Future of Hydrocarbon In Africa

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Introduction

Hydrocarbons are the result of the slow transformation of organic material underground and underwater, in conditions of low oxygen, high temperatures, and high pressures. When talking about hydrocarbons, there is an important difference to be made between “resources” and “reserves”. In order to become reserves, resources need to be carefully assessed in quantity and quality, which takes a significant effort in terms of geological exploration. Also, reserves need to be commercially exploitable, meaning that it has to be possible—and economically sound—to extract the resource using available technology and at market conditions (M. Hafner et al 2018).

Fig 1: Oil and Gas Refinery Source: Signal.com (2015)

The story so far…

Natural resource concentrations in the world vary from resource to resource and hydrocarbons are not left out. Africa is richly endowed with hydrocarbons resources. A recent geological survey sets the upper bound of Africa’s potential at 1,273 billion barrels of oil (including condensate gas from gas extraction) and 82 trillion cubic meters of natural gas (including associated gas from oil extraction) and estimates that it would be “technically and economically feasible” to recover around 381 billion barrel of oil and 73.8 trillion cubic meters of gas (Modelevsky and Modelevsky 2016). Although according to British petroleum, proved reserves are less than a half of that of the survey; 128 billion barrels of oil and 14 trillion cubic meters of gas.

Such disparities indicate that it is for fact that Africa is richly endowed but, there is significant uncertainty surrounding the hydrocarbon endowment and particularly in Sub-Saharan Africa where hydrocarbon basins have generally been explored to a lesser extent. In parts of Africa where the sector has thrived, investments have focused on extraction for export ahead of the development of domestic markets.

Specifically focusing on Sub-Saharan Africa, the following regions host major hydrocarbon basins at different levels of exploration and exploitation (International Energy Agency 2014)

The Niger Delta. This is the best known, most exploited, and richest hydrocarbon basin in the region. Reserves are in the offshore territory of Nigeria, Cameroon, and Equatorial Guinea;
The East African Rift. Recent discoveries of oil have been made in Uganda and Kenya and exploration is ongoing in the Democratic Republic of Congo, Rwanda, Burundi, Tanzania, and Ethiopia;
The East African Coast. Major discoveries of gas have been made in the offshore territory of Mozambique and Tanzania, and geological surveys point at further resources in Seychelles and Madagascar;
The West African Transform Margin. Initial discoveries of oil resources are awaiting the assessment of commercial viability in Ghana, Liberia, Mauritania, Sierra Leone, and Ivory Coast;
The West Coast Pre-Salt. Exploration is ongoing in the deep layers of basins offshore of Angola, Namibia, and all the way up to Congo, Gabon, Equatorial Guinea, and Cameroon. Recent major discoveries have been made in Congo and Gabon (James and Wright 2016).

Hydrocarbons play a huge role in the energy field for African countries and it has enough oil and gas to supply both current and future demand by itself. (International Energy Agency 2014). Amid commercial energy sources, oil and gas constitute a significant part of the African primary energy demand; oil accounts for 42% and natural gas 28%. Renewable energy only constitutes 8%, most of which comes from hydropower (British Petroleum 2017). The biggest oil producers in Sub-Saharan Africa today are Nigeria and Angola, they account for almost half of the entire African production.

Table 1: Oil Reserves and production (2016)

Country	Proved Oil Reserves (billion barrel)	Oil Production (thousand barrel/day)
Algeria	12.2	1,579
Egypt	3.5	691
Libya	48.4	426
Tunisia	0.4	63
Angola	11.6	1807
Chad	1.5	73
Congo	1.6	238
Equatorial Guinea	1.1	280
Gabon	2.0	227
Nigeria	37.1	2053
South Sudan	3.5	118
Sudan	1.5	104
Others	3.7	233
Total Africa	128.0	7892

Source: British Petroleum (2017)

However, according to ENI, other countries with proved reserves of over 0.1 billion barrels include Cameroon, Ivory Coast, the Democratic Republic of Congo, Ghana, and Tunisia (ENI 2017).

