Plummet goes the oil price, falling more than 50 percent since last year. Tapering due to efficiency measures and weakening economies in various regions like Asia and the US certainly helped this.
The cocktail of slowing economies and new alternatives in Shale Gas for the US and Canada slashed US demand from OPEC in half. A side-tack implication is pressure for Iran and Russia where revenues are hedged on supply with higher demand.
Here’s the paradox; strangely markets are more sanguine about geopolitical risk in various regions and their real effect and impact. Secondly, America, once the world’s largest consumer of oil has now become the world’s largest oil producer. Strategically, the US has led the way in destabilising global markets using the gas and oil energy markets.
My opinion is; we know that the US and Canada have known and had reserves for many years. Their trump card was for not only economic, but geopolitical reasons. This is portly seeing in the leading of sanctions against Russia and Iran, and despite Saudi Arabia as an ally.
The market is stomped with uncertainty despite many believing that it could spur growth and net reserves in revenue savings. It does however leave a huge reserve of oil in the market with the US slashing imports, plunging demand. An alternative worry is the increased carbon footprint failed policy is trying to fight.
In Africa, many have exposed themselves to risk lending at the expense of high oil process. The same applies in the United States. Producers lose out and consumer countries benefit. But how much certainty is there even in the current climate?
To this extent, KPMG Africa has made the call for continued reforms notwithstanding the slowdown in exploration projects.
Investors will likely delay the development of oil and gas projects in sub-Saharan Africa, changing 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.”
There has been a significant exploration explosion that took place in sub-Saharan Africa and in East Africa, particularly over the past four years adding to a sense of realistic prosperity for the continent and continental regions, awakening 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.
“The fall in oil prices has brought a jolt of reality to energy investors. If the production costs are higher than $70 per barrel, then their investment is wasted.” – Adam Bruce is global head of corporate affairs at Mainstream Renewable Power and co-chairman of the UK’s Offshore Wind Programme Board.
The pressure from the decline in prices will coerce firms to sell off non-core assets and reduce their equity stakes in assets in order to focus on a smaller number of field developments, investing in assets that are close to production. KPMG feels 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 investments 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.
Essex 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.
He continues to warn 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.
