AOP talks to Kola Karim, Chairman of Shoreline Natural Resources and AOP Advisory Board Member about the potential of Nigeria’s oil and gas sector and the key trends for the African energy sector in 2018.
What do you see as the key trends for Africa’s oil, gas and power sectors in 2018?
In regard to power, that there is a large supply-demand gap on the continent is no secret. This massive gap will take at least a generation to close and will ensure that there will continue to be many power projects being developed in the region. Africa is the premier investment destination for power investors. The political and economic climate across the continent has steadily improved over the several decades, making Africa a strong investment case for international developers. It is tough to operate and develop projects here and despite the frustration of long lead times associated with developing infrastructure projects, on a risk-return adjusted basis, Africa still boasts far better returns than developed markets. At Shoreline, we are very bullish on power and see a massive advantage in the continent’s abundant natural resources for power, such as good solar radiation, wind, hydro and biomass potential, gas resources, etc. Africa will continue to be a compelling investment case.
With regard to oil, financing costs are a continued challenge due to the recent downturn in the oil price. Many companies are still working through their financing challenges and this will likely continue. Alongside financing will be the need to focus on efficient asset operations in a competitive lower oil price environment. African oil and gas companies are looking to achieve a sustainable growth. The use of disruptive technology is undoubtedly going to be key regarding that and we find the American shale revolution instructive in creating a cost-adaptive oil business. We will need to learn from this to leapfrog our competitiveness using disruptive technologies and innovations to overcome the specific challenges of the African continent, and to propel the industry’s and businesses’ growth.
Which countries in Africa are the most attractive as investment destinations?
The top five destination countries — Angola, Egypt, Nigeria, Ghana, Côte d’Ivoire and Ethiopia — host 57 percent of the continent’s total FDI inflows. With the sectoral distribution being skewed towards the hydrocarbons and food processing industries, I think we will see these countries being the main beneficiaries of FDI. Flows to West Africa for instance are propelled by Nigeria and Ghana’s dominance in in hydrocarbons and cocoa processing projects.
What does 2018 hold for Nigeria’s oil and gas sector?
I think we will see a subset of the regional trends I mentioned above, writ large. Nigeria is the largest economy on the continent and the largest producer. Our industry is the barometer for the continent. Many of the sectoral trends are driven by activity in Nigeria.
Our theme for this year is Energy Coalitions. Do you expect Nigeria to cooperate more with African countries in its oil and gas industry in the future?
Nigeria is an important member of OPEC despite our difficult relationship with the group. OPEC’s objectives are aligned with what is in Nigeria’s interest in the energy industry — a focus on a sustainable oil price. The industry dynamic is changing fast as traditional cartel-led price management is being undermined by massive technological innovation, as evidenced by the US shale revolution. To continue to maintain important oil-led revenues, Nigeria must find new partnerships and new ways to achieve sustainable income from the energy industry. Pan-African coordination is a viable long-term tool in Nigeria’s arsenal of policy, trade and partnership initiatives.
Africa’s lack of power generation is a serious impediment to growth. What steps should be taken to improve power capacity at the domestic and regional levels?
The key to driving capacity is to use private sector-led tools such as public private partnerships to build capacity. A lot of progress has been made in creating the correct legal and regulatory frameworks across the continent and especially in Nigeria. The choke point is the credit quality of the offtake, without this, projects cannot take off. We need to see the establishment of national and even regional credit enhancement bodies that use international bond and other instruments to improve the credit quality of projects and reduce the cost of capital for developers. These types of institutions and initiatives will see greater numbers of larger projects take off.
How do you see gas-to-power schemes impacting Africa’s and Nigeria’s power generation plans?
At Shoreline we believe gas is the future feedstock for power projects in Africa. Gas is plentiful across the continent from Mozambique to Nigeria and beyond. It is plentiful and a viable energy source producing cleaner, cheaper energy. Nigeria is a gas giant and unlocking gas will deliver significant benefits to the economy and specifically the power generation industry. The capital costs of unlocking this opportunity are significant, so an integrated approach to creating the right investment climate is critical to delivering on the promise of gas.