In terms of natural gas, the situation is almost the same. About 90% of Africa’s natural gas production comes from Algeria, Egypt, Libya, and Nigeria. Potential newcomers such as Tanzania and Mozambique whose potential discovered reserve is estimated at 1.3 and 2.8 tcm respectively (US Energy Information Administration 2014; Department for International Trade Tanzania, Government of the UK 2015).

Table 2: Gas Reserves and Production 2016

Country	Proved Gas Reserves (trillion cubic meters)	Gas Production (billion cubic meters)
Algeria	4.5	91.3
Egypt	1.8	41.8
Libya	1.5	10.1
Nigeria	5.3	44.9
Others	1.1	20.2
Total Africa	14.3	208.3

Source: British Petroleum (2017)

About one-sixth of these proven natural gas reserves in Sub-Saharan Africa is associated gas that, associated with oil and gas flaring – a process of burning associated gas during oil extraction is very widespread. Nigeria is responsible for 60% of gas flared in SSA. In the third quarter of 2017, Nigeria flared 23% more gas in 2017, the total for the year being 324 billion cubic feet (Department of Petroleum Resource 2018). Countries like Angola, Congo, and Gabon also follow. However, these countries are beginning to take important steps towards minimizing this by marketing the excess gas or re-injecting it to sustain production.

Demand, Uses, Trade, Price and Infrastructure.

Oil demand is growing across the subcontinent. It recently overtook coal as the most consumed source of energy in the region and this is driven mainly by the transport sector. Oil is also important for power generation, including for backup— a key feature of the Sub-Saharan Africa industry (M. Hafner et al., 2018). As earlier established, oil consumption in SSA remains very low if compared to the rest of the world and, of the entire regional demand; half of it comes from South Africa and Nigeria alone, which are also the only two countries with a noteworthy petrochemical industry (International Energy Agency 2014).

In the case of natural gas, it is the least consumed of hydrocarbons in SSA today, but it is gradually gaining importance. The most notable advantage of natural gas is that, when it comes to power production, it is a cheaper alternative to oil and a cleaner alternative to oil. However, at the same time, the infrastructure required to handle it is the most complex because, in order to be transported, natural gas needs to be either compressed (Compressed Natural Gas) or liquefied (Liquefied Natural Gas). Asides from being the largest producer, Nigeria is also by far the most significant when it comes to consumption of natural gas with 5.2 billion cubic meters consumed in 2015 followed by South Africa with 2.3 billion cubic meters (Organization for Economic Co-operation and Development). The power sector contributes largely to the consumption of gas in Nigeria, about 60% and industrial uses such as cement and fertilizer production (Occhiali and Falchetta 2018), South Africa on the other hand uses it exclusively for the production of synthetic liquid fuels (Department of Energy, Republic of South Africa).

North African countries rely on fossil fuels across the spectrum of their economy (including agriculture and households) and they are heavily subsidized. Elsewhere in Africa too, prices of oil products are either subsidized (in producing countries) or at least regulated to protect consumers from global oil price fluctuations (International Energy Agency 2014). In general, in SSA for household consumption, kerosene and Liquefied Petroleum Gas are the most common substitutes to solid biomass. The first is a product of oil refining, while the second can be produced both from crude oil and natural gas processing. The use of these fuels is subsidized in most oil-producing countries (especially kerosene) as well as in some importing countries with dedicated policies, like Senegal (Liquefied Petroleum Gas) (International Energy Agency 2014).

Fig 2: Petroleum products from oil refining (above) and natural gas processing (below) Source: M. Hafner et al. (2018)

While the demand for hydrocarbon is growing, Africa is still the lowest average oil and gas consumption region in the world. This according to research has been largely linked to how domestic markets are poorly developed and the bulk of resources extracted being exported. Oil and gas investments currently feed the upstream oil and gas sector much more than the midstream and downstream industries. Countries like Nigeria, Angola, and Mozambique to name a few exports a very large amount of their production and rely largely on imports when it comes to oil and gas products like liquefied petroleum gas, gasoline diesel, and so on. Exporting these resources is a major source of income for African countries, however, typically fails to reinvest these returns in the development of internal energy markets.

