Something to Lean On
Dr. Thabo Kgogo, CEO of South Africa-based SacOil Holdings, discusses the importance of a large, anchor shareholder for newly founded E&P companies and the need for government guarantees in the downstream sector.
How do you see indigenous E&P companies evolving their business strategy in the next five years?
The oil and gas business is an expensive, high-risk industry. For this reason, indigenous companies require a very strong financial backer. Without it, their chances of success are slim. New exploration and production companies need to start with this financial support, such as an anchor shareholder. For example, with SacOil, the largest shareholder is a large investment fund, which owns a 70 percent stake. This anchor shareholder helped us grow our business.
Another example I can give is Seplat in Nigeria, which has been very successful. They also have an anchor shareholder; in their case it is Maurel et Prom. Having Maurel et Prom as a backer helped them get to where they are today. Indigenous companies need to look for these shareholders who can work on a strategy with them.
Once they have that, they have to develop a skilled workforce. Coordinating with international companies to acquire the relevant skills and promoting international studies are some ways of achieving this. Having a shareholder that supports the company with this training and technological process is beneficial. Creating a joint venture with another oil and gas company can also provide support in terms of technical expertise, for example. But having the strong financial support is the most important thing.
Otherwise, indigenous companies are simply carried through the exploration and production process by an international player, and will not see any revenue until the international company recovers their costs and makes their profit.
What challenges do you foresee with the development of downstream projects and what is the best strategy to see these projects to completion?
The challenge with downstream projects is that a trader will buy oil and gas products in dollars, but then they have to sell the product to the local market in the local currency. It is not like the upstream sector, where you produce oil and you sell it to the international market and get paid in dollars. The problem is the exchange rate between the dollar and the local currency. In Africa especially, where currencies are weaker compared to the dollar and where there are many currency fluctuations, this is a great risk for the downstream sector. Downstream is also a low margin business, with a long-term forecast to recoup investments.
Many international companies, then, do not want to participate in the downstream, because of the currency risk. The best way, I think, for these projects to really succeed in Africa is government guarantees and strong government support.
Downstream development and diversification is about the development of the country and furthering a country’s energy and economic independence. Therefore, the government must also take a stake in these projects, perhaps as a joint venture, and they also must drive attractive policy and regulatory changes to make the downstream market attractive to international investors.
For example, in South Africa, the whole downstream business is owned by multinationals, but the government regulates the price of products so that the investors are always protected. If they are not guaranteed that good price, they would have never wanted to invest in South Africa.
Until the government really drives this process, I’m afraid I do not see it moving very far.
What do you see as the opportunities for development of Africa’s energy sector in the next year?
I see a lot of opportunities in tank farms, storage and pipelines because of where the natural resources are located in Africa, compared to where the demand is. Additionally, one of the common problems in Africa is port capacity, such that a company can bring a cargo of product to Africa but they can’t access a port in a timely manner to be cost effective. So port expansion is also a big opportunity that I see.
Of course the other opportunity is exploration, as there are still more than 1,000 unallocated blocks in Africa. However, the oil price has made it difficult to really push this sector. Hopefully, following the OPEC deal, the oil price will continue to move up and companies will get back into exploration.
The biggest opportunities in Africa are exploration, port development, storage and pipelines.
Dr. Thabo Kgogo will join the Upstream Development and Production panel at Africa Oil & Power 2017. See him speak at the year’s elite energy event. Register for your delegate pass here.