African oil and gas assets have become hot property as the world hunts for profitable projects in jurisdictions that will allow extensive exploitation.
This has come at an opportune moment for governments keen for added tax revenue, who were facing a drop in investment as oil and gas majors like Shell (SHEL) and BP (BP.) shift focus to other regions and non-fossil fuel projects. At the same time, banks have pulled back from funding major new fields that have found financing even in recent years, like the Mozambique onshore gas fields and Greater Tortue Ahmeyim (GTA) offshore LNG project on the maritime border of Senegal and Mauritania.
But now the energy crisis has revved up interest in the continent’s existing assets and expansion options. The EU said it would “explore the export potential of sub-Saharan African countries” in the RepowerEU plan to wean itself off Russian oil and gas. On a visit to Senegal in May, German chancellor Olaf Schulz said securing gas supplies from the region was “a matter worth pursuing intensely”.
Just last week, the Nigerian petroleum minister confirmed a 4,000-kilometre gas pipeline from his country to the Mediterranean was back on the table, with funding discussions already taking place with European institutions.
In the short term, the US will likely take up more of the current slack in supplies to Europe as Russia cuts supplies, but it cannot cover the full load. A rush to largely West and North African assets will not help the current crisis, deals and project green lights now will determine what oil and gas markets look like in a decade.
“Existing pipeline infrastructure from Northern Africa to Europe and historical LNG supply relationships make Africa a strong alternative for European markets, post the ban on Russian imports,” said Siva Prasad, senior analyst at consultancy Rystad Energy.
The key producers in North Africa are Libya, which is still a no-go zone for plcs, and Algeria, where production is still largely in the hands of the state oil and gas company. Egypt is where more London-listed companies have exposure, however, including Energean (ENOG) and Capricorn Energy (CNE).
More companies are operating in West Africa, which has been a hive of activity recently.
Tullow Oil (TLW) and Capricorn are asking investors to back a deal that would see the latter’s cash used to build Tullow’s projects in the region, “creating a leading African energy company”.
Some institutional holders and analysts have said it is a poor offer for Capricorn, but the fact that the former Cairn Energy board has backed it says something about the desire for reserves right now. Capricorn has assets already in Egypt but is keen for a bite of Tullow’s Ghana expansion plans and Kenyan greenfield project.
This comes after the majors have spent years backing away from countries in West Africa particularly.
"We've seen a lot of the international majors and supermajors looking to step out or reduce their activities in certain African jurisdictions where the issues of doing business legally and reputationally are difficult for them," said Jason Fox, UK managing partner at law firm Bracewell.
Shell, for example, is selling off its Nigerian holdings. Jefferies analyst Giacomo Romeo said investors in Europe had flagged this on a recent roadshow as one of Shell’s “ESG limitations”.
But smaller companies are doing extremely well from deals in the same country: Savannah Energy (SAVE) has seen its operating profit go from negative figures in 2019 to $90mn in 2020 and 2021, and consensus forecasts put this figure at $246mn for 2022.
New entrants
The majors backing away, just as in the North Sea, has left room for other players to come in.
Afentra (AET), a new company set up last year as an acquisition shell, is in the final stages of buying stakes in two blocks held by Angola state oil and gas company Sonangol. The $130mn deal is for non-operated stakes in shallow water fields, with around 50 wells producing a total of 4,000 barrels of oil per day (bopd), net Afentra.
Chief executive Paul McDade told Investors’ Chronicle West Africa was around 15 years behind the North Sea, in terms of established players selling off mature assets. Governments are now embracing this change, and the reception smaller companies get now in Angola is much warmer than it was in the mid-2000s, the former Tullow boss said.
“It was very much the domain of the majors [in 2006],” he said. “Since we've re-engaged with Angola, as Afentra, they recognise the energy transition and how it's impacting the major IOCs.”
“Angola has been early to recognise they need new investors,” he added. Afentra’s shares have been suspended since October, when the Sonangol deal was announced, as it hashes out the details with the state oil company and financiers.
The country doesn’t come without its negative aspects. The state oil and gas company was looted for years by the previous ruling family.
McDade said the lengthy deal process (shares will potentially be trading again by the end of the month) was because Sonangol was so focused on making sure the sale of the stakes in the blocks was done transparently.
Mid- and small-caps like Savannah and Afentra swooping in and taking on existing assets will not move the dial in terms of global production. But a handful of major greenfield options could.
BP and fellow GTA owner Kosmos Energy (KOS) are nearing a key decision point for the project as well, as they consider whether to go ahead with phase 2. Going by BP management’s previous statements (“It will just take a completion of commercial negotiations with the country and with partners and suppliers to get there”, said CFO Murray Auchincloss in May), this is close to a done deal. This language has shifted from 2020, when Auchincloss said the investment metrics would also have to line up for BP to double production at GTA, as per the phase 2 plan.
“The continent is forecast to increase its gas output from about 260bn cubic metres (bcm) in 2022 to as much as 335bcm by the end of this decade,” said Prasad at Rystad. “If oil and gas operators decide to up the ante on their gas projects on the continent, near- and mid-term natural gas production from Africa could surpass the above conservative forecasts.”
