‘Double Black Swan’ Event Hits African Energy

Rodney MacAlister, CEO and Co-Founder of Monetizing Gas Africa Inc speaks to AOP about the future gas projects for Africa, especially in terms of financing availability and which projects are most at risk in the current crisis.

How do you see the combination of COVID-19 and the drop in oil and gas prices impacting the development of the energy sector in Africa?
We are in a double black swan event. For most people, the corona virus panic has completely masked what is happening with the oil price, but for those of inside the industry, the oil price was definitely a black swan event that no one saw coming.

In addition, the Moody’s downgrade of South Africa to junk status has led almost immediately to a downgrade of the five largest South African banks as well. The cost of financing for the private banks is going up along with government debt. Together with many equity investors busy stemming losses, the outlook for finance is bleak in the short-term.

How has the crisis already impacted funding availability for Africa’s oil and gas projects? What projects are most at risk?
Anything that hasn’t already reached FID is at risk. Everything that is in development, but short of FID is easier to defer than projects that have already achieved FID and are having resources applied to them, from budget allocations to careers.

Among those projects underway in development that are post-FID will depend on the size of the projects and the size of the company. The larger the company, the more you can afford to keep any project going – though size alone is no guarantee. The smaller you are, the less financial latitude you have and so that will cascade into the smaller projects.

When do you think finance, especially private equity, will come back into play?
I think it will take several months and depend on many factors, including governments acting competently and in coordination with each other.

What the financers want to work on right now is what’s currently on their plates and try to get those to completion – and that’s if stopping hemorrhaging allows even that. But in terms of looking at new projects, the trouble is, until we know we are at the bottom of the crisis, who can plan with any kind of certainty? I think private equity and all similar forms of investment are going to ride it out until the global economy has hit bottom, from when we can carefully and cautiously see a recovery is on the horizon.

What is your outlook for the market? When will things get better?
Data shows that the recovery cycles average three years from when markets tumble, and obviously this is worse than a tumble and more recovery is required. One might start with that benchmark. Being optimistic, though, there are opportunities. For those in a position to buy, it is a cheap asset opportunity. A wave of consolidations is predicted and that follows past patterns.

Even with all this demand destruction because of COVID-19, the world still needs to consume a significant amount of energy every day. Our industry certainly provides the lion’s share of this energy. Even the minimum energy demand is quite consequential, and those companies that have the reserves and the resources have opportunities to capitalize on.

My advice (which we give to ourselves) is to hang in there and ride it out. Keep doing what you’re doing. Be alert. Compare notes, look for the unexpected and be nimble to exploit opportunities. What we don’t want to do is sit around and lose energy and momentum with remote working. As long as you are getting up and going to work every day, we’ll keep our edge and stay in the game.