West Africa oil projects face yet longer delays than rivals as prices languish – Reuters

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* Investment may take time to recover for West Africa

* High costs of offshore fields make fields uneconomic

* Could have lasting impact on fragile economies

By Edward McAllister

DAKAR, Feb 16 Oil firms have put major projects
in West Africa on hold because of low prices – as they have
across the globe – but when the market finally picks up,
development is likely to recover much more slowly in the region
than elsewhere.

High costs bedevil the region, which includes established
producers such as Nigeria and newer entrants like Ghana. Add to
this long-standing problems of poor infrastructure, complex
bureaucracy and politics, and West Africa may be well down the
list for any investment revival.

A dive in oil prices since mid-2014 has forced international
energy companies to postpone or cancel hundreds of billions of
dollars in investment all over the world.

In West Africa it has made projects for Royal Dutch Shell
and Tullow Oil uneconomic, and hurt regional
economies that rely heavily on energy revenue.

Already, Gabon has cut its 2016 budget because of low oil
income and Ghana is considering doing the same.
African oil exporters further afield,
such as Angola, are also feeling the pain.

“There is no doubt that the amount of capital expenditure
over the next five years will be severely reduced,” said Andrew
Hayman, an Africa oil and gas project specialist at data
provider DrillingInfo. “From the bigger producers like Nigeria
and Angola to the smaller producers, the capital will just not
be available.”

According to the United Nations, overall foreign direct
investment in Central and West Africa, which includes major oil
and gas projects, fell 44 percent to $14.2 billion last year,
greater than the 31 percent drop for Africa as a whole.

The number of oil and gas rigs in the region dropped by two
thirds to 18 in December 2015 compared with the same month in
2014, according to U.S.-based oil service firm Baker Hughes,
which conducts surveys on rig activity globally.

“Capital investors are getting cold feet about new
investment,” Hayman said. “Countries in West Africa will be
lower down their list so investment will be longer coming back.”


Africa holds 129 billion barrels of proven oil reserves,
according to PricewaterhouseCoopers, or nearly 8 percent of the
global total. Development varies widely from Nigeria, a
prominent world player, to Gabon, which is struggling to
maintain output from maturing fields.

There are bright spots. Senegal is beginning to establish
offshore potential, with Kosmos Energy saying last month it had
discovered a “significant” amount of natural gas off its
Atlantic Coast.

But much of West Africa’s oil and gas is offshore where
drilling is expensive: sub-ocean wells can cost $100 million
each and whole projects billions. Accordingly, many
multinationals have cut offshore development.

Offshore projects made sense back in early 2014 when oil was
above $100 a barrel but this week it is little more than $30.
By contrast, in the United States, which has large
shale oil deposits onshore whose geological make up is well
known, wells can be drilled for a few million dollars.

These are the kind of projects that will be revived first
whenever oil prices finally rebound. West African projects will
need to be not only viable, but also compete with such
production if they are to attract investment.

“There is a big cost problem in West Africa,” said Gail
Anderson of U.K.-based consultancy Wood Mackenzie. It reckons
only a third of the $270 billion of oil projects in the planning
stage in sub-Saharan Africa are viable when oil is below $50.


On Feb. 4, Shell said it was delaying its Bonga South West
project offshore Nigeria for at least another year as part of
global cost cuts. Its final investment decision, first mooted
for 2015 or 2016, will now not be made before 2017.

For Shell it makes sense to wait. Bonga South West involves
the construction of a complex floating production and storage
facility and the project’s numbers were last crunched when oil
was nearer $100.

“Bonga Southwest … ought to be a good project,” chief
executive Ben van Beurden told analysts. But, he said, “we need
to get to a point that we believe not only is the project
affordable … but also competitive.”

Six days later, Africa-focused Tullow Oil said it was
considering halting drilling of new wells offshore Ghana while
prices remain depressed.

Tullow has already halved investment in West and Central
Africa to $100 million per year. It could come down further,
Tullow said last week, and possibly remain low into 2018 – a
factor likely to hit production.

“Exploring today in this oil price environment is not
something you should be doing,” chief executive Aiden Heavey
said. “It will be very difficult to get banking for any
developments, so you focus on the assets that you have.”

(editing by David Stamp)

West Africa oil projects face yet longer delays than rivals as prices languish – Reuters