Slipping off the radar
Slow-moving legislation, political risks and the weak oil price have damaged West Africa as an investment destination. Senegal may be the exception
FOR THE first time since Tullow Oil's discovery of the Jubilee field in Ghana in 2007, West Africa's upstream has a new frontier play to get excited about, in the shape of multiple oil and gas finds in and around Senegal. But these cannot mask an otherwise gloomy regional picture.
West African countries offering costly deep-water exploration and production opportunities, combined with an uncertain investment environment, are struggling to compete for a limited global pot of energy project funding.
"It is a difficult investment environment, given low oil prices and the fact that international oil companies have a global asset footprint," says Rolake Akinkugbe, head of energy coverage at investment bank FBN Capital in Lagos. "They will be thinking, for example: is it easier to go for Ghana right now, or East Africa?"
Overall, that battle for capital between East and West Africa over the past couple of years has been won by East Africa, whose plentiful, easily accessible gas reserves, handily placed for export to Asia, have generally looked more attractive than West Africa's offering.
Senegal might, though, buck the trend by bringing together substantial oil and gas finds, relatively benign business conditions and political and social stability.
In 2014 Australian minnow Far Petroleum found an oil-rich offshore formation close to the capital Dakar, located midway up Senegal's coast, and was able to bring in Cairn Energy as operator and ConocoPhillips as a partner. Meanwhile, Kosmos Energy believes it may have found a large gasfield in the Greater Tortue prospect, which straddles Senegal's northern border with Mauritania, and is considering developing a liquefied natural gas project from it.
These developments have already boosted Senegal's standing as a potential investment destination. If results from a number of further test wells set to be drilled in coming months are positive, the country's profile will expand further.
"We think it's a world class asset with a good upside," says David Thomson, principal sub-Saharan Africa analyst at energy consultancy Wood Mackenzie. "It's deep water and Senegal is still a frontier country, but we do think the prospects seem good."
The country is unusual among African countries for having had three peaceful transitions of power between four presidents since independence in 1960. Its president, Macky Sall, trained as a geophysicist before working as a geological engineer at the national oil company and later headed the country's energy and mining ministry.
The conjunction of political stability and a face at the top who knows how the oil sector works, along with a solidly performing economy, should offer a sound backdrop for oil and gas investment. As one observer put it: "With his experience, the president will know that, while oil may be a boon, it doesn't mean everyone will be smoking cigars in six months' time. He knows there has to be a reasonable lead time."
Now, though, Senegal's reserves need to be turned into commercial assets. Back in March, before its latest successful drilling campaign, Kosmos said it was confident it had enough gas in Greater Tortue alone to merit LNG. These reserves straddle the border with Mauritania, and although the two countries have agreed to cooperate on their development, Cairn and its partners will only want to build one LNG facility - so a wrangle could develop over which side of the border it should be located on.
IOCs have bank-rolled the state's share of projects for years. The weak oil price makes this matter all the more worrying for investors
And while the country may boast greater political stability than many of its neighbours, and a 6.5% economic growth rate in 2015 - the second highest in West Africa after Côte d'Ivoire - some still find reason to gripe.
"An unfavourable investment climate, costly energy, and weak governance systems have prevented the private sector from stimulating the economy," the World Bank says, though its overview of the country is generally favourable.
Nigeria's oil industry, the region's largest, is in the midst of a radical overhaul, designed to stamp out corruption and restore investor confidence. Measures to dynamise the economy - like allowing the naira to trade more freely and liberalisation of foreign exchange controls - are also plus points for investors.
Infrastructure in place
Domestic companies planning to invest in place of more risk-averse foreign ones may find it easier to raise funds, though they are unlikely to have the financial clout needed to partner international oil companies (IOCs) in deep-water offshore ventures. Instead, they will continue to play a role in lower-cost near-shore or onshore production.
The big IOCs, which dominate Nigeria's offshore, will be reluctant to plough more money into the upstream until efforts to restructure state oil firm Nigerian National Petroleum Company (NNPC) and provide a new investment framework for the sector to advance. The upsurge of unrest in the Niger delta is another deterrent.
The country's Petroleum Industry Bill, designed to clarify the investment framework for the sector, remains blocked in parliament and has been under review for so long that some of its main objectives now look outdated.
Persuading IOCs that the state should have a bigger share of the take in production-sharing agreements was always going to be tough, given cash-strapped NNPC's inability to fund its share of projects in which it has a stake. Effectively, IOCs have bank-rolled the state's share of projects for years. The weak oil price makes this matter all the more worrying for investors.
Moves by the government to short-circuit the country's cumbersome legislative process by trying unilaterally to put the industry on a more commercial footing have been welcomed by potential investors. Concrete measures are more helpful than those bound up in the morass of already-antiquated legislation.
It's deep water and Senegal is still a frontier country, but we do think the prospects seem good
Chief among these new measures has been the restructuring of NNPC. The government is trying to change into a more commercially-oriented entity, with greater transparency and the ability to raise money more easily through capital markets. The process started with the appointment of former ExxonMobil executive Emmanuel Ibe Kachikwu as the company's new boss.
"For the government to be confident enough to bring in someone from an IOC, who is used to sitting on the other side of the negotiating table, says a lot about how it wants to position the national oil company," says Akinkugbe. "But risk-averse investors are still going to wait and see how serious changes at NNPC are before taking a decision on whether to partner."
Like Nigeria, Ghana has been struggling to get updated upstream legislation into law. This hasn't stopped investment rolling into the sector - or it didn't until oil prices slumped.
The Tullow-led $5bn Tweneboa, Enyenra, and Ntomme project (sanctioned before the price drop) is set to start production in the third quarter of this year. The Jubilee field expansion is now likely to go ahead and offers a relatively low-cost, low-risk add-on to the existing project.
The new global investment climate, though, has complicated efforts to pass Ghana's Petroleum Exploration and Production Bill. It is supposed to replace legislation dating back to 1984, and has just been put before parliament again - having been under revision since 2011. Critics of previous drafts have pointed to the bill's limited transparency requirements and concerns over how ministerial discretion could influence competitive bidding.
This article is part of an in-depth series on West Africa. Next article: Nigeria: Making gas work.