1 Challenges in oil and gas

Oil & gas industry in Africa continues to show substantial growth, with new hydrocarbon
provinces developing at a significant pace. The industry key players in Africa include;
international oil companies (IOCs); national oil companies (NOCs), services companies, and
oilfield services companies (OFSCs), among others. “Large gas finds in Mozambique and
Tanzania, Oil and gas discovery in Uganda and Kenya have caused the world to take note of
East Africa as an emerging player in the global industry that was previously forgotten.

The challenges for this industry come at the same time with some fantastic opportunities
emerging for the sector. According to Ernst & Young, the challenges are broadly divided into
4 categories namely; financial, compliance, operations, and strategies in place.

By Ernest & Young

1.1 Frontier acreage and access to reserves. (o)

‘Frontier acreage’ challenge represents exploration and development of new fields that were
previously regarded as too difficult, too expensive or too politically unstable to justify
operations. These new locations are remote, rift valley systems, Sahara desert, mountainous
regions, etc. Access to reserves involves competition for access to proven reserves what
became more difficult in comparison to decades ago due to expansion of government role.

1.2 Unconventional resources’ exploration and exploitation

For unconventional, production is directly from the source rock that creates the hydrocarbons.
or from a “reservoir” with such a low porosity and permeability that previously it would not
have been considered a reservoir at all or production of fluids that were previously too viscous
or simply too immobile to produce, even from within a good reservoir.

With the significant and impressive technical and industrial achievement while exploiting
unconventional resources, there are both environmental and commercial issues. The
technology uses a large amount of water, and has been accused of contaminating drinking-
water aquifers and of causing earthquakes near active drilling sites. It is also “activity” rich,
with a huge number of active rigs, transport, shipping and other disruption affecting
communities. On the commercial side, the large volume of oil that Unconventional technology
promises to release will only do so at a significant oil price. Finally, and perhaps most
worryingly, it is not clear that unconventionals will really have the needed impact at the global
scale to meet the challenge of 21st century oil demand.

1.3 Infrastructure challenges for African energy market

Beyond oil prices and energy market volatility, efficient and effective infrastructure facilities
are essential components for the welfare of the oil and gas industry. The potential increase in
global energy demand poses serious challenges, common in infrastructure development, which
the world governments would need to address.

1.4 Price volatility and role of speculators.

Crude oil is arguably one of the single most important driving forces of the global economy,
and changes in the price of oil have significant effects on economic growth and welfare around
the world.

Oil price shocks (i.e. sudden changes) can be transmitted into the macro-economy via various
channels. In the private sector, a positive oil price shock will increase production costs and
hence restrict output – with price increases at least partially passed on to consumers. Moreover,
as prices for gasoline and electricity increase, households face higher costs of living, with the
poor being particularly vulnerable. These impacts can have further significant knock-on effects
and repercussions throughout the economy, affecting macro-indicators such as employment,
trade balance, inflation and public accounts, as well as stock market prices and exchange rates.
Thereby, the nature and extent of such knock-on effects depend on the structural characteristics
of an economy; for instance, the more a country engages in oil trade, the more it is exposed to
price shocks on global commodity markets.

A dive in oil prices since mid-2014 has forced international energy companies to postpone or
cancel hundreds of billions of dollars in investment all over the world e.g in West Africa, it has
made projects for Royal Dutch Shell (RDSa.L) and Tullow Oil (TLW.L) uneconomic, and hurt
regional economies that rely heavily on energy revenue and already, Gabon has cut its 2016
budget because of low oil income and Ghana is considering doing the same.

According to the United Nations, overall foreign direct investment in Central and West Africa,
which includes major oil and gas projects, fell 44 percent to $14.2 billion in 2016, greater than
the 31 percent drop for Africa as a whole. The number of oil and gas rigs in the region dropped
by two thirds to 18 in December 2015 compared with the same month in 2014, according to
U.S.-based oil service firm Baker Hughes, which conducts surveys on rig activity globally.
Africa holds 129 billion barrels of proven oil reserves, according to PricewaterhouseCoopers,
or nearly 8 percent of the global total. Development varies widely from Nigeria, a prominent
world player, to Gabon, which is struggling to maintain output from maturing fields. .

These are the kind of projects that will be revived first whenever oil prices finally rebound.
West African projects will need to be not only viable, but also compete with such production
if they are to attract investment.

1.5 Skilled manpower gap

Africa still lags way behind in terms of human skill development that can take on major
challenges to invest in the oil and gas industry that can compete favourably in the global
market. This has plunged the content into hiring expatriates from abroad that leads to a great
economic loss due to the high salaries paid to these hired expatriates.

Africans have the ability to learn but lack the capacity of a technical knowhow which in turn
makes the oil industry in the continent unattractive as it is a benefit to acquire the necessary
skills to be innovative to stand a chance in the oil and gas industry.

1.6 Political Risk

“Oil is Power!” through being a primary factor in the process of asserting and maintaining
political dominance and control, it lubricates the mechanisms of both national and international
politics. Those who can consistently get their hands on the most oil, at the best prices … will
rule! Most of the oil agreement and businesses in Africa are mixed with political aspirations
and ambitions.

