Continued Reforms are Necessary Despite the Slowdown in Exploration Projects

Investors are likely to delay the development of oil and gas projects in sub-Saharan Africa and change the scope of their early-stage projects due to the sharp decline in oil and gas prices.

Mark Essex, director of Oil and Gas: KPMG in Kenya, says host countries will be disappointed by the postponement of the development of these projects as they have worked hard at making their countries attractive investment destinations for oil and gas players.

The exploration boom that took place in sub-Saharan Africa and in East Africa in particular over the past four years has brought a real sense of excitement to this part of the world and awakened high expectations in governments and communities. “They have their sights set on goals such as energy independence and job creation,” says Essex. “The activities of the energy companies made these goals more attainable.”

Essex adds that governments in this region have from day one expressed a firm resolve not to repeat the mistakes others have made by investing significant effort in fiscal, regulatory and institutional reforms for the energy sector.

But the decline in prices will lead to firms selling off their non-core assets and reducing their equity stakes in assets in order to focus on a smaller number of field developments, investing in assets that are close to production. This development is certain to slow down the commercialisation of projects and will leave governments feeling they have even less control over the pace of development.

“There is a risk that everyone will now sit back with regard to putting regulatory and institutional frameworks in place. Investment by the industry has largely driven and motivated reforms, such as setting up and staffing industry regulators to give timely project approvals to allow them to take bankable projects to the final investment decision (FID) stage,” says Essex.

He recommends host governments continue to make regulatory and legislative reforms in order to maintain the interest of investors or entice new energy players. “Governments need to make the investment environment even more attractive for when the project economics improve. All the preconditions for significant in-vestments in infrastructure need to be in place as and when exploration and development expenditure does return.

“Host countries that are able to continue reforms, address cost constraints and work collaboratively with investors to ensure a more amenable environment for long-term oil and gas exploration and development, will ultimately become a more attractive investment location compared with their peers,” he says.

Commenting on the expectations of local communities, Essex adds that it is typically difficult for communities to see how large amounts of funds can be spent on exploration with benefits only coming to them years down the line at the development and production stages. Since the commercialisation of oil and gas projects will be moved out, there is a possibility that issues or misunderstandings could arise if good communication does not take place.

KPMG expects the scope of projects to change as companies start to feel price pressures

“Projects may increase in size as investors look for greater efficiencies. There are a number of LNG projects in Australia and other parts of the world that are further advanced and are more likely to go forward despite the current market conditions. Fierce competition in the global LNG market could well lead projects to continue getting bigger and bigger,” says Essex.

He expects a move towards more modularisation to help reduce costs, which could have an adverse effect on local suppliers and the benefits derived in-country.

Essex warns that countries with more assertive local content policies could find it harder to remain cost-competitive, potentially becoming less attractive investment destinations in an even more cost-conscious environment of mega projects. “Whether local content requirements do drive up costs depends on the competitiveness of local markets for labour, goods and services.  Host governments can positively influence this and improve the attractiveness for industry by focusing on support to promote local competitiveness”, he says.

“Host governments should not abandon their resolve for the necessary reforms. They can be proactive and take this opportunity to ensure attractive and fair fiscal terms are put in place and legislative and regulatory frameworks are clarified to reduce complexity and uncertainty. Where local drivers of cost inflation and other above ground-risks are identified they should be addressed with investors to build long term confidence.

Source: KPMG, Africa.