with Anton Botes, Leader – Oil & Gas Industry, Deloitte South Africa
When our colleagues interviewed you in 2006, Deloitte South Africa stood at a turnover of ZAR 580 million, with a target to achieve ZAR 1 billion by 2010. Of this, the aim for the energy sector was to contribute 20%. Has this target been achieved or was it too ambitious?
The growth rate for Deloitte South Africa’s turnover was an understatement, whereas we currently stand at more than twice that target. Energy & Resources is clustered together as one industry, including oil & gas, power, utilities and mining. Also there, we have achieved our target and stand at around 20% today. Albeit perhaps from other sources than we had anticipated, we are on target.
You also described Deloitte as the leading consultancy to the energy industry back then. How do you see the company’s competitive positioning in the market today?
When you talk about sectors such as oil & gas or mining, the thinking cannot be confined to a particular geography. This is a global business and Deloitte is certainly one of the leading oil & gas advisory and assurance providers globally. Our client list consists of the major international and national oil companies (IOCs and NOCs) and we are growing tremendously in places such as India and China through companies such as Sinopec and SINOC. The oilfield services providers (OFS) further represent one of our growth areas and are part of our focus at present.
We are active across the entire spectrum from upstream right through to downstream. For IOCs, however, statistics have shown that around 60% of their turnover comes from their downstream business, while between 75 and 90% of their net revenues comes from upstream. This is one of the reasons why some of the IOCs are divesting downstream assets in more complex markets.
Deloitte is strongly focusing its efforts on its capabilities in upstream, which we see as a big growth and focus area for Deloitte globally. At the same time, we have our capabilities in mid- and downstream as well. In line with this, we have acquired a number of specialist organizations such as the Petroleum Services Group. These companies are specialists in terms of data, geology, as well as the understanding of markets and financial advisory & dealmaking. At a global level, the oil and gas industry is a key growth area for Deloitte.
In 2006, you pointed to Sasol as one of your main clients. If you say that you now focus more on the upstream part of the value chain, are we seeing companies in the likes of PetroSA becoming more important for Deloitte in the region?
We first need to define the region we are talking about, which we consider to be sub-Saharan Africa. Looking at this part of the world, the game is changing entirely. Sasol is one of Deloitte’s biggest and most important clients globally, and will always remain a priority client for us. Some of the reasons why they are such a prestigious client lie in the fact that they are very innovative, forward thinking and going global. They are a great organization to do business with.
In terms of our client base, things are indeed changing. In South Africa, PetroSA is becoming quite an important player for us because –in our view- NOCs are expected to become increasingly important in Africa in general. There are roughly 36 countries in sub-Saharan Africa but only a handful of those countries are rich in oil and gas resources. The roles of the NOCs in those countries are becoming increasingly important as they own the exploration rights to these resources. Yet being government-owned companies often makes it very difficult for them to execute these rights, which is why they engage in deals with the IOCs. E&P agreements will always involve NOCs and are tradable, saleable, farmable, etc. At the same time, the IOCs also remain important to use and we aim to showcase that we can provide the support when they come to Africa.
You mentioned the OFS as a growingly important customer type as well. Why?
It starts with the fact that there is a lot of upstream activity in Africa. From the moment there is upstream activity, exploration and production, the oilfield service providers come into play. The more oil and gas is being explored in the continent, the bigger the presence of these players.
In terms of E&P activity, the East Coast –with countries such as Mozambique, Tanzania and Uganda- has been up and coming, beyond the traditional West Coast of the continent. Has this been a game changer in terms of how you have seen the market evolving over time?
The gas finds in Mozambique and Tanzania in recent months have changed the landscape dramatically. Looking at the global energy mix, it is our view that LNG is structurally changing the oil and gas industry. Certainly now, gas can be liquefied and turned into a global commodity that can have its impact on market dynamics. The world does not yet understand what could happen next, following the different natural gas finds around the world.
Traditionally, the Middle East, CIS and Southeast Asia have been big suppliers of gas traders to China, India, Europe and so forth. Now, it has become possible for South America to supply natural gas to Europe with the Eastern Mediterranean region supplying natural gas to the USA for example. In theory, most of the gas from this region will go to China and India. Such resource flow not only makes sense geographically, but demand in those markets is also expected to quadruple. With that in mind, the dynamics around the East Coast of Africa are changing as we speak. We do not think that the related industries realize what is really going to happen around natural gas in Mozambique and Tanzania.
Moving to the West Coast then, traditional countries such as Angola, Nigeria and Gabon will remain main producers of oil and gas, while they will all have their own internal issues. Interestingly enough, they will move towards midstream developments, meaning refineries, beneficiation, and so forth. Recently, we have also been informed that there is a great possibility that there could be significant gas finds off the coast of Namibia and South Africa. Overall E&P activity on the South West Coast is expected to increase. The environment is stable, the infrastructure is in place and the geological data support such developments.