Political risk evaluates the likelihood of state or non-state political actors negatively affecting
business operations in a country through regime instability or direct/indirect interference, and
also evaluates the influence of societal and structural factors on business.

State actors can include domestic and foreign governments, parliament, the judiciary,
regulatory bodies, state and local administrations and the security forces. Non-state actors can
include insurgent groups, labour forces, campaign groups, lobbies, other companies, organised
criminal groups and international organisations. Societal and structural factors can include
corruption, infrastructure, ease of establishing and maintaining a functioning business, and
bureaucratic and business culture. The impact on companies can include judicial insecurity,
corruption, reputational damage, expropriation and nationalisation, contract uncertainty,
international sanctions, bureaucratic delay, partiality in contract and tender awards, campaigns
and protests

Political risk arise from the actions of national governments which interfere with or prevent
business transactions, or change the terms of agreements, or cause the confiscation of wholly
and partially foreign-owned business property”. Political risk is associated with factors such as
direct violence, instability, or limitations placed upon foreign business. This can take the form
of expropriation, discriminatory taxation or restrictions on remittance of profit, but it can also
be non-focused, such as in the case of riots

Oil and gas companies may experience risks on a transnational, national and human security
level. Because of this, the success of new investments often depends on the successful
utilization of risk management strategies. The success of an investment often depends on
proper risk management and risk mitigation.

Africa´s political instability has been seen as one of the main reasons why foreign investors are
unwilling to invest in the continent. The high values associated with oil and gas lead
international companies to invest in countries with increased political-security risks.

1.7 Security Risk

Security risk evaluates the likelihood of state or non-state actors engaging in actions that harm
the financial, physical and human assets of a company, and the extent to which the state is
willing and able to protect those assets. Actors that may pose a security risk include political
extremists, direct action groups, the security forces, foreign armies, insurgents, petty and
organised criminals, protesters, workforces, local communities, indigenous groups, corrupt
officials, business partners, and in-country company management and staff. The impact of
security risk on companies can include war damage, theft, injury, kidnap, death, destruction of
assets, information theft, extortion, fraud, loss of control over business, and disruption to
operations caused by damage or denial of access to buildings or vital infrastructure caused by
terrorist attacks, threats or official responses.

1.8 Worsening Fiscal terms.

The fluctuation of fiscal regime in Host-Governments makes enormous pressure on oil

companies, creates insecurity for the entire company financial strategy and investment policy.
The industry needs secure and predictable fiscal regime. Thus, measures to stimulate
investment need to be introduced as a matter of urgency.

1.9 Complex bureaucracy

There is still the major problem of following long bureaucratic processes in taking a step in the
development of the oil industry in Africa. These time delays occur at processing paper work
and hence frustrating the investors and delaying the development sector of the economy in oil
and gas. Such delays make Africa to lag behind in the global market.

1.10 Innovation, Research & Technology.

The oil and gas industry is undergoing a period of significant uncertainty. Operators and service
companies in the upstream oil and gas sector face many technology and innovation challenges
in developing existing and future oil reserves to their full potential. This requires investment
decisions on technology to enable working in deeper water, develop subsea operations, extend
the life of oil and gas fields, and work in increasingly more remote and dangerous fields.

The industry is going through massive disruption, investments in the energy renaissance is
continuously shifting which requires innovation in all sectors. Every company understands
nowadays, that R&D and Innovation is a key to growth and prosperity. This position creates
severe competition between market-players with sufficient resources for R&D.

Every oil and gas operator has different needs depending on their assets, geographical location
and business objectives. These needs include; 1) exploiting technology-led market intelligence,
providing a better understanding of market forces through benchmarking and market scanning.
2) Developing innovation and technology strategy – using decision science support techniques,
scenario planning and advanced analytics and modelling to help align innovation technology
strategy with business objectives and optimise R&D investment. 3) Optimising and
streamlining technology management – by developing technology roadmaps across portfolios
and providing talent management expertise to address the ageing workforce.

These different needs have bled to the lack of commitment for the key players to integrate in
software, technology and procedure of work. They see this diversity as a lee-way for one
company to another. To innovate properly and achieve business goals companies must address
a number of common challenges, including collaborating more openly, using data more
effectively and changing traditional mind-sets.

1.11 Other challenges

1.11.1 Corporate social responsibility.

Corporate social responsibility/ external engagement means the efforts a company makes to
manage its relationship with the external world. This relationship includes various stakeholder
groups, health and safety concerns, i.e. human rights, employee rights, stakeholder rights,
environmental protection, community relations, transparency and corruption issues. It can and
should include a wide variety of activities: not just corporate philanthropy, community
programs, and political lobbying, but also aspects of product design, recruiting policy, and
project execution.

