After two difficult years of spending cuts, layoffs and project delays, oil and gas companies are finally beginning to adapt to the slump in world oil prices. Analysis published by the energy consultancy Wood Mackenzie in July found that 56 companies reviewed would be able to generate a free cash flow at oil prices above $50 per barrel. Just two years ago, most of those firms relied on an oil price of $90 per barrel.
Adapting to this change in fortunes has not been easy. Most companies have had to make deep cuts, amounting to as much as 49% of spending on exploration and production, or $230bn, compared to 2014 levels, according to the Wood Mackenzie study. Although these cuts have made companies more resilient, investors are feeling nervous about where they spend their money and are placing ever greater importance on the cost efficiency of projects.
This shifting dynamic has a particular bearing on Africa's upstream sector. After a boom in exploration and production activity in the late 2000s and early 2010s, companies are now looking at investments in the region with much greater scrutiny, says Chris Bredenhann, a partner at PwC in Cape Town.
A study by Bredenhann's team published in August 2016 found that, despite the sharp fall in the oil price, Africa remains an attractive prospect. The study found that the continent produced eight of the top 20 discoveries globally in 2015, and nine out of the top 20 in the first eight months of 2016. These include major discoveries such as the "supergiant" Zohr gas field off Egypt, containing 30 trillion cubic feet of gas, and Kosmos Energy's discovery of 11-15 trillion cubic feet of gas off Mauritania. "The difference now", Bredenhann says, "is that companies are approaching investments with a much more critical view."
In a region where weak infrastructure and uncertain regulatory environments weigh heavily on the economics of oil and gas projects, the change in the global price environment has made investors warier of capital-intensive and technically complex developments in politically shaky frontier markets. An exploration licensing round in Uganda earlier this year, for example, failed to gain any interest from major international oil companies, attracting only junior players with little previous experience.
Where investment has continued is in those projects that were already close to completion, says Cobus de Hart, an economist with South Africa's NKC African Economics...