Innovation the way to go for oil companies in Africa, says PwC

08 January 2018 Authored by Consultancy.africa

A new review of the oil industry across the African continent, conducted by global professional services firm PwC, has revealed that the sector continues to be in trouble, particularly with respect to output. Nevertheless, the firm believes that the continent can navigate this slump by embracing technology and innovation.

Africa is vast and rich in oil. Historically, most countries in the region have built their economies around the oil trade, which has paid dividends over the years. In fact, most of the richest countries on the continent happen to have substantial reserves of oil. Some, such as Nigeria, have used this as fuel, so to speak, to diversify their economy. Others, such as Libya for instance, are more than 80% dependent on oil for their GDP.

In light of such dependence, it is crucial for the economy of the continent that the oil industry performs well. However, this has not been the case in recent years. In 2014, global oil prices dropped from $115 per barrel to $75 per barrel. A year later, they further plunged to below $35 per barrel, sending the entire African economy into a slowdown.

A new report from Big Four accounting and advisory firm PwC has revealed that the price is not the only problem plaguing the region’s oil reserves. As per the report, the worldwide share of African countries in the production of oil has dropped from 9.1% last year to 8.6% this year.

Onshore and offshore discoveries

Major dips in production came from Nigeria, which fell by 11.9%, and Congo, which fell by 7.6%. Even South Sudan, which is almost entirely dependent on oil revenues, registered a massive drop of 20% in production. Algeria and Chad were the only countries to register an increase, of 1.4% and 0.6% respectively.

Overall, Africa contains approximately 128 billion barrels of oil. The proven oil reserves on the continent have dropped by a tenth of a percentage point, from 7.6% to 7.5 %. This is especially worrisome, as it comes despite a range of new reserves that have been found. In Nigeria, for instance, a reserve capable of supplying one billion barrels has been found, while a reserve containing 313 million barrels was found in Angola, with an additional supply of 2.8 trillion cubic feet of gas. 

Challenges

A number of reasons emerged for the poor performance, largely consistent with the issues that have been plaguing the region for the last few years. Some of the key challenges include an uncertain regulatory framework, which has remained the top concern for members of the industry over the last four years.

The second biggest concern this year, closely related to the political strife that has struck South Sudan and other countries, is widespread corruption. Financing costs, which has previously been a relatively mild challenge, followed as the third biggest challenge this year. Similarly, the volatility in foreign currency, which was seldom considered a challenge before this, emerged as a major one this year, as markets across the world fluctuated.

Top five challenges over time

On the contrary, taxation requirements, which were the second biggest challenge last year, have appeared to fall in importance to fifth this year.

The biggest challenge, however, which has dealt a blow to the sector as a whole, has been the fall in oil prices. Currently the prices fluctuate between approximately $50 and $60 per barrel. Some stability is expected over the next few years, with a majority of the respondents (65%) expecting the price to stand between $51 and $60 per barrel in 2018, and 52% expecting the same price range for 2019 as well.

Towards reformation

In light of stable prices, the report recommends a shift away from traditional operation techniques towards latest innovations in technology, primarily in order to maximise profits over the next few years and orchestrate a partial economic recovery.

Expectations of future oil prices

Commenting on the strategy going forward, Chris Bredenhann, Oil and Gas Advisory Leader at PwC Africa, said, “Africa’s oil & gas industry is experiencing significant change and upheaval. There are fundamental shifts in companies’ strategies, business models and ways of working.”

He continued; “The time is opportune for oil & gas companies to take up and utilise advances in technology as an enabler in meeting some of the challenges faced. Instead of playing catch up the rest of the world, we believe that the industry should be ‘learning to leapfrog’ so that they are not only ahead of disruption – they actually cause it.”

One example of a company that is embracing the new era is that of Sonatrach in Alegria, which has recently invited bids from consulting firms to help with a comprehensive restructuring to navigate this period of crisis. 

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