The oil and gas industry has experienced significant uncertainty this year – hard hit by the global pandemic, disruptions in global supply chains, volatility in demand, and dropping prices.While sub-Saharan Africa has for decades been a cornerstone of the portfolios of major oil and gas companies, this is fast changing as they position themselves to deal with the ongoing uncertainty and the energy transition.According to Greg Roddick, principal analyst – fiscal and valuations at consultancy Wood Mackenzie, this means cutting back on oil investments and slimming down upstream portfolios to meet bold emissions targets.“Traditional deep-water oil projects have given way to gas – but that generates lower returns,” he says. “Sub-Saharan Africa now makes up just 6% of the majors’ value globally, and big oil in the region looks ripe for portfolio rationalisation.”Roddick believes LNG mega-projects and brownfield developments will dominate in the near term, but only those with high cash margins, substantial upsides, and rapid returns will stand the test of time.Considering that we are still operating in a lower-for-longer oil price world and all companies are focused on cost, sub-Saharan Africa can expect some serious headwinds.“Divesting the highest-cost assets would be the quickest way for oil and gas companies to cut back – and many may choose to spend their money elsewhere,” says Roddick. “But, if the majors do decide to divest rather than invest, buyers will need to be found. The pool of potential buyers has shrunk over the past 10 years and this will not be an easy accomplishment.”While that does not mean there is no interest, it does mean that governments across sub-Saharan Africa should be worried by now at the thought of their main investors leaving.“The major oil companies aren’t about to exit sub-Saharan Africa entirely, but large parts of the region could be opened up to new operators and investors. The challenge will be finding companies that can step into the majors’ shoes and maintain production, or even reverse declining production.”Roddick says mature low-value assets are obvious candidates for divestment. “Core LNG mega-projects in Mozambique and Senegal/Mauritania will dominate investment budgets for years to come. And, in the near-term, companies will focus on brown-field growth, which delivers the most bang for their buck.”Increasingly, however, bold emissions targets, lower price forecasts, and a fundamental shift to greener business models continue to drive oil and gas companies. In contrast, sub-Saharan African governments are pushing and planning for increased oil production. According to Roddick, deep-water oil powered some growth in the 2000s but the era of costly mega projects is over and the focus has shifted to gas. “But it doesn’t generate the same value that oil once did.”An important consideration for oil and gas producers when it comes to sub-Saharan Africa is that it remains a high-cost region in a low price world. “Oil companies are preparing for a future of more price uncertainty, potential carbon taxes, and changing investor sentiment. In the face of these risks, costs become increasingly important, and on that metric, sub-Saharan Africa is in trouble,” he says. “Operating costs are well above the global average.”
