2020: Paving the Road for a Smooth Ride in the Future
NJ Ayuk, Chairman of the African Energy Chamber, discusses the impact COVID-19 and the oil price drop will have on Africa’s oil producing countries, as well as efforts to diversify and grow the continent’s tax base. He advocates for governments working with international oil companies to get through the current crisis, from offering postponements on tax collection to extending production sharing agreements.
The oil markets have been incredibly tumultuous, with the combination of the COVID-19 crisis and the oil price war. How do you see Africa oil producers being impacted by COVID-19 and the oil price collapse?
For African producers, a lot of programs are getting shut down. We are seeing a force majeure in Cameroon, in Senegal. ExxonMobil is dallying a gas project in Mozambique. In Uganda, some companies are delaying exploration. Frankly, most projects are going to get delayed.
Unfortunately, this comes at a time when Africa was seeing a lot of drilling Nigeria, Gabon, and throughout the continent. Now you are seeing rig counts reducing drastically. The current market doesn’t encourage banks and financial institutions to invest, as they won’t get the right kind of return. And if projects aren’t bankable, no one is going to put money in them. This will have an impact on African producers, even in a country like Nigeria, where you have mature and marginal fields.
How will the crisis impact diversification efforts on the continent?
Many countries had already made great improvements with regards to diversification, but of course it will be impacted. Whether they like it or not, the issue is now: how are you going to finance that? Oil provides a revenue stream to finance diversification and many African governments are not able to offer strong sovereign guarantees.
Not only did oil provide the revenue, but when you are going to diversify, the first thing you have to look at is diversifying within the energy space. From crude, you go to gas, from gas to power, and once you build up your energy mix, you can look at producing petrochemicals, ammonia, fertilizers. With that, you can power your agriculture sector and your manufacturing sector. But you can’t do any of these things without energy, without power. You’re not going to create manufacturing jobs running on power generators.
Power is the key component. Once you have that, you create jobs. You expand the tax base of the country and that is what is really key for African countries — diversifying the tax base and creating jobs at the same time.
Africa had been boosting its presence on the international stage, with more countries joining OPEC, South Africa taking leadership roles, etc. Have these efforts paid off? Does Africa have more of a voice in the global economy or is it still held ransom by the decisions of larger producers like U.S., Russia and Saudi Arabia?
I tend to disagree. These efforts have made a huge difference. Now, Africa is at the table. Africans are negotiating these agreements and pledging to the cuts. It doesn’t matter how big or how small — that is where your negotiating skills come into play. But if you’re not at the table, you’re on the menu. And you don’t want to be on the menu, because you’ll be chopped.
The challenge now is that African countries need to have a more united voice when it comes to African crude and African energy. They have to leverage their collective voice, and that is our biggest challenge when it comes to OPEC and other international discussions.
Saudi Arabia produces 10 million to 11 million barrels of oil per day. The entire African continent is doing 7 million to 8 million barrels per day, but a huge portion of Africa is untapped and explored — 85% of the continent has not even been explored. The continent has the capacity to produce 18-20 million barrels of oil in the next 20 years and that gives you the ability to influence things at OPEC and in the world market. It depends on how you position yourself, and the problem right now is we are not speaking with that strong African voice.
What are some strategies for African countries that are not yet producing, or aren’t producing yet, but are emerging as producers in this turbulent market?
Find ways to not fight with the IOCs. Uganda is a prime example. Uganda has suffered. It is very unfortunate they didn’t get that deal put together and start producing oil. Ghana and Uganda discovered oil at the same time, in 2007. By 2010, Ghana had first oil and was able to build a diverse industry and now you see Ghana being very independent and doing something that works for them. But in 2020, Uganda is still debating taxes with Tullow and Total. You can’t tell many players with keen interest in investing that over ten years to wait is a good sign for producers. We have to turn that around, because sometimes the bureaucratic way we do business is not going to get the job done.
The relationship with IOCs is a give and take. You have to find ways to get them on board and get things going. It is better to have FID. You have to have an environment where investors can close deals. Oil companies want to explore, they want to drill, develop their fields and produce in as short a time as possible, given the cyclical nature of the industry.
What is the strategy for companies and governments? How should the two be working together right now?
They have no choice but to work together. The Chamber is very bullish about energy and Africa and we believe we have a responsibility to build, educate and mobilize one of the most important sectors in Africa for our development. Yes, we believe advocating the principles of smaller government, lower taxes, free markets, personal liberty and the rule of law. It has to be part of our comeback story. The first thing you have to look at is to avoid the big issue: where we turn around and blame the IOCs and over tax the companies. This is not the time to put too much pressure on companies and tax them to death. This is a time when we have to look at the industry and say how can we help? How can we work with you to find solutions and make this happen? You can’t love jobs and hate those who create jobs.
Real policies have to happen that encourage and facilitate that development. For example, if we postponed collection of taxes owed by companies, so that companies could have more money in their accounts. This means people don’t lose jobs. You can give an extension of exploration programs immediately. Talk to investors to do deals with licenses that are currently operating, so that money goes into ready projects and drillable prospects.
Now could also be a time to invest in midstream, so that when production comes online in the future, the midstream capacity is already there to support that development.
What do you see as the short-term and long-term outlook for the industry?
2020 is going to be a tough year for everybody. Everyone needs to buckle up for the ride. The real question is: are we paving the road for a smooth ride in the future? That is really key to what we want to do.
You have twin issues of the price war and the corona virus — you can’t make this up. Hollywood couldn’t have written out this script. 2020 is done. So, you have to look at 2021 and form the policy that will drive you forward. You have to be in a strong position to go forward and really deal with a future that works for the industry.
Long-term, oil is going to be around. Of course, there are challenges with climate change, and there is a responsible transition there, but demand for oil will be around for the foreseeable future.
Still, this is a chance to change the focus to gas. If you develop gas, you create more diversification and more jobs.
I do see a strong future for the oil and gas industry in Africa. The fundamentals are there.
This article was first published on Africa Oil and Power.