Towards the end of last year, we attended Africa Oil Week in Cape Town, South Africa. With more than 500 delegates in attendance from all of the major players and many of the junior explorers and service providers in the sub-Saharan African exploration and production sector, the conference offered a good overview of the state of the industry.
Although Africa and London-based management teams tend to comprise most of the African junior and independent space, Canadian-listed companies and management teams are playing an increasingly important role in developing African assets.
Our firm has been involved in many of the leading Africa-based transactions that have a nexus with the TSX or AIM, whether through mergers and acquisitions, finance or underwriting work in Calgary, London and Toronto. Our view is that we are at the beginning of the next phase of the growth of the African oil and gas industry, and we have made a long-term commitment to be involved in its future through finance and M&A activity involving TSX-listed companies.
Several major themes emerged from the conference:
The Key Regions in Sub-Saharan Africa
There is significant activity in many diverse geographic locations at the moment. The anchors of the sub-Saharan Africa upstream business are Nigeria, the rest of offshore West Africa and the emerging gas plays in Mozambique and Tanzania. In addition, offshore Namibia is seeing substantial activity, as is the Rift Basin that extends in Kenya as well as offshore Ghana.
In Nigeria, a number of intermediates are working to develop large plays left behind by the majors, despite uncertainty around certain elements of the national petroleum law. For some, the story of Nigeria will continue to be chronic logistical issues for the majors and civil unrest, but there is an emerging group of players focused on repeating the "post-majors" era of development of assets in the US and Canada. Many participants felt that there are substantial opportunities that have been bypassed by the majors and that are waiting for clever management teams to develop. Oando Energy Resources (amongst others) is an independent that recently obtained a TSX-listing and is focused on this strategy.
Outside of Nigeria, the rest of offshore West Africa continues to be prolific. Many independents, large corporates and national oil companies are operating and investing in the region, exploiting existing plays and developing new areas. Overall, the region is at a relatively early stage of development. There was optimism that it will continue to yield new discoveries as it is explored.
Africa's Gas Potential
The emerging plays in Mozambique and Tanzania lead to a consideration of Africa's potential as a gas producer. South Africa is seen as having exceptional shale gas potential.
Some participants felt that the gas potential in the sub-Saharan region is as large as its current oil reserves and that this part of the energy complex will support substantial growth in Africa's industrial sector, which lags growth in other emerging markets. In Nigeria, this demand is already manifesting itself in the form of increasing demand for gas used to generate power.
On balance, it was felt that much of this frontier work lies in eastern Africa and in South Africa. Because of the scale of the resource and its early stage, there is a large opportunity get this development right and establish a sound foundation for liquefied natural gas (LNG) export and domestic consumption, on the scale of what has happened in Qatar.
Other participants pointed out that the chemical sector will play an important role in this growth of gas in east Africa. There are limits on the supply of methanol and other gas-derived chemical products internationally, and east Africa can service this demand.
On the demand side, resources in sub-Saharan Africa are expected to play a major role locally and in Asia and Europe.
India will need additional LNG supply in order to meet its internal demand. East African supply is expected to be priced competitively with Australia and Canadian supply, when it comes on stream.
Europe struggles with a variety of problems. Fiscal crisis, nuclear shut-downs, limited unconventional growth and constraints on supply from the North Sea all mean that although gas demand is flat, there is expected to be a major shortfall in gas supply by 2040.
Fortunately, Europe has access to a rich range of supply options and a flexible distribution system which will permit it to develop alternatives and avoid concentrating too much risk on one supplier. Some participants felt that North American supply would have no price advantage over African LNG in serving the European market. There was pessimism over the ability of European unconventional gas to compete at current gas pricing levels, leaving plenty of room for LNG to supply some of the shortfall.
On the equity side, capital-raising has been steady but not euphoric. There continues to be reasonable demand for the equity of African intermediates in London. Despite the somewhat tepid fund-raising conditions, the equity of African-focused companies has outperformed the equity of players working in other international markets and this seems to support additional capital-raises by high-quality independents.
In the M&A market, most activity is focused on assets because the equity market continues to value corporates at less than the underlying value of the assets. Deal volume has returned to 2005 levels, but has not yet equaled the 2006 peak.
Most of the juniors are well-funded and debt-free, with London and Australia serving as the preferred capital markets; with the Canadian market getting significant exposure on the back of the success of Africa Oil and the listing of Oando Energy. The conference heard from a number of technically-focused teams who are working on very early-stage plays in onshore and offshore east Africa using capital from those regions.
Governments were well represented at the conference. Emerging jurisdictions such as Comoros, Namibia and Somalia made presentations, and the national oil authorities of Senegal and Madagascar were represented as sponsors, all of whom are interested in fostering additional development. Representatives of most of the other national authorities were in attendance.
Independents are feeling competition from the majors in accessing assets. They are much more active than in prior years and good land is not as easy to get.
Representatives of Statoil, CNOOC, Sinopec and ONGC all made presentations. They exhibited a range of strategies, largely geared to their current position in Africa. All of them acknowledge the importance of the region and its role in their future growth. Statoil, Sinopec (through Addax) and ONGC have substantial positions.
Getting the Deal Done
There is substantial focus on the management of political risk and the development of ties to local communities. Many argued that capability in this area is as important as "under the ground" skills and that it is not possible to be effective in the region without deal skills in this area, no matter how large or small the business.
Our impression was that in some cases the smaller players have a substantial advantage over very large entities in creating positive ties to the communities in which they work, overcoming some of the limitations inherent in working in jurisdictions where economic and political systems are underdeveloped and state institutions are more informal and fluid.
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