From - Wood MacKenzieFinancing the next phase ofAfrica’s oil and...

From - Wood MacKenzie

Financing the next phase ofAfrica’s oil and gas development

Access to capital the biggestobstacle for local players….

19 October 2023

The message from this year’s Africa Oil Week and African Energy Week,held back to back in Cape Town, could not have been clearer.

With energy poverty endemic and war in Ukraine driving home theimportance of affordable and secure energy supply, the continent must fullydevelop its abundant oil and gas resources.

Big Oil’s huge deep and ultra-deepwater discoveries are driving Africa'supstream resurgence, including Baleine (Eni) in Côte d’Ivoire and Venus(TotalEnergies) and Graff (Shell) in Namibia.

But local E&Ps must step up to develop the region’s enticingshallow-water and onshore resources to maximise the opportunity.

And there is the rub: whereas the Majors can readily self-finance andaccess low-cost debt, it is a different story altogether for much of the restof Africa’s upstream sector.

How can Africafinance its oil and gas riches?

Better projects make for betterfinance

High-quality projects in Africa continue to move ahead.

We expect 2023 to be a significant year for new production start-ups andAfrican greenfield FIDs are also moving forward. Four major greenfield projectscould reach FID this year, with Angola to the fore.

Much of this is inevitably being led by the Majors. With bulging balancesheets and options to debt finance, divest assets or sell down equity positionsto fund African projects, capital is not a barrier to growth.

African governments are pivotal to financing

African governments are critical to the ability to secure financing foroil and gas.

Several African countries offer progressive sliding-scale profit share,royalty and tax rates, which enable faster cost recovery – a key issue forfinanciers.

Terms that provide for accelerated depreciation of capital for costrecovery and tax purposes – and the widening of ring fences to allow producersto consolidate investment in new areas with revenue from existing areas – alsohelp. Egypt is a good example.

In two of Africa’s major resource holders, we also see ongoing effortsto crowd-in funding.

Nigeria’s new President Tinubu has signalled a significant shift infiscal and monetary policy to boost investment with a focus on the oil and gasindustry.

Meanwhile in Angola, improved upstream terms have been negotiated on anad-hoc basis for several licences and helped to unlock exploration anddevelopment spending.

Governments can also support the flow of capital for African M&Adeals by fast-tracking regulatory approvals. Holding up investment on matureassets only accelerates production decline rates.

With smaller balance sheets and tightening lending criteria from banks,independents and local players across Africa do not have this optionality.

To have any hope of accessing capital, quality matters.

Companies must push hard to reduce costs, improve project deliverytimelines and ensure watertight ESG credentials including carbon emissions.

Without this, lenders will remain thin on the ground.

Opening more innovative sources of finance

‘Peak ESG’ may have been 2021, but Africa remains at the sharp end ofthe squeeze on oil and gas funding from traditional lenders.

With a clear stratification between the Majors and African E&Ps, thelatter must look to more innovative sources of finance.

Firstly, we expect more activity fromAfrica-focused banks as international banks continue their retreat.

These banks – ambitiously – believe they can finance up to a third ofthe oil and gas investment needed in Africa, providing greater liquidity whenlending in local currency.

Secondly, the role of traders offeringproduction-based financing is growing in importance. Identifying a gap in themarket almost a decade ago, traders are now underwriting significant debt forindigenous Nigerian players, moving at speeds commercial banks are unable tomatch.

But traders must also service their own debt, increasing lending coststo third parties. Typically, only the highest-value barrels make the cut.

Finally, there remains some scope formultilateral lenders and development finance institutions (DFIs) to financeprojects in Africa that tie into local infrastructure and industrialdevelopment.

However, most remain hesitant to directly finance upstream supply.

More positively, the African Export-Import Bank last yearreached agreement with the African Petroleum Producers Organization tocreate the African Energy Bank, a signal of intent by the continent tofind viable sources of funding for its oil and gas projects.

Africa rising

The ambitions of COP28 are a timely reminder that the world cannot wait forever for Africa to develop its oil and gas riches.

But there is a golden opportunity for resource-rich African countries totap into the world’s need for energy security and tackle energy poverty athome.

Attracting finance is the Achilles heel, and governments and willingfinanciers must leave no stone unturned to ensure that local companies are ableto play their part.

https://www.woodmac.com/news/the-edge/financing-next-phase-africas-oil-gas-development/