This Down-cycle is Different
Jude Kearney, Chair of Greenberg Traurig’s Africa Practice, gives us his view on the state of petroleum regulations in Africa, and how this latest downturn has encouraged sustainable thinking on oil and gas among governments.
Broadly speaking, how attractive are the regulatory regimes in Africa for the energy sector, and what improvements need to be made?
Not all countries are alike and not all have evolved as much and as well as others. There are a number of regulations, in the more developed jurisdictions, that seem vital and relevant to the full and fair development of petroleum resources.
New producers don’t necessarily have ideal petroleum laws. They almost certainly won’t have ideal production sharing models. These will have to be developed over time. This is a process that is at different stages in different countries.
There are certain things that need to exist both for the benefit of the investor and for the benefit of the state. Nigeria, for instance, has been at this for quite some time and has a regulatory and tax environment that is attractive to outside investors. However, even when these regulations aren’t perfect, the opportunities for investors in these markets might still be substantial. Candidly, often investors have benefited more when the regulations are not completely comprehensive.
Oil producing countries in Africa will have no shortage of interested investors from this point forward.
How did the drop in oil and gas prices impact the near-term development of petroleum sectors in Africa?
No one expected the prices to drop as much as they did at the particular time that they did, and it certainly had a negative impact on the industry. But four things have tended to offset this.
The first is that the oil industry, and that includes the government stakeholders in oil production, have gotten used to it, to some extent. They understand that oil prices are cyclical. No one likes the down cycle, but they are not shocked by it. So that is a good stabilizer — that people may not be happy, but they don’t believe it is permanent. That has an important stabilizing impact on the negative drop in oil prices.
The second is that some very good and positive aspects naturally flow from the low prices, and they always do. But this time, and in particular in Africa, there has been a phenomenal focus by the major oil producing nations on truly, fully supporting and building sustainability into non-petroleum sectors. I think this down cycle made them focus on other industries on a more long-term basis than they have in other downturns. There has been more of an effort to make lemonade out of the lemons, and a lot of focus has been on mining, agriculture, petrochemical developments and refining. I believe that a lot of this will be sustainable even after oil prices rebound.
The third thing is that, candidly speaking, a lot of associated transactions occur as a result of the reduction in oil prices. Some people will decide they want to get out of the business. Others, understanding that this is a cyclical issue, will be looking for just those opportunities where others are getting out in order to get in. So there’s still theoretically considerable activity in the sector.
“This time, and in particular in Africa, there has been a phenomenal focus by the major oil producing nations on truly, fully supporting and building sustainability into non-petroleum sectors.”
Fourth is this: the drop in oil prices has not dampened the efforts of new entrants into the sector, such as Kenya, Uganda, Mozambique, Tanzania, Namibia, and some of these other countries that are just coming into the fold. They could not have known the downturn would occur, and they are not going to ignore these new opportunities just because prices have temporarily gone down. So there is a lot of activity and a lot of transactions that are going to happen because these new actors have just arrived, and they will be damned if they are not going to set themselves up to become important players in the oil and gas sectors. So a lot of things happen just coincidentally to offset the doom and gloom that is often associated with low prices.
How can African countries encourage more sustainable growth for the long-term, especially in relation to the oil, gas and power sectors?
The governments in many of the countries where I do business are focused on taking a more active role in commercial aspects of their resources. They are focused on and interested in a more active and productive role for the state, as opposed to the more passive role governments have historically played in the exploitation of resources. Now they are taking a commercial stake in the concessions, which allows them to contribute to the success of the projects and which actively encourages third party participation. Many are also beginning to focus on the on-shore processing or beneficiation of their resources so as to provide greater value to the host country – and lessen the impact of re-importing the final products.
As examples, many countries are investigating the development of refineries as one form of internal beneficiation. They are setting up LNG production facilities in parts of Africa. They are also focused on petrochemical plant development to utilize oil and gas, both for the local market and exported production. These actions will assist governments to regulate and sustain their roles in the resource sectors in a way that benefits populations more robustly than has been the case before. This development of the downstream is very important, and you have a number of governments that are very focused on that right now.