How the upstream Oil & Gas industry can tackle challenges faced by its strategic projects in West Africa
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Oil & Gas

How the upstream Oil & Gas industry can tackle challenges faced by its strategic projects in West Africa

March 18, 2021

7 min read

Devin Culham

Devin Culham

Capital-intensive Exploration and Production (E&P) projects represent a significant economic stake for the upstream Oil and Gas (O&G) industry. The years 2014 through 2016 marked a volatile era for the O&G sector, including a precipitous drop in oil prices that profoundly impacted the entire O&G ecosystem. Now that oil prices have begun to recover, the most promising Large Capital Projects (LCP) can proceed. Some of these projects, in particular, unconventional O&G projects, are becoming a priority and are supported by a stronger global economy and the surging energy needs from developing countries in Asia. In response to increased demand, O&G companies are investigating their next steps, while being mindful of the high volatility of crude oil prices. Currently, the search and development of new reserves in challenging locations are characterized by difficult conditions such as ultra-deep waters or new geographies. Because of this, O&G companies are required to navigate both the extraordinarily complex industrial challenges and the financing of these massive investment projects.

Across the whole continent of Africa, an estimated $190B will be spent on O&G projects between 2018 and  2025, representing 7.5 percent and 7.1 percent of global oil and gas production and reserves, respectively. Interest in offshore projects on the West African coast has grown significantly in recent years because the region boasts nearly a third of the African reserves. Investors and industrial players alike want to benefit from promising reserves by developing large E&P megaprojects.  Apart from known geographies in Nigeria and the Gulf of Guinea, Senegal and Mauritania, followed by Guinea-Bissau and Sierra Leone, are becoming the focus of attention due to the discovery of smaller reserves. The oil-rich area (commonly referred to as the MSGBC Basin) extends from Mauritania to Guinea-Conakry.

In this article, we will investigate key challenges afflicting upstream projects in the West African region and discuss relevant solutions and mitigation strategies.

Financing the most promising projects remains a priority

Regarding upstream investment decisions, it is essential to undergo a highly professional due diligence and project valuation phase to support an efficient decision-making process. Price volatility and future market uncertainties challenge LCP’s financial evaluations, which are already complicated by limited political stability in some West African nations. Financing all potential E&P projects remains an impossible task, especially at a time when banks are tempted to reduce their exposure to O&G projects. Of course, a few focused efforts can help address these financing challenges.

Reinforcing market insights integration is a necessity

The inclusion of analytical inputs within LCP’s financial evaluation can significantly improve the decision-making process. Data scientists and analysts must play an increasingly integrated role with E&P project teams to facilitate well-informed strategic, tactical, and operational decisions. For example, after the fall of oil prices in 2014, new deepwater projects were among the first delayed or canceled projects as the industry moved towards shorter cycle investments, like shale. Now that prices have recovered, new O&G projects in West Africa, particularly on the Senegalese coast, will benefit from Financial Investment Decisions (FIDs).

Investigate alternative funding sources

Investigating alternative funding sources can help counteract the reduction in lending from traditional banking players. Some private equity-backed E&P players are already investigating offshore stock exchanges, creating potential opportunities for private investment. Another possible financing solution may occur when companies sell old assets and repurchase them under new leasing arrangements.

E&P companies must continue to restructure or sell the least efficient assets in their portfolio

Selling arbitrages can free significant amounts of capital better utilized for more promising projects and geographies. By continuously decreasing capital investments, E&P companies can restore financial flexibility to pursue new opportunities, like the acquisition of extension of identified promising assets.

Acquiring local players with unique assets in selected geographies

Partnering with a local firm can become a winning strategy in geographies where specific E&P companies are not present. A local partner can take advantage of optimized costs by leveraging existing local expertise in project assessments and asset management.

Identified African Mega Projects in 2018
Identified African Mega Projects in 2018 – Source: AfricaOil&Power.com

Solutions to tackle operational challenges in West Africa

Operations in the O&G sector can be particularly challenging in West Africa. First, the talent shortage in the upstream sector remains a very critical issue in developing countries. The lack of skilled personnel strongly impacts E&P sector operations, which rely on high-tech and high stakes processes. Generations of experienced employees retiring from the industry only exacerbates the talent shortage by not having a labor force that is readily available to replace skilled workers. Furthermore, E&P firms’ input costs have soared over the last decade, driven by increasing expenses related to the construction of offshore facilities. The combination of challenging drilling conditions in frontier areas with the volatile cost of materials (such as steel) are operational challenges that will require innovative solutions.

Supporting capacity building and the development of local expertise

Developing specific local O&G training curriculums can help to create a pool of highly qualified local engineers. In light of the limited local employment opportunities in many developing countries, there is no doubt that the O&G industry can recruit the best local talent. Refraining from financially supporting the creation of training and development initiatives is short-sighted; the expertise availability and flexibility of a highly-skilled local workforce would prove to be an invaluable return on investment for any O&G project.

