Accra, Ghana, November 25, 2020//-The goal of any project within the oil and gas world is to create value by generating sufficient revenue to recuperate all cost and generate sufficient free cash flow to justify the required rate of return.
Multiple parameters influence the free cash flow generation, but chief among them is commodity prices that determine how much revenue is generated.
As projects are evolving through their life cycles at different points in time, the sum of all cash flows across all projects create trends.
Versus other continents, Australia has and is expected to generate on average the highest free cash flow per barrel of oil equivalent from 2018 to 2025.
African performance is however in line with other continents and exhibits similar volatility on the back of the industry’s typical boom and bust cycles.
Analyzing free cash flow from all African projects, one notices that 2012 and 2013 remain some of the most profitable years in history on the back of high commodity prices and capital programs ramping up.
In 2014, the commodity prices started to decline to thereby decrease free cash flow generation, but more impactful were the numerous giant projects initiated from 2012 to 2014 that represented enormous capital expenditure.
It was these locked-in capital programs, together with the drop in commodity prices that caused free cash flow generation to be highly constrained during 2015 and 2016.
From 2017 onwards, the capital programs were completed, the projects started to produce and generate revenue, and commodity prices increased.
The result was an improving free cash flow that grew to $55 billion in 2018. The industry had effectively responded to the commodity price shock in 2014 and rebalanced spending and revenue to be more sustainable than what was the case in 2015 and 2016.
Under normal circumstances, this new balance was expected to continue, but the impact of COVID-19 has created many similarities to 2015 and 2016 whereby free cash flow will be squeezed on the back of reduced revenue and locked in capital programs.
As such, the industry will once again have to rebalance its spending and revenue which typically implies curbing exploration activity and deferring new investment decisions.
While 2020 free cash flow is not expected to decline towards the same depth as during 2015 and 2016, the spend curtailment and expected higher commodity prices are anticipated to create a rebound into 2021.
With more free cash flow generated in 2021, the scene is set for a new cycle of investments with activity picking up for deferred projects and exploration activity. For the same reason, we can expect most key final investment decisions (FID) on African projects to be taken in 2021.
While fiscal parameters such as depreciation and royalties can cause distortions versus the observed free cash flow generated for companies, the general relationship between commodity prices and locked in capital programs will also influence government take.
From a government perspective, 2020 is potentially the worst year since at least 2012 with only about $55 billion in government take.
However, as commodity prices are expected to increase and the balance between revenue and cost improves, so will also expected government take towards 2021 and onwards.
The rebound by 2021 in free cash flow and government take described above is dependent on increasing commodity prices in order to generate more revenue.
For instance, scenarios where oil remains at $50/ bbl or below implies that free cash flow and government take will be unable to reach 2019 levels.
The list is dominated by majors and national oil companies (NOCs), which is to be expected given the player landscape on the continent.
CNOOC is the sole exception at 10th place, representing growing Chinese interest in African resources.
The economies of the hydrocarbon-producing African nations are heavily reliant on their respective output to meet both domestic energy needs and exports.
For example, Nigeria had previously set its 2020 capital budget based on its plans to produce 2.1 million barrels per day of oil in 2020 at a crude price of $57 per barrel.
An extended period of the current price scenario will therefore prove detrimental to the health of these economies. The African OPEC nations may soon lose the capacity to produce at their desired levels if upstream operators and international majors stop investing and delay the sanctioning of projects.
While Angola or Gabon have been implementing a strong enabling environment for their oil and gas investors in recent years, policy uncertainty and in some cases the unchecked use by African policy-makers of the oil & gas sector as a cash cow could adversely affect the continent’s production outlook and competitiveness.
Curled from African Energy Outlook 2021
