How the Global Oil Price is Affecting Capital Expenditure on Exploration in Africa?


As reported by Cape Business News, oil and gas explorers must rethink their capital expenditure on exploration in Africa in the wake of the significant drop in the global oil price.

Chris Bredenhann, PwC Africa Oil and Gas Advisory Leader warns “Oil and gas explorers will be relooking at their budgets and deciding where to allocate their limited capital spend given the substantial decline in the oil price. Overall, low oil prices could have an impact on production undermining certain players in the market.”
According to PwC’s recent analysis, Africa has seen substantial successes in the exploration for hydrocarbons over the last decade including the entry of new country players with East Africa, joining other West African countries. In 2013 alone, six of the top 10 global discoveries by size were made in Africa. The key to surviving the changing environment of the oil and gas market is to learn how to adapt quickly and be more agile, advises Bredenhann.

The drop in oil prices is expected to have a significant impact on the African continent. The challenges facing oil and gas companies in Africa continue to be diverse fuelled by regulatory uncertainty, fraud and corruption, poor infrastructure, and a lack of skilled resources. Africa also holds a number of technically challenging hydrocarbon prospects.

Bredenhann says: “While oilfield service companies will venture to cut back on spending, they will also be under extreme pressure by the oil companies to drop their prices.”

According to the analysis, the following oil and gas players in the market are expected to be most likely at risk from the drop in the oil price: frontier areas, host governments, major gas projects and oilfield service companies.

Major African gas projects are also expected to be under increased scrutiny, as oil-linked LNG prices have dropped significantly.

At this time, governments would do well to place regulatory, legislative and fiscal policies in order so that they are seen as attractive regimes when the price recovers.

Oilfield service companies will be affected internationally, but Africa may be an especially vulnerable portion of their portfolios, states the analysis. Africa could pose further challenges due to difficult logistics and the lack of infrastructure. Overall exploration costs have already decreased significantly due to cost pressures. This is expected to lead to some delayed and potentially cancelled projects.

However, there are still numerous opportunities to invest in the oil & gas industry in the African content. The greatest opportunity seems to lie within onshore exploration, which although risky, is significantly cheaper.
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