Short-term investment bias adds to Africa's oil financing woes

Increasingly polarized oil demand forecasts have added to Africa’s upstream investment challenges by reducing investor tolerance for long-term projects, industry experts told delegates at Cape Town’s Africa Energy Week on Nov. 4.

At roughly $600 billion per year, upstream exploration and production investment is only now approaching levels seen before the oil price shock of 2014, with Africa currently accounting for just a 7% share, according to S&P Global Commodity Insights data, leaving a spate of recent activity in jeopardy in the event of another price slump.

As OECD countries plan for a major upheaval in their energy mix, forecasters have been forced to make big calls on the speed of the transition and countries' resolve to meet climate targets, creating wide gulfs in demand outlooks and uncertainty for potential investors.

“Uncertainty of the oil price looking forward for the 8-10 years it takes from licensing through to development and production means that people want that timeframe to be shorter,” Michael Wynne, Vice President of Upstream at S&P Global Commodity Insights, told delegates at Africa Energy week Nov. 4

At two ends of the spectrum, the International Energy Agency sees peak global oil demand by as soon as 2030, while OPEC insists that demand for its oil products will continue to grow through 2050. International oil companies like TotalEnergies and Shell have also challenged a 2030 peak, though signs of short-term oversupply and stalling Chinese demand growth have blunted the bull case in the near term.

The lack of clarity leaves upstream players exposed to a potential 43% contraction in global liquids demand by 2050 in an accelerated environmental policy scenario, said Wynne. Commodity Insights forecasts put $3.3 trillion of upstream spending at risk globally by 2050 in the event of an accelerated environmental drive.

Production sprint

With hopes increasingly pinned on short-cycle barrels for new exploration and production, African production hubs could lose out, Wynne said, adding that quick turnarounds offered by the likes of the Permian Basin in the US are rarely possible to match.

“Developing something of the Permian factory scale is probably over a 15-year exercise,” he said, adding that Algerian shale could offer one of few similar opportunities on the African continent.

Also speaking at the event, Shirley Webber, Head of Natural Resources and Energy at South Africa’s ABSA bank, agreed that financing terms on upstream investments have dramatically shifted in line with changing risk appetite, adding pressure to jurisdictions to speed up licensing to stay competitive.

“Many projects we put in place 10 years ago are coming up for refinancing and the terms are very different,” she said, adding that fewer investors are willing to consider 10-15 year financing structures that had previously been the norm.

“Commercial banks will come in first and then private equity will follow. It’s a change in the financing mechanism as they now want to see financing happening first before they put their money in,” she said.

The shorter timeline focus could pose an even greater challenge for the ambitious of gas-rich regions such as Nigeria, Algeria and Mozambique, with projects typically facing longer lead times and a looming LNG supply glut around 2030 threatening export prospects, said Luara Sima, Director of Upstream Strategy at Commodity Insights.

Patient capital

The change in investment priorities could exacerbate a shift in investor profiles attracted to African oil production hubs as European financers have retreated.

Increasingly, exploration previously focused on enhanced oil recovery to squeeze reserves out of mature reservoirs has also lost favor to new frontiers, driving a spate of divestments by international oil companies in mature basins. In Nigeria, local independents such as Oando and Seplat have picked up oil blocks in the Niger Delta as Eni and ExxonMobil have retreated, bucking the trend of a shrinking role for independents globally in the upstream space.

Speaking to Commodity Insights Nov. 4, Dr. Omar Farouk Ibrahim, Secretary General of the African Petroleum Producers’ Organization, or APPO, said that the imminent launch of the Africa Energy Bank should help to provide vital long-term funding to mine Africa’s hydrocarbon resources, while also hinting at growing investment interest from Middle Eastern producers.

Of the $5 billion in planned equity for the new bank, APPO and Africa’s Afrexim bank are expected to provide $1.5 million each in financing, with non-APPO African countries expected to inject an additional $1 billion and another $1 billion is expected from outside of Africa, mostly in the Middle East. The bank is now expected to launch by the first quarter of 2025, delayed from a previous 2024 timeline.

Premature upstream divestments could threaten flexible production capacity, the APPO head warned, stressing the importance of long-term energy security.

“In the next few years, we are going to feel the pain of not making the right investments today and yesterday,” he said.