Source: Interfax Date: 9 November 2016
Merger and acquisition activity has slowed significantly in Africa in 2016, but for buyers seeking opportunity, the African upstream market is becoming more competitive and the quality of projects on offer is higher than previous years, delegates at the a Africa conference have said.
Mozambique’s state-run ENH is planning to launch a farm-in process for its Mazenga Block in Inhambane province in mid-2017, a spokesman told Interfax Natural Gas Daily. The company is seeking a private partner to help exploit the gas and spread the risks.
"The gas will be used to supply South Africa, or could be used to supply Mozambique’s industry if industrialisation picks up," the spokesman said. Industrial activity, such as in the sugar and concrete industries, has slowed in Mozambique in recent years in line with weaker economic growth elsewhere in sub-Saharan Africa.
Tullow Oil also confirmed to Interfax Natural Gas Daily that it is farming out its three oil blocks offshore Mauritania because they are no longer a priority for the company. Tullow is looking for shareholders to take a 40% stake in each block. However, the company denied the decision was indicative of a particular trend in the region.
Meanwhile, OMV is farming down a 50% stake in a block offshore Madagascar that could hold more than 2 billion barrels of oil, and similar opportunities could be available in Mozambique. Sasol said it had not ruled out offering a company the opportunity to farm in to some of its domestic gas blocks.
Significant deals have taken place over the past year, such as MV Upstream farming in on Otto Energy’s Kilosa-Kilombero licence in Tanzania, Africa Oil Corp.’s farmout to Maersk Oil in Ethiopia, and Kosmos Energy farming out stakes in the offshore São Tomé and Principe blocks to Galp, among many others. The opportunities are often not announced publicly until a buyer has already been found.
"Farming out is like rearranging furniture: it happens all the time," Tim O’Hanlon, vice president of Tullow in Africa, told Interfax Natural Gas Daily on the conference sidelines.
The reasons for farming out can vary. It can be done to reduce risk, or because a company no longer has the money to fund its original percentage of the investment.
But most companies are keen to keep a foothold in their African assets via a minority stake. Speakers at Africa Oil Week unanimously agreed on the continent’s potential and said in general it is a low-cost region in which to develop energy projects. However, many lamented that projects and deals take a long time to progress.
Exploration costs are also at rock-bottom levels. Guy Maurice, president of African exploration and production at Total, said the company’s E&P costs are estimated to drop by 50% from 2014 to 2018. O’Hanlon said Tullow’s 2016 capex is down by 41% compared with 2015, partly attributable to the Tweneboa-Enyenra-Ntomme gas fields in Ghana coming onstream last August.
Despite the fall in costs, smaller companies have moved away from deepwater offshore ventures, which account for many of the potential farmouts. Small players struggle to secure financial backing for such discoveries, which are high-risk and high-reward. Instead, they are gravitating towards lower-risk onshore opportunities, delegates said.
But several delegates noted on the sidelines that exploration was the first thing companies cut if they are worried about their balance sheet, and expressed doubts that the deal market was likely to pick up as the focus was on maintaining current assets rather than acquiring new ones. The number of wells being actively explored has dropped by around 60% since 2015.
"There’s so much out there, so now is the time to be very brave – or very stupid," David Sturt, managing director at Namibia-focused exploration company Azinam, told Interfax Natural Gas Daily.
Gas is unlikely to be high on the agenda of explorers looking to pick up new assets, two delegates told Interfax Natural Gas Daily at the conference. "Gas is not profitable at the moment and there have been so many large discoveries in Africa that it’s just not a farmout or deal type that companies are likely to focus on," a delegate said.
Gas opportunities tend to require more planning than oil because the regulatory framework is less developed, and will require more of a long-term view because worldwide hydrocarbon prices are expected to remain low for the foreseeable future.
"If oil is like dating, gas is like marriage," said Duncan Clarke, president of the African Institute of Petroleum.
African comprised around 30% of the global oil and gas M&A market in 2014, but that has slowed in 2016 and it is taking longer for deals to be done. A one-year timeframe is becoming the new norm, energy investment bank GMP First Energy said at Africa Oil Week.
Deloitte reported in a 2014 poll that 2.2% of participants were likely to pursue M&A deals in sub-Saharan Africa. The figure dropped to 1.3% in 2015.
But more is on offer, and Africa is now by far the biggest market for potential exploration and production deals for oil and gas globally, GMP First Energy said. There were 290 M&A deals in Africa in 2014, up by 1% since 2015, 50 of which were oil and gas, according to Merger Market.
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