Making it to FID

Standard Bank’s Paul Eardley-Taylor on the competitiveness of African oil and gas projects.

How does a country’s regulatory framework impact the availability of financing and the interest of foreign investors? What do investors look for in a regulatory system?

This is a huge point. It is not really a political point, where we are saying Country A is backwards because they haven’t got this legislation. To be honest, you don’t need the legislation until you have the resources. It is only when you discover the resources that you need to have the legislation, and this point goes back to the North Sea in the 1960s.

Many jurisdictions looking to do a mega project don’t have the legislation in place for this reason. So, what is important is the process around how the legislation is developed and how the elements of the project can come together.

Classic examples are the rights of ownership of the resources; if the nature of the project changes from the original upstream contract, will the rights of the project be extended? Can finance be raised? Is there fiscal stability? If you raise finance are there offshore accounts? All of those pieces of legislation are super important.

What is also important but is often ignored are the softer aspects, for example work permits and immigration. You are potentially going to have thousands of people working on a site. How will those projects be managed? What happens to the locals? Where will people live?

Really, implementing a mega project is a multi-faceted discipline that is going to involve a lot of regulation. But the good news is there is precedent out there in how to do it.

What types of projects are attracting the most interest? What projects will be moving forward?

From an African lens, you have to divide the projects into two broad buckets. You have the projects that domicile in Africa, but which primarily supply the rest of the world — examples of these are the Mozambique projects. And where the local regional piece is small on day one but could become quite substantial.

And then you have projects which are more centered around Africa’s needs, and examples would be import terminals and power plants. And there is going to be a sweet spot over time where the two coincide, where you have projects being developed on a regional basis. I suspect, though that is still some time away as the scale of mega projects really needs the international cash flow and the international financing to get them off the ground. And then over time, you get more projects that are designed more for regional needs.

I think a good example of this is in Uganda, where the initial stage is upstream and midstream with a pipeline taking the oil to global markets and raising capital, and the Ugandans also have a refinery plan in mind. Similar is Mozambique’s plan to use LNG as launchpad for the country’s economic development.

In general, what disadvantages does Africa face on the international stage in attracting funding for its world-class oil and gas projects?

From an oil and gas perspective, the big macro point is we are seeing that increases in demand in the Western world is capped, so that growth is coming from the Asian markets among others. That puts a constraint on the individual projects, as there isn’t enough demand for every potential project, so every project has to have competitive advantages to get away. And the problem with that is that the supply side is no longer constrained, and the development of American shale resources has really unlocked the Americas as a potential supplier of oil and gas and petrochemicals. Their key advantages are flexibility, large indefinite resources, easy access to funding and low political risk.

Countries generically have to be able to compete with the US position in the competitiveness of their individual projects. Beyond that, you also have additional jurisdictions entering the market that weren’t previously there, like Guyana.

What are the greatest opportunities for Africa’s oil and gas sector in the coming years?

The mistake has often been made in treating Africa as one size fits all, and it is not. The countries’ histories, political environment, the geological foundation, geographic position, etc. all vary greatly. The potential markets for Senegal and Mozambique are completely different, for example.

It is important for each individual project and each individual country to develop its own energy strategy as to how it can compete in the next ten years. If that is done, we have every confidence that the individual African projects under discussion at AOP can take their respective FIDs and commence operation as soon as possible. Really, that is what is needed for the good of Africa as a whole and Africa’s continued economic development.

Paul Eardley-Taylor will take part in The Outlook on Mega Projects panel at Africa Oil & Power 2018, on September 5-7, 2018. Register online to get your delegate pass.

 

Paul Eardley-Taylor, Oil & Gas Coverage, Southern Africa, Standard Bank