The difference between cyclical versus structural changes is an interesting finding. Do you see other key trends as well in that respect?
Unconventional gas (shale gas and coalbed methane) is going to change the market –especially in the case of North America. North America will eventually become a gas exporter rather than importer. Other than that, because the oil price goes up, previously less attractive reserves now become a feasible business case. Exponentially, there will therefore be an increase in upstream E&P of crude oil as well, which will again change the structural dynamics. A last aspect is that we are underestimating the challenges that the industry faces in terms of talent, skills, etc. in remote places. Because of this challenge, the traditional oil and gas value chain and profitability structure is going to change over time.
If your clients would hesitate to enter the East Coast of Africa, for example because of the region’s lack of upstream experience, what can you tell them on why it is still a region worth moving in to?
Clients do approach us with such questions and want to understand the potential of the East Coast of Africa. There are potentially 4 groupings of issues they have: understanding the country (political stability, outlook, short-term VS. long-term, opinions on beneficiation, etc.), ease of doing business (setting up an office, paying taxes, using local workforce, etc.), upstream-specific challenges (availability of service & maintenance facilities, sourcing of spare parts, etc.) and sustainability over time. Factually, Tanzania is not as risky in terms of political thinking while Mozambique has shown an understanding of what needs to be done.
At Deloitte South Africa, our strategy is to offer insight into these different countries’ political thinking. We have an oil and gas center of expertise that these companies can tap into. Every company we work with has some type of strategic positioning and questions around this. We mobilize our global expertise to make sure that we optimize their value position strategically while minimizing their risk position. We then also offer a so-called oil and gas ‘shared service,’ run from Johannesburg. This center can take care of your payroll, work permits, and other back-office functions, and is being offered by Deloitte as an independent actor. We have got the expertise, the power to mobilize and the economies of scale.
Companies looking into the East Coast of Africa should therefore not be worried. If their move makes strategic sense, we can be the partners when it comes to market entry, maturity and sustainability. We actually have a set of solutions to those issues that any organization will typically face when entering, which vary according to the life cycle of the organization.
When it comes to the country’s oil and gas service hub potential, we have taken note of various contradicting opinions. While Minister of Trade & Industry Rob Davies has included the oil and gas sector as a priority sector in the IPAP2, several of the industry professionals have remained skeptical of the progress that is being made in terms of infrastructure. While most will agree that the potential is there, in your view, can this be fully unlocked in the coming years?
Entities and organizations such as the government, the South African Petroleum Industry Association (SAPIA) and the South African Oil & Gas Alliance (SAOGA) all understand that the potential is there, while the basic infrastructure is also in place. The most important thing is that we have both the political support as well as the willingness to unlock this potential.
The challenge persists in convincing the related industries such as Portnet, Transnet, and so forth. As mentioned before, we do not believe that these industries understand how significant the sector’s potential is. Cape Town will probably be leading in unlocking such potential, although it also aims to tackle the more difficult and mature markets on the West Coast of Africa.
The bigger opportunity lies on the East Coast. If you ask yourself where any upstream exploration company will source its technical supplies from, they will source from Southern Africa. Therefore, we need to unlock the vision and align the different related industries –transportation, infrastructure, ports, power, financial…- to complete the circle. We do not have a lot of time, but we do have the window of opportunity. All of these industries are focus industries of Deloitte, so from our point of view this is something we are pushing very hard.
Apart from creating the awareness, it is also about the implications. Infrastructure remains the key issue and relies on investments requiring a 20 to 30 year view. Long term views, in turn, require answers to 2 things: ‘What will the market be like in 30 years?’ and ‘How will I get a return on this investment?’ The first answer can be derived through understanding and analyzing the different global trends, demand, and so on. To find the second answer, one needs to gain a better understanding of aspects such as tariff protections, which remain unclear for most African countries. Governments takes a 3 to 5 year view as they think in election cycles. However, they require 30 year views the way Singapore looked at its oil and gas development decades ago.
With local champions such as Keppel and infrastructure hubs such as Jurong Island, this Southeast Asian island-state has indeed seen impressive developments over time! Can South Africa be the next Singapore?
The Dutch already understood the strategic value of South Africa’s location when they started Cape Town in 1652. We have the location, the workforce, well-developed related industries, resources (other than oil & gas), the basic infrastructure, and so forth. What will flip the switch is a government 30-year view on infrastructure.
Would you like to add anything we have not covered?
Mozambican gas finds present a great opportunity for that country to grow exponentially. The type of gas that has been discovered is probably ‘dry natural gas,’ which needs to be brought to shore and cleaned out before it can be liquefied and shipped out. The byproducts of the cleaning out process is ideal input for fertilizer and explosives plants, which implies that the potential is there to build a lot of related plants. Southern Africa needs power and gas-fired power plants can be an absolute game-changer.