Looking forward: The future of African Oil in a post COVID-19 world

As we have established in recent blogs, Africa has long had the potential to emerge as a major player in the global oil and gas markets. The continent is home to five of the top 30 oil-producing countries in the world and in 2019 already accounted for more than 7.9m barrels per day or 9.6% of world output.

COVID-19 has had a visible impact on the economies of oil producing African nations. The nosedive of Brent Crude prices together with lockdown measures has led to disruptions in the oil sector and widening fiscal deficit. This has been painfully evident in Nigeria, where oil accounts for 57% of government revenues and 10% of the country’s GDP. The latest data by Capital Economics has projected that Nigeria will suffer its worst economic hit for 35 years by the end of 2020 and in Angola, Africa’s second largest economy, the situation is not much better as countries haemorrhage cash. The pandemic has managed to halt drilling across the entire country, something that even a 27 civil war failed to do.

While the continent has so far recorded a lower coronavirus death toll than other continents,  the true outcome remains to be seen with the WHO predicting that a quarter of a billion people in Africa are at risk of contracting the virus in the next year. And with annual budgets premised on higher oil prices, many African governments have had to cut expenditure or source additional finance to adjust the fall in revenue. New licensing for fossil fuel exploration is also diminishing, and projects are being delayed or cancelled in countries from Mozambique to Guinea Bissau.

Although plummeting oil prices have triggered fresh challenges for oil and gas firms on the continent, what is certain is demand for oil will recover, and when it does, Africa will need to have laid down a framework for recovery. The pandemic has accentuated the importance of achieving energy security to be able to respond and achieve post-crisis recovery. Economies who are oil import-dependent are already developing policies to diversify their energy mix to ensure energy security and become less reliant on oil imports. However, it is important that energy resources are balanced in sustainable and equitable manner that will support the growth of the African economy.

Measures on how best to support the local industry to navigate the impact of COVID-19 are also being reassessed. While the coronavirus may be a new phenomenon, supporting entrepreneurship and stimulating the diversification of African economies has always been a long-term challenge

When it comes to investment, African governments should be working hard on regulations that will foster an enabling environment for investors and businesses. The sector will need both indigenous experts and suppliers, as well as partnerships with foreign companies, who are willing share their technology and knowledge.  Governments need to develop fair, balanced local content policies that create economic and educational opportunities for Africans without being overly restrictive or become a burden to foreign investors and discouraging them from operating in Africa. Removing obstacles across the production and supply chain including excessive taxes and red tape and offering better fiscal terms such as breaks on import duties will all help deepen collaboration, partnership and investment.

The adoption of technological developments is also essential, as we have discussed in our blog in June. Technology is already transforming the way we locate, extract and distribute oil and gas, and this is the time to invest and explore innovative solutions in order to participate in, and contribute to, reshaping the energy and infrastructure sectors across the continent. This will lead to efficient operations, profit increases and a boost to economic growth within communities. Africa simply cannot afford to let this digital transformation pass them by.

Across much of the continent then, there is a diverse array of opportunities in the oil and gas value chain. Even with the onset of the pandemic, experts are predicting a rise in mega gas finds and offshore exploration, as well as the development of gas-to-gas power initiatives, refining potential and trans-continental pipelines.

These opportunities are exciting, but they will also bring challenges related to corruption, and a lack of transparency and infrastructure.

Investing in local infrastructure and creating an appealing fiscal and regulatory regime that align with the long-term interests of private companies are not overnight ventures. This ability to execute across the entire value chain requires good governance and will remain the biggest challenge to the development of Africa’s energy market. It is vital that the continents’ aspiring emerging economies embrace true structural reform to unlock growth.

When it comes to the pandemic itself and the resultant drop in oil prices, COVID-19 will continue to test African countries in the months and maybe years to come. But the situation is not permanent. 2020 will be a tough year for businesses, industries, and societies around the world. Oil and gas companies are notoriously risk-averse following the price dive but to reset and prepare for the future, they must map out a strategic direction to thrive post-crisis.

Long-term, oil is going to be around and Africa as a resource rich continent – all the fundamentals are there. Africa could easily take a key seat in driving oil production in the future if governments carefully manage the infection rate and put in place appropriate policies and investments.

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