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with Elias Pungong, Oil & Gas sector Leader Africa, Ernst & Young Africa

17.05.2012 / Energyboardroom

When we met Ernst & Young’s CEO in South Africa -Philippe Hourquebie- in 2006, he said that E&Y closely follows the movement of the different oil and gas companies in Africa in order to address their needs in their respective markets. At present, 19 African countries are significant producers of oil and/or gas. As an introduction to our readers, what do you see as the current hotspots in terms of oil and gas activity in Africa, and how have you seen these changing over the years?

I have specialized in the oil and gas industry in the last 13 years, and have seen significant changes. Historically, there are the traditional producers Nigeria Libya, Algeria, Sudan, Egypt (mainly Gas) and Angola as well as a number of minor countries, mainly Gabon and the Republic of Congo, Mauritania, Equatorial Guinea and Chad, that have a history in oil production.

Thirteen years ago, it would have been unimaginable to speak of oil exploration/production countries like Kenya, Uganda, Sierra Leone, Mali, Guinea, Madagascar, Liberia, Ghana or even Sao Tomé. Today, we see oil exploration or production in almost all African countries. Over the years, an entirely new category of countries has developed, with examples of Ghana,Côte d’Ivoire, Mauritania and recently, Kenya and Uganda. Then, there is an additional range of countries where we would have never thought to find oil or gas, most particularly in the East of Africa with countries such as Kenya and Uganda for oil and Tanzania and Mozambique in terms of gas. In terms of exploration, significant activity is also taking place in Liberia, Sierra Leone and Guinea. Today, there seems to be no further limit as to where oil can be discovered in Africa. This is exciting news!

In 10 years from now, the major oil and gas producing countries in Africa could no longer be recognizable.Madagascar and So Tomé are 2 more examples where significant exploration activity is taking place. The African landscape is very exciting today, with E&P taking place in areas we would have never imagined.

Looking at the oil and gas demand, several of our 2012 interviewees are of the opinion that global demand for African oil is going to increase significantly over the coming years. Would you agree that this is the case?

The demand of oil is driven by the emerging economies in the Far East, most particularly China and India, as well as other BRIC countries like Brazil and Russia. This supports the belief that demand for oil will indeed increase. All else being equal, we can only be optimistic that the global demand for African oil will increase. Furthermore,geopolitics will shift US reliance on Middle East oil and African oil producing countries, some of which are even closer to the US, will benefit.

Africa itself is growing very rapidly too. To what extent do you see African consumption impacting this demand?

In most of the African countries where oil and gas activity has recently started taking place, most of the governments have automatically started thinking of refineries to meet local needs. There is a general recognition that local demand is increasing because of the rapid growth in these various African economies, which can only up the overall picture of an increasing demand of oil to meet local requirements. However, Governments must take concrete steps to create the right environment for investors to build refineries. Downstream transformation of resources is largely absent in Africa and this issue is not peculiar to the oil and gas industry. Look at bauxite in Guinea. Africa is still largely an export base.

A number of our interviewees have opinionated that the construction of several of these refineries on the African continent are not justified, and that only a few of the larger refineries will sustain. What is your observation of this?

This school of thought is the result of Africa’s failure to increase its refining capacity because of the absence of economies of scale. A lot of countries, however, also need to take into consideration their security of supply. While some of the refineries may be uneconomical, they may play a role as a strategic asset. Both sides have their own arguments and it is up to the governments to decide to create the appropriate investment climate for investments and provide the right subsidies. Most importantly, government should both invest and encourage companies to invest in this space in a profitable manner.

African oil and gas production is led by the major integrated companies, particularly the Italian and French majors, ENI and Total SA respectively. When we spoke to Anton Botes, Deloitte’s Africa Oil & Gas Leader, he was expecting the National Oil Companies (NOCs) to start playing a bigger role in Africa. Would you agree?

Absolutely! There is a general recognition that the different African governments want to participate more in the industry. As a result, we are seeing the NOCs becoming more important. Many of them have seen their finances bolstered significantly with the recent jump in oil prices. Today, they do not only try to protect the interests of their respective governments, but are also acting as commercial companies that participate in E&P activity. Countries that historically never had any NOC, such as Gabon, have now started to create such companies. Having said that, there are serious challenges. NOCs are notoriously inefficient and several of them are known to be very corrupt. However, if they are well-run and serve as engines of growth to attract the right investment in the oil and gas industry in their countries, they will have a much bigger role to play. The challenge is to find a balance between the interests of NOCs and IOCs. It can be a win-win, if managed properly: IOCs providing access to technology and finance and NOCs access to the market and local stability, albeit in liaison with the government.

