINOPEC also appear to be entering a period of consolidation and integration. Petrobras is currently trying to sell oilfields, exploration rights, refineries and other assets in Africa and other countries to help finance a $237 billion five-year domestic investment plan. It also doesn’t help that cost projections appear to be increasingly uncertain in well-trodden African geographies, such as Angola and Nigeria, bloating estimates for the new frontiers. A BP oil development project off the coast of Angola has overshot its budget by $4 billion after being delayed by more than a year and oil theft losses in Nigeria amount to $6 billion annually. In this environment, international oil companies and NOCs are likely to be much choosier about where they invest, and more than usual, keen to play countries against each other to get the best bang for their buck.
Getting to China and Japan first isn’t a done deal. Africa’s enormous gas finds in Mozambique and Tanzania should have positioned the continent as the next great gas supplier. But the capital requirements to commercialize the gas and parallel advancement of other projects in Australia, Russia and elsewhere may yet prevent it from being a game changer. East Africa’s finds will require substantial onshore infrastructure, which may delay the anticipated 2018 start date for cargo delivery. Given that it took neighboring Tanzania 30 years to commercialize its first gas findings, doing it across the border in five seems like lightning speed. Project start and end dates are critical because various LNG projects in different parts of the world, especially Australia, are expected to come online over the next decade and compete for the same off-takers. Just this week, Russia signed a 25-year $270 billion oil and LNG supply contract with China, doubling its sales volumes overnight. Add to this that prospective buyers have traditionally not favored Mozambican gas, which tends to be ‘lean’ with lower heating rates. Empresa Nacional de Hidrocarbonetos (ENH), Mozambique’s national resource company, has problems of its own: finding financing to cover its carry. Because there is so much uncertainty in global gas prices, covering capital costs even in the short term for gas projects has been hard to achieve.
There is good reason why the International Energy Agency has called Africa the “newest frontier” for oil and gas. With over 70 oil and gas discoveries in the last five years, and four of the top five natural gas discoveries in the world, Africa has never had more influence on global energy markets. But things are changing. The assumptions that governed the old world may be less relevant to the newest frontier in the new global energy world. In order to compete in the new global energy world, Africa increasingly needs to do everything at once: set in place the right mix of attractive and transparent investment policies, secure long-term investors, development partners and off-taker contracts, as well as reinvest in developing infrastructure, regional markets, and downstream industries. But if Africa has demonstrated one thing over the past 10 years, it’s that things can change quickly.
Eliot Pence and Nathaniel Adams both work with Upstream Analytics. Zenia A. Lewis is currently a Research Analyst with the Africa Growth Initiative at the Brookings Institution in Washington, DC. *The views stated in this article are solely those of the authors and do not reflect the views of their respective organizations.