By Constantine ‘Labi Ogunbiyi
The African continent stands at a pivotal juncture in the global energy sector, with abundant oil and gas reserves offering immense potential for economic growth.
However, while the continent holds significant promise, navigating the upstream oil and gas sector in Africa comes with a plethora of risks and potential setbacks that demand careful consideration and strategic planning.
This is against a backdrop of cutbacks in international capital for carbon-intensive oil and gas developments and increasing competition for the same sources of capital.
Innovative financing solutions are thus required to fill the void, but can only be truly successful if tailored to specific needs.
Nigeria, Africa’s largest oil producer, epitomises the complexities and opportunities within the continent’s energy sector. Over the past decade, the Nigerian oil and gas industry has grappled with insecurity, asset vandalism, and community unrest, leading to a decline in investment.
This coupled with the need for the sanctity of contracts and a properly structured fiscal framework has seen investment in the sector decline to about US$5 billion per annum from highs of about US$22 billion per annum in 2012.
Nigeria has an abundance of unexploited discovered natural gas now heralded as a “clean” transition fuel amidst global energy shifts.
Nigeria should seek to attract significant investment during this transition era (which has also seen crude oil prices rebound) to take full advantage of this, thus retaining the value of crude oil and gas resources to enable it to position itself for its energy transition agenda.
A just energy transition, the paradigm that gained impetus at the December 2023 COP28 Conference, is intended to decelerate financing fossil fuel developments while supporting those most vulnerable to the impacts of climate change when facilitating the transition to clean energy.
This is not simply a tweak to existing systems, it is a fundamental transformation towards a cleaner, more sustainable future. This shift is driven by environmental concerns, the changing balance of power on the global stage, and awareness that the energy-producing nations in the Global South should be given a chance to “catch up” industrially, technological advancement as consumer demands.
It is estimated that the country needs about US$25 billion of annual investment in the next 10 years to achieve crude oil output of three to four million barrels per day and 3 bcf per day of gas production for domestic consumption.
The new government has declared that it is “open for business” and will take urgent steps towards solving the fiscal, regulatory, security, and other issues discouraging investment and operations in the nation’s petroleum sector – something that is urgently required to help to push its oil and gas production to the ambitious levels being targeted.
The mechanisms are in place – the Petroleum Industry Act (PIA) has done a lot to bring an enabling framework to the industry, including by allowing the Nigerian National Petroleum Corporation (NNPC) and its subsidiaries to raise capital on their own balance sheets.
Still, there is a need to focus more on implementing the PIA in a manner that restores investors’ confidence and boosts oil and gas production, ultimately increasing jobs, the country’s earnings, and prosperity.
Whilst international commodity traders have increased their activity and funding of oil production in Nigeria, they rarely support the development of appraisal and near-production assets.
Access to innovative capital structures for such capital-intensive projects, involving a more risk-reward approach will be key to developing such assets, as will the deepening of regional capital markets to bolster the capital available from institutions such as the African Export-Import Bank and planned new initiatives such as the African Energy Bank. Effectively, more “home-grown” solutions will be required.
As international oil companies shift focus to deep offshore and gas-rich assets, indigenous companies and smaller operators are stepping in to fill the void.
However, accessing capital remains challenging. Innovative financing models, such as the contractor risk service model, offer a promising solution. This model, which involves contractors taking financial risks and receiving payment from production, incentivises efficient asset development while mitigating risk for owners and operators.
The contractor taking such risk, is effectively a co-financier of, and investor in the development of the oil block – ensuring a service that would otherwise require immediate payment, to benefit from payment from oil and gas production.
The success of such models hinges on the support of all stakeholders, including operators, joint venture partners, financiers, regulatory authorities, and local communities.
By aligning incentives and sharing risks, these partnerships can drive sustainable development and enhance investor returns.
The recent completion of the FSO ELI Akaso infrastructure project by the Century Group (CG) facilitated by the contractor risk service model, exemplifies the potential for collaboration to unlock value and foster growth. The ACOES is being developed as a result of the need to enhance production and supply security from oil blocks in the Eastern Niger Delta due to infractions and prolonged outages of the Nembe Creek Trunkline. (historically one of Nigeria’s major oil transportation arteries evacuating up to 150,000 bopd of crude from the Niger Delta to the Atlantic coast for export). The CG model is “Made-in-Nigeria-for-Nigeria” but can be rolled out regionally (and globally too), in countries where access to capital for oil and gas developments is tough.
Contractors work in a vacuum, the aim of which is to optimise oil production to ensure that their clients thrive so that they do too.
However, they rarely take financial and production risk executing a “pay-as-you-go” model which can leave operators hanging where assets under-perform.
They also get the job done without involving themselves in the issues that may affect joint venture partner relationships.
Local and international investors, including UK-listed San Leon Energy plc, World Carrier Corporation, and GT Bank plc have invested heavily in Energy Link Infrastructure Limited (ELI), the sponsor of the ACOES and owner of the FSO ELI Akaso and relevant pipeline infrastructure to develop the ACOES.
With the advent of COVID and a lack of production available from anchor clients, ELI needed to look for alternative sources of capital to ensure that the FSO ELI Akaso is ready for operations. Without CG’s involvement in a contractor risk service model, the FSO would not be operationally ready and now established as a terminal for oil export.
As the Akaso starts to take on barrels from various oil producers, the business should thrive. CG, as an investor by the application of its contractor risk service model, should also be rewarded and feted for having stood by the business at a time when access to alternative capital was proving difficult.
With the success of this approach, CG is ensuring that the contractor risk service model should be considered by the industry as an alternative, proactive, and additional funding source for the development of energy projects.
Looking ahead, achieving sustainable development in Africa’s oil and gas sector demands collaborative action from all stakeholders.
Local investors, operators, and contractors play a crucial role in de-risking opportunities and crafting an appealing investment narrative that attracts capital.
By leveraging local expertise and fostering partnerships, these stakeholders can unlock the sector’s full potential while mitigating risks.
Regulatory frameworks also play a pivotal role in shaping the investment landscape. It is imperative that these frameworks prioritise ease of doing business and uphold contract sanctity to instill confidence among investors.
Additionally, addressing bottlenecks to investment and exits is critical for maintaining investor interest and sustaining growth momentum.
Addressing the need to resolve the long-standing saga and delay in the consummation of the $1.3 billion ExxonMobil sale of its 4 percent stake in Mobil Producing Nigeria Unlimited (MPNU) to Seplat Nigeria Plc, the Nigerian Minister of State for Petroleum Resources, Heineken Lokpobiri said on 16th April 2024: “Now that the whole world is campaigning against investment in fossil fuel, if we close this transaction and Seplat expands their investments, Bonga North, which is predicated on that resolution, comes on board, and the whole world will know that Nigeria has become a new investment destination and that is the objective of this government.”
In charting the course for Africa’s upstream oil and gas industry, daring innovations and strategic partnerships will be indispensable. By embracing risk and seizing opportunities, the continent can harness its energy potential to drive economic prosperity and sustainable development for generations to come.
More local investors, operators and contractors will need to step up to help to de-risk opportunities and ensure the investment narrative is attractive, properly articulated and understood.
With traditional international financing techniques becoming more difficult to secure for oil and gas projects, the contractor risk service model is an invaluable additional tool to ensure the continuing development of energy projects.
.Ogunbiyi, founder, Afren plc, writes from Lagos.