Sub-Saharan Africa to cut $100 bln in spending, IOCs $370 –Wood Mackenzie

Sub-Saharan Africa to cut $100 bln in spending, IOCs $370 –Wood Mackenzie

Nov 06, 2016
4 min read
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Capital investment plans for Sub-Saharan Africa has been cut by $100 billion for the next five years, Wood Mackenzie said in a report on upstream activity in the region.

It also said international oil companies will cut spending by $370 billion this year and next, according to an interview with Bloomberg news.

Major oil companies are heavily invested in Sub-Saharan Africa and account for the bulk of cuts.

“Exploration cuts in the region will also contribute to a longer-term production slump as explorers have shied away from greenfield prospects,” Femi Oso, senior research manager for Sub-Saharan Africa at Wood Mackenzie said.

Benchmark Brent crude plunged from more than $115 a barrel in June 2014 to less than $28 in January this year, and traded below $46 on Sunday. The decline has forced explorers to delay projects, cancel billions of dollars of investments and eliminate thousands of jobs.

The industry has slashed capital spending from about 700 billion dollars in 2014 to 400 billion in 2016.

Total chief executive Patick Pouyanne cautioned of an oil production shortfall in coming years, in an exclusive interview with Pipeline Magazine.

“Projects are not being sanctioned, and this in turn will mean less output down the line, while demand is set to remain strong. In the meantime, producing fields decline at a natural rate of 5 per cent yearly. You do the math: we might experience a production shortfall in the coming years,” he said.

Downstream Sub-Saharan Africa

Wood Mackenzie expects a slow recovery for exploration. Operators will benefit from cost deflation and will improve efficiency through streamlining project design.

"Governments in Sub-Saharan Africa need to revive the upstream oil and gas industry by offering attractive fiscal terms rather than look to increase state revenues in the current climate," says Oso.

The biggest upstream success story in Sub-Saharan Africa is East Africa’s emergence as a gas region of global importance. With over 168 trillion cubic feet of gas found and limited regional demand, East Africa is on track to become a major global LNG supplier and various export projects are awaiting final investment decision.

According to Wood Mackenzie's research, Mozambique and Tanzania gas project economics are resilient and will "transform the global LNG market".

"The expected increase in gas production in Sub-Saharan Africa, from 6 billion cubic feet a day (bcfd) currently to 13 bcfd next decade, is very good news for the region."

Onshore LNG plants remain the preferred way to monetise gas, although liquefaction via third-party-owned floating liquefied natural gas (FLNG) vessels is emerging as a simpler and less expensive alternative.


Oil production shortfall

The global oil industry has postponed a number of projects, raising the risk of a slump in output and a potential shortfall in supply, U.A.E. Energy Minister Suhail Al Mazrouei, Bloomberg quoted his as saying on Thursday.

“The number of postponed projects is massive.” Decreased investment in oil production can crimp supply in the future, even as “the market is moving towards balancing,” he said.

The International Energy Agency estimates spending in exploration and production fell 25 percent in 2015 and will decline by the same amount this year, cutting more than $300 billion in investment. It sees no signs companies will resume spending in 2017.

Spending cuts in capital investment and deferred projects will amount to $1 trillion for the period from 2014 to 2020, according to Wood Mackenzie. By the end of the decade, those projects that didn’t go ahead will account for the equivalent of about 3 million barrels a day of supplies.