Not ignoring how badly the price of these resources, in turn, affects producing countries. The trends and dwindling of oil prices in the global market have become a source of concern for oil-producing countries. Especially African countries that depend solely on the revenue generated from oil exports. Wide fluctuations in oil prices have played an important role in driving economies into a recession which is why movements in oil prices are closely watched by economists, investors, and policymakers the world over. This helps to know what decision to make in the best interest of the country. According to CNBC, on the 23^rdNovember 2018 oil prices fell to their lowest levels in more than a year, deepening a rapid seven-week sell-off that has plunged crude futures deep into a bear market.

Fig 3: Average annual OPEC crude oil price from 2018 to 2018 (in U.S. dollars per barrel), Authors Elaboration *Source: Statista (2018)*

Fig 4: Oil and Gas Infrastructure. Source: Role of Hydrocarbon in Africa’s Energy Mix (2018)

Another major problem the region has battled with so far but is currently working on is the technical know-how and the infrastructure necessary to process, transport, and distribute products to the final users. This is particularly a major problem in Sub-Saharan Africa. As earlier stated, that the region exports a large amount of its production and depends on imports for oil products it articulates the inadequacies of the refineries which are not only few but poorly maintained. South Africa remains the only country in the SSA with a major capacity for refining and this serves about 67% of its own domestic demand of oil products reducing its dependence on imports. Other small producing countries like Cameroon, Chad, Ivory Coast, and Niger are self-sustaining with their own refineries, this is very little compared to the rest of the SSA. On top of having low refining capacities, the utilization rates of refineries are low and declining: the average in Africa today is 60% in 2016, the lowest of all continents (British Petroleum 2017, Statistical Review of World Energy).

For natural gas, the high cost of mid-and downstream (i.e. transport and distribution) infrastructure has been one of the major hindrances to the development of domestic gas industries in SSA countries. The gas pipeline in Nigeria that takes natural gas from the Niger delta to the interiors of the country is so far the only example of a gas network that was built for internal connection and it is not even properly managed.

Another crucial thing to mention is the implication of clean/renewable energy and environmental concerns on the future of hydrocarbons in Africa. Environmental concerns are resonating in the global sphere and are garnering major supports from an international financial institutions. In as much it is established that this will not put a halt to investments, as an interest of international investors in African oil and gas is high, individual countries need to begin to reposition themselves for the accommodation of clean energy and respect for environmental standards to maintain the interest of the investors. If properly thought through, this might give rise to a sub-optimal consequence.

The Future

Fig 5: African Project Gas Portfolio *Source: Uganda and East Africa Hydrocarbon plans, Coleman G. (2018)*

Having identified the major challenges, it is a step towards the remediation of the current state of hydrocarbon exploration in the continent. Various countries have taken different steps to properly harnessing their nature-given endowment and turn it around for the good of their nation and the world over. Hydrocarbons as no doubt contributed largely to the development of Africa and it will continue to do so. The pace however slow is a positive one. Each member country is beginning to envision its own policy surrounding hydrocarbons, its infrastructures, and revenue generation and sharing to name a few, and is strategizing on how to make it work for rather than against them.

Fortunately, many countries are putting more pressure on oil and gas developers to ensure certain levels of production to supply internal markets first, to improve local content, or to respect environmental standards, but without a parallel commitment to making energy governance more efficient and transparent, this may only result in investors losing interest (Ernst & Young 2014).

Plans, more or less advanced, exist to build pipelines or other connections to solve one of the major issues plaguing the downstream sector (via rail and road as in the case of South Sudan-Djibouti-Ethiopia) in: