Hydrocarbons in Sub-Saharan Africa: Part One

The hydrocarbons sector is particularly vulnerable to political risk because of the nature of high cost, long term investments in fixed assets.

19 African countries are significant producers of oil or gas. The majority of reserves and production remain concentrated in six countries, Nigeria, Libya, Algeria, Angola, Sudan and Egypt, and there have been significant new discoveries in Ghana, Kenya, Tanzania, Mozambique and Uganda, with prospected fields in other countries, including Sierra Leone, Mali and Kenya.

Investment risks

Politicisation of natural resource projects

Rising fiscal pressure on African governments in the next two years creates a negative outlook for natural resources development. With Nigeria’s presidential election fast approaching, divisions within the ruling People’s Democratic Party will exacerbate regulatory uncertainty within the sector and delay progress on anti oil bunkering measures. In Angola, the government is introducing extensive legislation, including a mandate that international oil companies (IOCs) conduct financial transactions in kwanza through domestic banks, increasing the complexity and operating costs of some players.

Kenya may prove the exception to this negative outlook with President Uhuru Kenyatta prioritising the development of infrastructure to support natural resources projects and the cultivation of positive relationships with neighbouring states necessary to develop the economies of scale for new pipelines and refineries.

Legislative hurdles

Lack of government capacity and lagging regulatory reforms will undermine the development of natural gas deposits in Tanzania and in Mozambique ahead of October’s general election. The interests of competing political factions are less pronounced within Mozambique’s Liberation Front (Frelimo) and IOCs are aligned to swifter development than in neighbouring Tanzania, but legislation has been delayed by a lack of government capacity and uncertainty within Frelimo about President Armando Guebuza’s succession. As a consequence, the new petroleum code has been blocked along with the accompanying fiscal framework. The bill’s passage will remain hostage to a decision on Guebuza’s successor, which could delay the fifth offshore bid round until after the election.

In Tanzania, the country’s natural gas policy has been released and a bid round is underway. While these are significant positives, draft natural gas legislation is unlikely to be passed until the second quarter at the earliest. Bureaucratic and political inertia has caused BG and Statoil to postpone final investment decisions. Terms of the production sharing agreement (PSA) on taxation (70 - 90%) and government profit shares is more negative than in neighbouring Mozambique where the state shares petroleum profits at a rate of 10 - 60%. Capital gains disputes should be anticipated later in 2014 as the respective governments try to enforce the new rules.

Local content requirements

Regulatory wrangling, political infighting and corruption have thwarted production in Uganda’s Lake Albert and serves as a warning of the challenges of developing hydrocarbons industries in territories that lack the requisite legal and regulatory infrastructure and independent judiciaries.

The drafting of local content laws in Kenya will encounter delays in the first half of 2014 as the Kenyatta International Criminal Court (ICC) trial and the inaugural Eurobond launch takes precedence. Ghana’s oil sector will continue to be impacted by local content pressures and significant pushback should be expected, limiting the implementation of quotas and forcing regulatory mandates to be imposed slowly over a number of years.

Security risks

Terrorism

Terrorism risk is rapidly spreading across Sub-Saharan Africa. Terrorist groups that have gained a foothold in states with weak sovereign authority are expanding their cross border activities, while the flow of cheap weaponry from Libya is providing armaments for criminal and terrorist groups.

Local protests and civil commotion

A common characteristic across Sub-Saharan Africa is the potential for local populations to create debilitating challenges to hydrocarbons projects. In Turkana, protestors triggered a two week shutdown in operations in response to a politically inspired dispute over service contracts. The question over project influence and the locus of control between the central government and local leaders is exemplified by the protests. Investment by Nairobi in the region is minimal and in response Turkana claims it should control the new hydrocarbons finds. Until a resolution is reached protests and political disagreements have the potential to blight the project.

The Niger Delta epitomises the dangers that arise when local communities and the central government disagree over the allocation of resource wealth. Although agreements between the Movement for the Emancipation of the Niger Delta (MEND) and the Jonathan administration have reduced the terrorism threat, oil bunkering continues to impact Nigeria’s crude oil production.

Cross border disputes

Cross border disputes that will impact the development of hydrocarbons projects on the continent are plentiful. Disputes between Tanzania and Zanzibar will continue to block natural gas exploration in the disputed northern blocks. Relations between Sudan and South Sudan remain precarious. Oil exports have resumed but the eventual referendum of the disputed territory of Abyei could provide the catalyst for new production delays. Security risks in Jonglei state, South Sudan, will hamper exploration of Total’s Block B, crucial for the rejuvenation of Juba’s declining reserves and the viability of a new pipeline route. Further West, the dispute between Ghana and Cote d’Ivoire over a shared maritime border continues and may impact the development of hydrocarbons resources.

Kidnap for ransom

Kidnappings, particularly of foreign nationals, is a risk in many African territories. The threat disproportionately affects workers of hydrocarbon companies as these types of businesses operate in the most volatile regions. Nigeria retains the top spot as the African country most affected by kidnapping, accounting for over half of incidents on the continent.

Al-Qaeda in the Islamic Maghreb (QIM) and its affiliates kidnap activities continue, with the groups claiming responsibility for kidnappings in Mali and Niger.

Mozambique remains a kidnap hotspot. The profile of kidnap targets has expanded from members of the South Asian community to include foreign nationals and expatriates working in the country.

For more on how to manage these risks, see also ‘Hydrocarbons in Sub-Saharan Africa: Part Two’.

Written by Elizabeth Stephens, Jardine Lloyd Thompson, UK.  Edited by Emma McAleavey.

Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/25042014/hydrocarbons_in_subsaharan_africa_426/