Upstream prospects stay bright for West Africa

October 3, 2014

N. Foster Mellen analyzes West African transactional activity and drilling rig data, which indicates a promising future for the region.

Continuing strong upstream transaction activity in West Africa bodes well for the oil and gas industry. According to data from Derrick Petroleum, EY has seen an average of more than 50 transactions per year in West Africa (Fig. 1) since 2006, with reported deal value averaging more than US$6 billion per year.

Notably, however, deals with reported transaction values have only accounted for about one-third of all deals in the region during the same time period (January 2004 – August 2014).

National oil companies (NOC) have played a major role in West African upstream transaction activity, particularly Asian NOCs, but also from elsewhere in Africa, the Middle East, Latin America and the former Soviet Union.

Including transactions involving the relinquishment of leases back to host governments, transactions with NOCs as acquirers represented about 20% of all transactions in West Africa since 2006. “Big oil” – the integrated majors along with the other large international oil companies (IOCs) – accounted for another 20% of all deals since 2006. The smaller, more-nimble and more-focused regional specialists accounted for roughly another 15% of all upstream transactions, with the remaining 45% made up of smaller independents and local firms.

The Derrick data by deal type shows the maturation of the region since 2006. Transaction activity in the early years is dominated by new exploration awards and then, in turn, followed by increasing farm-in activity and the inevitable relinquishment of some blocks. A new round of exploration awards can also be seen starting in 2010.

Like historical oil and gas production in the region, deal activity has been concentrated in the central sub-region, anchored by Nigeria and Angola, along with Gabon, Congo, Democratic Republic of Congo, Cameroon and Equatorial Guinea. However, the Derrick data (Fig. 2) shows that transaction activity has increased in the other two less-explored West African sub-regions – the West African Transform Margin (WATM) and the Senegal Basin – particularly so in the last few years. The WATM includes Benin, Ghana, Guinea, Ivory Coast, Liberia, Sierra Leone and Togo. The Senegal Basin includes Guinea-Bissau, Mauritania, Senegal and The Gambia.

While there has been some petroleum activity in these less-explored sub-regions as far back as the 1950s, the recent high-impact discoveries in Ghana and the Ivory Coast have brought new attention and optimism to these sub-regions (Fig. 3). Transaction data substantiates this shift into the new frontiers of West Africa, heralding the ramp-up of further exploration and development activity in the two sub-regions, notably in Ghana, Liberia, Senegal, Guinea, Sierra Leone and Guinea-Bissau.

Left: West Africa upstream transactions, January 2004 – August 2014. Right:  West Africa upstream transactions by type.  Source: EY analysis of data from Derrick Petroleum.
 

Potential resources by sub-basin

Confidence in the sub-regions’ resource potential is underpinned by the recent US Geological Service (USGS) resource estimates for the West African region. According to the USGS, the Senegal basin could contain almost 5 billion bo and more than 39Tcf of natural gas. The WATM could contain more than 18 billion bo and more than 151Tcf of gas. Mean resource estimates from the USGS indicate that the two sub-regions contain almost 10 billion bo (2.4 billion bbl for the Senegal basin and 7.3 billion bbl for WATM) and almost 79Tcf of gas (18.7Tcf for the Senegal Basin and 58.1Tcf for WATM), along with almost 2.5 billion bbl of natural gas liquids. While these estimates are substantially smaller than the resource estimates for the central sub-region’s mean oil resources of more than 65 billion bbl and more than 134Tcf of natural gas, they nonetheless are very attractive, particularly for the small-to-mid-sized independents.

Left: West Africa upstream transactions (deal volume by sub-region). Right: West Africa offshore rig demand (forecasts after 2013). Source: EY analysis of data from Morgan Stanley.
 

A promising period for the region

For the global oil and gas industry, 2013 was not a particularly fruitful year for discoveries; according to energy analyst consultancy firm Wood Mackenzie, total discoveries were less than 17 billion boe, well below the 26 billion boe average over the previous 10 years. But 2013 was a productive year for Sub-Saharan Africa, with the region accounting for almost 40% of the year’s total global discoveries. Notably, in 2013, West Africa had three of the year’s 10 largest discoveries:

  • Cobalt International Energy’s Lontra discovery off Angola, estimated at 900MMboe
  • Afren Plc.’s Oro discovery off Nigeria, estimated at 775MMboe
  • Eni’s Nene Marine discovery off Congo, estimated at 700MM boe

Success in the region has continued in 2014, with notable finds reported in Gabon (Eni and Harvest Natural Resources), Ivory Coast (Total) and in Congo (again by Eni).

Offshore drilling activity

Offshore West African drilling activity is expected to continue to ramp-up (Fig. 4). Analysts at Morgan Stanley see demand for floaters (e.g. deepwater drillships and semisubmersible drilling rigs) more than doubling over the 2014-2020 period, while demand for the jackup drilling rigs that work in shallow water remains relatively flat. Despite the strong increases in rig demand over the next five to six years, rig supply is expected to be more than ample, given the strong newbuild order backlog.

Exploration and early-development activity in West Africa looks set to ratchet up over the next 12 to 18 months, with hopes for a Jubilee-type success in offshore Ghana in the nearby TEN development (Tweneboa-Enyenra-Ntomme) and as the IOCs and smaller independents push into the less-explored areas.

However, the recent regional health crisis with the Ebola virus looms over the region. Particularly in the short-term, it is expected to dampen oil and gas activity in the region, primarily limiting movements of personnel and equipment. Containment of the virus should limit the adverse impacts on oil and gas industry activity, but a failure to contain the virus could have devastating consequences for the region, including longer-term implications for oil and gas industry investment and activity in the region.




N. Foster Mellen
is a senior strategic analyst in Ernst & Young’s EY Knowledge group. He has worked as an energy analyst since 1977, and holds a master’s degree in development economics. Prior to joining Ernst & Young in 1999, he was with London’s Petroleum Economics (PEL), analyzing developments in the international oil and gas markets. Prior to PEL, he was a consultant to the US Department of Energy.



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