Posted by: Requier Wait | November 18, 2014

The most incredible article about trends from the Africa Oil Week, you’ll ever read

The 21st Africa Oil Week/Africa Upstream Conference took place in Cape Town earlier this month.  I was fortunate to attend and present at this prestigious event. The conference addressed a number of inter-related issues pertinent to the future of the industry.

Talents_chess

These inter-related issues include:

  • resource nationalism & upstream investment;
  • oil prices;
  • shale gas and the impact on talent.

Firstly, host governments seek to maximise their share of revenues whilst investors want to maximise profits or returns in relation to the risks they take. Oil and gas projects have high costs and risks, with the opportunity for high rewards, i.e. economic rents. A major issue for host governments is to obtain a “fair share” of this economic rent.

Determining what constitutes a “fair share” is easier said than done. The government collects it’s share through bonus payments, various taxes, production sharing agreements, local content requirements as well as state participation through the National Oil Company.  In the background, the stability and certainty provided by a country’s fiscal regime is a crucial concern for investors.  Companies may tolerate a high level of government take, provided that they have certainty on what this take entails without the fear of retrospective changes or the burden of unexpected capital gains taxes.

In this context, there are a number of indices that measure investors’ perceptions of fiscal regimes and the impact it has on investment decisions.  I find it striking that in many cases,  survey respondents seem to have discounted the impact of fiscal uncertainty when reporting  a minimal impact on investment decisions.  For example, Nigeria’s PIB has been in process for many years and respondents seem to be relatively unaffected by this uncertainty.  However, from what I have heard at the conference as well as from companies’ comments in the  media, it certainly does have a profound impact on new investment.  For example, Shell’s divestment from Nigeria’s onshore upstream.  Although there are many factors that influence investment decisions, fiscal uncertainty will be a negative consideration.  Uganda is a further example where pro-longed uncertainties have stalled the industry from developing.  Significant oil finds in 2006 have yet to be brought to market, whilst domestic market obligations and refining has placed a further lag on the process.

Oil prices can only go up or down, but down is the current trajectory.  Host governments will have to incorporate such developments into their policies, as opposed to only considering an upside scenario.  Lower oil prices tied to rising costs place more pressure on oil firms to stay profitable and satisfy their shareholders.  Accordingly, exploration dollars will flow to the most lucrative prospects in terms of both geology and fiscal stability.

The boom in unconventional resources, particularly US shale gas, places a further dynamic on the global oil patch.  Particularly in terms of the next generation of talent and upstream skills.  Unconventional resources are attracting  a large proportion of new graduates. The exploration and production skills they develop are valuable but not perfectly transferable to the conventional exploration game. What will happen once the oil price and the search for conventional oil picks up?  Will there be a talent gap? The industry already faces a talent challenge, a large proportion of knowledge is pooled with the older generation preparing for retirement.  It will be crucial for companies to embrace these skills for longer by supporting the transfer of critical skills to the next generation.  Referring to critical skills, I mean those more intricate skills you normally do not get from a textbook, but from an expert who can say: “been there, done that, got the upstream T-shirt”

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Responses

  1. Hi Requirer,
    Baie goed. Onthou die treatises vir dir M is in working paper (ERSA) format..
    Pierre

  2. Dit is reg so!


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