Forging long-term partnerships that nurture a local ecosystem

Long-term partnerships with local suppliers is a necessity for E&P companies. As E&P projects develop, framework agreements that cover long-term periods and standardized deliverables and services are poised to become the norm in countries like Senegal. If mutual interest exists – such as reducing costs and localizing production – safety and quality control issues will represent another challenge and be a key indicator for localization projects.

Technological innovation

The regeneration of technology projects in Africa is an opportunity to field-test simplified, standardized, (and in some cases, downsized) E&P equipment. Deepwater technologies utilizing new digital solutions, such as the atomization of drilling mechanism and innovative robotic technology, could also be tested on upcoming Nigerian and Senegalese installations.

Operational excellence for new E&P projects in Africa

The cost of large capital projects continues to increase, and it’s becoming important now, more than ever, to spend every dollar wisely. Now that rising oil prices have made investment opportunities more available, companies need to continue their efforts to streamline operations and leverage new possibilities offered by digitalization. Before the price decrease in 2014, E&P projects in the upstream industry were already demonstrating the impact of excellence in traditional project management and experienced significant cost overruns.

E&P cost overruns can reach alarming proportions
E&P cost overruns can reach alarming proportions – Source: PWC

Addressing policy issues remains a recurring challenge

Obtaining timely regulatory approval for megaprojects, particularly for unconventional O&G projects, can be challenging. Especially on the northwestern coast of African where the O&G sector remains in its infancy, weak institutions focused on downstream distribution may have non-existent, or frequently changing regulatory requirements. Absent, changing, or increasingly stringent regulations can lead to delays, especially when permits involve multiple government bodies or business associations. Because of the “zero tolerance for accidents” environment now dominating the E&P sector, and the ever-evolving national regulations, large projects are increasing their expenditure on HSE compliance. Additionally, acreage can sometimes become more challenging to acquire, as well.

Leveraging positive support from policymakers: the Senegalese example

Between 2014 and 2016, significant O&G reserves discovered in Senegal that could begin production as early as 2021 or 2022. According to forecasts by the Senegalese authorities, production could reach 100,000 barrels per day, leading to a yearly growth of more than nine percent and a GDP increase of more than $5 billion per year. Newly elected Senegalese President Macky Sall’s background as a geological engineer and former head of the country’s national oil and gas company, Petrosen, is likely to facilitate discussions between O&G players and the Senegalese government. Sall is currently investigating opportunities to develop a local tax waiver, among other initiatives, to help support the development of local industry capable of supporting large scale O&G projects.

Anticipating and documenting fiscal and non-fiscal challenges

In Senegal, the 1998 oil code is currently being modified to adapt to recent O&G discoveries and developments. Because of this, a continuous exchange between the government and upstream operators and investors is crucial to ensure a smooth transition and to anticipate issues that may arise. Collaboration is particularly necessary due to increasingly more demanding legal restrictions often required for E&P companies. A fact-based perspective on global fiscal and non-fiscal regulations, as well as modeling industry data, is necessary to create a clear view of the potential impact that regulatory changes can have during a time of changing regulations.

Reinforcing ties with key officials and local communities important now more than ever

Due to factors contributing to growing resource nationalism, foreign companies must reinforce existing relations with local officials and communication with local stakeholders. Doing so will help to ensure they are compliant with local content regulation and conquer logistical challenges related to sourcing goods and services locally. In countries like Senegal, one should investigate whether external advisors are welcome to share their O&G sector expertise with regulators like Senegal’s oil policy body, COS-PETROGAZ. Of course, high-profile megaprojects attract attention from many different stakeholders and are subject to misinformed options and oppositions. Clear and transparent information regarding stakeholders will be necessary for the long-term success of O&G projects.

Control and support is necessary to reinforce legal expertise

Adapting to challenging policies requires the development of significant local knowledge across several sectors. From acreage acquisition to fiscal, non-fiscal, and environmental policies, a clear assessment of current internal and potential external support should be investigated. By doing this, E&Ps can ensure that they have a full understanding of compliance rules to avoid any misunderstandings or uncontrolled cost escalation.

Companies investing in large E&P projects pose very significant financial, operational, and political challenges to industrial players and investors. Because E&P projects often focus on environmentally sensitive and remote areas, leveraging new technologies that increase oil recovery, develop shale and oil gas, and create new subsea oilfield projects will become more prominent all over the world. The low oil prices during the 2014-2018 period have forced E&P companies to reexamine their core business capabilities, forcing them to adapt to more challenging geographies and production environments, volatile markets, and frequently changing regulations.

In West Africa, extensive development projects in Senegal and Nigeria represent promising opportunities. However, they also pose specific challenges. Solutions and mitigation plans to improve financing, promote more efficient operations, and better anticipate policies certainly exist and will need to be pursued sensibly to avoid neutering a growing industry.

Geopolitical uncertainties also exist and contribute to Oil & Gas challenges. Local security concerns, which cover not only potential civil unrest and workforce disruption but also specific terrorist actions, are well addressed by the O&G industry, which has experience working in challenging environments. In West Africa, diplomatic and security issues are not anticipated to represent key hurdles to the development of upstream projects but are worth being thoroughly reviewed.

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