Ensuring affordability and security of energy supply in Africa
Production underperformance does not only impact domestic energy supply but reduced export revenues for producing nations, creating a multiplier effect on the economy. During 2021/2022, many African countries have seen production gradually declining, leading to stakeholders pursuing innovative ways to enhance exploration and establish energy security.
In an exclusive interview with the African Energy Chamber (AEC), David Hartell, Managing Director, Stellae Energy Ltd. provides more clarity on the current situation.
What will this production underperformance in Nigeria, Libya, Angola, Congo, Equatorial Guinea and African countries mean for the continent as a whole?
Production underperformance hurts the countries involved with less capital and operating expenditures on local personnel, services, procurement, and logistics. Countries receive less revenue from direct and indirect taxes and royalty payments. The economic multiplier effect hurts the overall economy of these countries. The continent also suffers from reduced economic activity within the continent’s internal markets of goods and services as well as less access to domestically produced energy resources. Importing hydrocarbons from international locations will cost more and requires external currency payments, whilst internal market transactions may facilitate alternate payments with food, minerals, and manufactured goods.
What do you feel are the primary reasons influencing production decline in Africa?
The initial impact of the pandemic in early 2020 adversely affected the oil price which declined significantly leading to reduced income streams and deferral of investment. Lack of continued investment has allowed some assets to degrade with a lack of new wells and facilities, inadequate existing well and facility maintenance, and reduced manpower to keep assets performing. With depressed oil and gas pricing, operators working in these countries had to constrain spending to keep the ability to meet their fixed obligations including debt repayments. A lot of good personnel were released, many small and medium companies suffered from some going out of business, and the significant experience was lost from the industry. Local staff hiring and training suffer significant deferrals. Hopefully, we are on a path to recovery.
What can be done to turn this around?
Oil and gas pricing has recovered significantly from the lows of 2020 with international demand recovering as the pandemic continues to be more resolved. Larger companies with better balance sheets have begun to recover their work and spending programs. Small and medium companies are beginning to recover with higher cash flows from existing assets. The maintenance of wells and facilities is beginning to improve, and this is vital. Existing assets offer the quickest means to rapidly improve production by performing maintenance, well workovers and maintenance, and near-field developments of existing underdeveloped resources. Continued access to funding and finance is under pressure with inadequate appreciation by some international governments, multi-lateral agencies, investors, and decision-makers of the role that Africa’s domestic production plays to help the 1.2 billion people in Africa to meet the UN Sustainable Development Goals and help end Energy Poverty. A united approach and lobbying by African countries with these external banking and multi-lateral investment parties are necessary to help educate them about the need to ensure affordability and security of supply of energy to the people of Africa. Africa accounts for only 3% of global emissions so improved access to and developments of domestic energy resources will not significantly impact others, but it will improve Africa’s living standards, access to clean water and improved sanitation, education, and better economies.
What do you recommend as an industry approach to low carbon gas monetisation and financing in Africa?
The EU’s recent decision to consider natural gas as a Green Investment was an important step to recognise the reality that gas plays in decarbonisation as Renewables continue to scale up. Other developing nations have seen significant increases in coal usage due to inadequate energy supplies and gas is better than coal in reducing potential carbon emissions. This classification of gas will help improve access to funding and finance for African countries and companies to pursue low carbon gas monetisation. Africa has significant gas reserves and the ability to target additional undeveloped unconventional gas in some countries has significant upside potential. Gas from North Africa can be exported to Europe to improve energy security, but Europe needs to support funding and finance. The proposed addition of African Energy Banks and the strengthening of the African Export-Import Bank to supplement the work of the African Development Bank is a good idea to improve access to funding and financing for gas monetisation. Carbon Capture and Storage of emissions can help make these gas supplies meet the targets of clean energy for export.
What should new independents consider while entering a changing African energy sector?
New independents should consider sustainable entry to the African energy sector. They should plan to partner with local companies that have significant experience and knowledge gained over decades with former and existing energy companies in Africa. Experienced energy staff, engineers, geoscientists, drillers, logistics providers, and operators are available in many countries and regionally across Africa. Improved costs are possible with these local service resources. Smaller domestic African energy companies are good partners for new independents considering entry with good knowledge of how to successfully meet regulatory and legal obligations to work efficiently. New independents can work with existing local companies to strengthen ESG frameworks and support the pursuit of UN Sustainable Development Goals for their local communities.
Is it time for Model Gas/LNG Production Sharing Agreement?
As the world addresses climate challenges, there is reduced external investment available to develop Africa’s oil and gas resources. Having countries with complicated PSA’s associated with complex commercial terms has reduced the attractiveness to external companies to enter into assets with these agreements. With investment decisions and allocation of capital influenced by economic return and risks, the use of some PSA’s has hurt Africa’s attractiveness to new investors and reduced the interest of existing investors to remain. A well-negotiated Model Gas/LNG Production Sharing Agreement addressing these challenges could help better balance direct and indirect revenues and risks and increase investor interest in helping African oil and gas exploration and developments. Unless this happens, fiscally advantaged jurisdictions will continue to attract investment away from Africa.
What pending deals do you believe should be completed and announced at African Energy Week in Cape Town?
A unified African approach to the international community regarding the importance of resolving Energy Poverty is an important announcement building on AEW2021 progress in this regard.
The various streams of work by African nations and companies to support the Energy Transition should be announced. Stellae Energy is working with several African entities to develop clean renewable energy solutions including Geothermal, Carbon Capture and Storage, Hybrid Solar PV and Wind, and Energy Storage Systems including Hydrogen. African companies are well qualified and experienced to begin transitioning a portion of their work to Renewables as existing oil & gas developments recover with increased cash flows for future investments in sustainability.
Pending announced and rumoured divestments by some international operators need to be resolved and announced. Until then, there could be a significant deferral of spending by existing operators and prospective new operators would be unable to implement their plans and make new investments.
The uncertainty hanging over potential divestments will just increase production underperformance until resolved. African governments can help these processes proceed smoothly to help maximise opportunities for new entrants especially in combination with domestic energy companies.