CSR requires oil companies to success in each criteria in order to build a reputation as a reliable
potential partner for public-private strategic partnerships: cross-sector and government. In
practice, however, most companies have failed to materialize their corporate social
responsibility duty. This is majorly centred on four (4) flaws;

a) Head-office initiatives rarely gain the full support of the business and tend to break down
in discussions over who pays and who gets the credit. Without the active participation of
the big-spending functions—typically, production and marketing—the ambitions of a
central team are difficult to realize.
b) Centralized CSR teams can easily lose touch with reality—they tend to take too narrow a
view of the relevant external stakeholders. Managers on the ground have a much better
understanding of the local context, who really matters, and what can be delivered.
c) CSR focuses too closely on limiting the downside. Companies often see it only as an
exercise in protecting their reputations—to get away with irresponsible behavior
elsewhere. Effective external engagement is much more than that: it can attract new
customers, motivate employees, and win over governments.
d) CSR programs tend to be short-lived. Because they are separate from the commercial
activity of a company, they survive on the whim of senior executives rather than the value
they deliver. These programs are therefore vulnerable when management changes or costs
are cut.

The success of a business depends on its relationships with the external world—regulators,
potential customers and staff, activists, and legislators. Decisions made at all levels of the
business, from the boardroom to the shop floor, affect that relationship. For the business to be
successful, decision making in every division and at every level must take account of those
effects. External engagement cannot be separated from everyday business; it must be part and
parcel of everyday business.

1.11.2 Alternative fuels, including second generation biofuels.

The environmental pressure and market demand that oil companies experience today force
them to explore new industries, i.e. renewables. This urge requires additional resources,
company policy and revised strategy.

For many years, environmentalists have argued for the adoption of renewable energy as a
replacement for traditional energy resources. Today, governments and corporations are singing
the same tune simply because it makes good business sense.

Production of renewable energy is usually more efficient compared to traditional energy. All
other forms of renewable energy sources also turn out to be way cheaper than traditional non-
renewable sources. What this means for consumers is that they can save money on their utility
bills.

It should also be noted that the renewables sector is an ethical and attractive investment
destination for those who desire to place their finances beyond and outside the traditional
channels. In addition to not having an adverse impact on the environment, these energy sources
will never die out as they are continuously replenished.

1.11.3 NOC-IOC Partnership

Forty years ago the IOCs had access to over 85% of the global reserves and they negotiated
almost lifelong concessions with the governments of producer countries. According to World
Bank 2010, the IOCs have access to only 14% of the proven global reserves and they are finding
increasing difficulties in acquiring new oil and natural gas reserves.

The competitive advantage of the international oil companies (IOCs) has been traditionally
based on their great experience in the sector, on great investor muscle and on advanced
technological development. IOCs' significance and role in the oil markets has been in decline
due to shrinking technical skills and expertise, reduced access to low cost reserves, and lower
operating profit margins.

The state participation in oil enhanced the role of government from a mere tax collector to also
taking part in the accumulation of capital. State intervention looks at increasing governments’
share of the price windfall, either through harsher tax regimes, or more directly, expropriation;
rising competition for international oil and gas assets from a new class of NOCs, driven
primarily by supply security concerns; and increased international ambition on the part of
NOCs from traditional exporting countries, particularly the more technically proficient ones,
supported both by state backing and their own higher revenue streams as a result of oil price
bonanza.

This participation is driven by a concern that the IOCs are taking too large a share of the cake.
And the perception that the resource will be needed for domestic uses or that the potential
customers are somehow ‘unworthy’ or a perception amongst ordinary people that they have
seen little or no benefit from the extraction of ‘their’ oil and minerals, despite IOCs paying
taxes to their governments.
1.11.4 Land tenure systems

Land is a major factor for oil and gas activities to take place from the exploratory to
decommissioning phases, land is needed as a precursor in all these processes. In Africa, most
communities regard land as wealth or as an investment for the future. This makes its access
rather difficult and complicated. Different countries have different regal regimes concerning
acquisition and ownership over land.

1.11.5 Other Challenges in the African oil and gas include:

 Weak revenue collection and monitoring institutions

 Lack of institutional autonomy and independence from political pressures
 Currency exchange rates
 lack of access to information
 lack of accountability and transparency
 lack of unequivocal states commitment to embracing the EITI global framework
 limited role of parliament in checking executive powers and influence over the
industry by the executive arms of government
 Failure to accommodate public participation in the revenue monitoring framework
through civil society representation in the policy and regulatory framework

Conclusion
The above challenges represent only tiny part of concerns of this extremely complex industry.
However, it provides brief overview of trends the interested party, whether it is oil company or
investment institution, needs to take into consideration while building its strategy. Clearly,
challenging times for the oil and gas industry have emerged. But for companies that leverage
innovative technology to maximize investments, lower costs, and mitigate risk, the
opportunities are endless. Despite these challenges, investors should look to Africa as a new
and good place to invest.

Developing countries need to monetise their natural resources to drive growth and
development. However, it is not easy to develop and produce these newly-discovered African
oil and gas deposits, particularly with declining commodity prices pressurising the market.
Many investors are adopting a wait-and-see attitude while planning for a recovery, which they
believe will inevitably come. In addition, emerging hydrocarbon provinces require significant
volumes of highly skilled labour and logistic support and consequently local content policies
and infrastructure constraints across the region are a key dynamic.