You already mentioned an increase in activity where E&P developments were taking place a few years ago. There are few doubts that Africa is rich in resources, but are there still some areas where the risks outweigh the potential returns?

Three to four years ago, I would have said yes. Today, however, we have seen such a change and improvements in technology that even frontier areas -previously identified as high risk- have now become possible to explore. Many of the players in the industry have been active in such challenging areas so that almost nothing has become impossible. No one initially expected Tullow Oil to move into Uganda, until they had the sunkthe first well. The rest is history. A lot of work has gone into de-risking these areas which can only be a good thing for the future. While recognizing that there is risk in Africa, I would note that there is a big difference between the level of perceived risk and the level of actual risk on the continent. Perception is such a big action.

How do you see the oil price impacting the feasibility of E&P activity in Africa?

The general consensus with respect to the oil price going forward is that it does not entirely follow the laws of supply and demand of other commodities. Instead, geopolitical factors play an important role. Over the last couple of years and more recently, the Arab Spring and turmoil in Irak, Iran and now Syria have created geopolitical tensions and issues around security of supply. At present, experts generally believe that the near term oil price will stay stable or may even increase.

You have previously participated in discussions on the effect of new shale gas finds in South Africa on countries such as Nigeria. If the moratorium would end and production would eventually take place in South Africa, how do you see this shale gas impacting the energy landscape in Africa?

If it does happen, shale gas would come in as another source of gas. Do not forget that gas reserves have also been found in Mozambique, in the Kudu gas fields, Tanzania, and so forth. Shale gas will simply add on to this equation.

Like oil, there is also an increase in demand –both domestically and internationally- for African gas, be it natural or shale. Also here, most of the demand is coming from countries in the likes of China and India. I do not think that if such shale gas comes into the market, that it would affect the African gas landscape. As long as the demand for African gas is there, we expect things to stay very stable in the medium to long term.

Speaking of E&Y in particular, we see a company covering a wide range of sectors. How important is the oil & gas sector for E&Y going forward, particularly when we look at Africa?

E&Y has identified the oil & gas sector as a priority sector. Because of this reason, E&Y recruited me from one of our big 4 competitors , where I previously was the African Oil & Gas Leader. E&Y is making significant investments into new capabilities in oil & gas right across the continent, including countries such as Nigeria, Angola, Uganda, Kenya and all the other new Oil & Gas provinces and so on. South Africa has always enjoyed our attention as a developed economy beyond oil & gas alone.

My task in Africa is to reach out to these different countries and get the best people to build world class capabilities in oil & gas. We have an African investment plan in place and have an identifiable oil & gas team irrespective of geography. This provides us with the local knowledge to service our customers on the ground. Oil & gas is not just a priority sector for E&Y; we also put our money where our mouth is and are making the requisite investments on the ground. We have also published several materials on Africa, such as the “Oil and Gas Risks & Opportunities” document, “Africa Oil and Gas: Continent on the Move,” etc. In terms of the oil & gas sector, the message is very simple: E&Y is really open for business in this Sector and we have boots on the ground to support and service our clients.

For investors that have not yet put their money into the African continent, what exactly can you tell them?

What they hear about Africa is true: it is a continent on the move. Let me start by referring to our just published: The Ernst & Young 2012 Africa Attractiveness Survey: Building bridges. It’s an incredible and positive document about Africa, which has been generally excellent received, but particularly in the Oil & Gas Sector. The message is clear – “That we are positive about Africa, we are optimists, but we are realistic and our perspective is deliberately a glass half full rather than half empty”

This reflects what’s happening across this great continent. There are significant opportunities in several countries while oil & gas E&P activity is taking place in almost all countries. We currently have 19 significant producing countries, a number that is still changing every year and could go as high as 30 in the next 10 years. Of course, there are still challenges –such as Access to reserves: political constraints and competition for proven reserves, Uncertain energy policy, Cost containment, Worsening fiscal terms, Health, safety and environmental risks, Human capital deficit etc etc, these are manageable and not unsurmountable. However, with the support of firms like E&Y, investors can be helped to navigate through these risks. Moreover, we also are best placed to advise governments in creating a business admosphere, which would enable the requisite private sector investments. Investors have every right to be positive, as long as they receive the appropriate advice from experts like E&Y.



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