Chris Bredenhann – Partner, Oil & Gas Industry Leader, PwC South Africa
Chris Bredenhann, PwC’s oil and gas lead for South Africa, discusses the services that PwC provides to the industry, recent industry trends, and highlights the country’s oil and gas potential.
Chris, in 2012, PwC was establishing a new structure for the African region to build an integrated African practice: one firm, one vision. How has this positioned PwC in Africa today?
“Africa is going to be the food basket and workforce of the world and it will need continuous investments into energy over the next few decades.”
Historically, PwC operated as a network of independent partnerships across the continent. This was not necessarily the most efficient or best way of engaging with our clients, given that many of them are international companies operating globally. They expect the same service offerings from PwC wherever we work with them, be it in Cape Town or Nairobi or Lagos. For this reason, we recognized the need to improve seamless client service, connectivity, as well as leverage on the benefits of scale and cost that comes with proper integration of processes and systems across the continent.
As a result, since 2012, we have operated as an integrated organization across Africa with the aim of better responding to our clients’ expectations of seamless service offerings and teams – wherever they are on the continent.
This is particularly critical for the oil and gas industry, which is one of the few genuinely global industries that demands a global presence from service providers like us. In the oil and gas industry, you have global companies with integrated global operations, and naturally they expect the consultants they work with to support that.
To support this, looking at sub-Saharan Africa alone, PwC has a strong presence with close to 400 partners and over 9000 staff across 34 countries. Cape Town is one of the 13 energy centers for PwC globally, along with Lagos on the continent. Traditionally, our center in Nigeria has had a more upstream focus while our center in South Africa has had a more downstream focus. This combination allows us to swop staff and combine teams to build the necessary service offerings our clients require.
Even with our assurance services, while audits are conducted in accordance with local regulations, at the same time, our multinational clients expect us to use a single consistent audit methodology for them across the world, delivered by local teams.
PwC Africa publishes a flagship publication, the Africa Oil and Gas Review, each year, and in 2017, the title was ‘Learning to Leapfrog’, which put forth the argument that the African continent should utilize the global oil price crisis to invest in technology and skills to position itself for the inevitable upturn. Has this opportunity been seized?
A prime motivation behind promoting this agenda has been precisely the fact that we have seen a missed opportunity on the continent in terms of utilizing new technology. The global oil price crisis in 2015 and 2016 has partly been a result of the better use of more advanced technology, which has brought more production on-stream, disrupting the supply and demand balance globally. With the industry having largely rebalanced and the fundamentals falling back into place, companies operating in Africa at the frontiers of the oil and gas industry now have an enormous opportunity to apply the lessons learnt all around the world and restart activity on the continent.
This is evident in the technology that the likes of ENI, Anadarko and ExxonMobil are bringing to their projects in countries like Mozambique, for instance. A strong message PwC wanted to send in our publication was the need for national oil companies (NOCs) and local companies to access and embrace this new technology as well, especially by capitalizing on partnerships with international players.
Speaking about Africa as the final frontier in E&P, South Africa could be seen as one of the last frontiers within the continent. How would you evaluate the E&P environment in the country at the moment?
As you are no doubt aware, the major upstream challenge South Africa faces at the moment is the amendments to the Mineral and Petroleum Resources Development Act (MPRDA), proposed in 2014 and still awaiting final approval by the Cabinet and President. Firstly, there were many suggested changes that made South Africa a less attractive investment destination for E&P, including state participation and free carry requirements. While these are not unusual, the challenge was the lack of clarity surrounding variables like the specific percentages, identity of the state actor, role of the Minister of Energy and his right to determine companies’ ability to export the hydrocarbons extracted, and so on. There was a climate of uncertainty that meant interested investors were not able to model out various production scenarios. As a result, companies started to look at other markets, where the potential returns could well have been lower but where there was more certainty.
When the amendments were proposed in 2014, it was during a period of high oil prices and significant upstream activity globally, so there might have been a too optimistic view from the government on the investment appetite globally. However, two things need to be considered: South Africa’s frontier nature when it comes to E&P, and the volatility inherent in the industry.
What has been really interesting is that despite the fact that this MPRDA issue has yet to be resolved, we have already seen a resurgent interest in South Africa from global players like ENI, Total and Statoil. I suspect there are a few factors contributing to this. First and foremost, with oil prices having increased to nearly USD 70, upstream investment is returning globally.
Secondly, after significant engagement between government and industry, there might be the sense, from an insider’s perspective, that concerns have been heard and addressed, and it is only a matter of time before the MPRDA is finalized.
There also seems to be the sense that despite being a frontier market, South Africa potentially offers significant returns. Companies are looking at recent discoveries in Tanzania and Mozambique and extrapolating those finds to South Africa’s potential. Total is looking at a potentially huge oil play in South Africa and had in fact, started drilling before having to withdraw as a result of weather-related technical challenges due to the short window of opportunity off the coast. They have committed to returning to continue exploration activities.
What about South Africa’s gas potential?
Statoil, ENI and ExxonMobil are all looking at gas plays further up the East Coast, in line with the global trend of majors focusing more on gas as part of a longer term transition to a lower carbon environment. BP and Shell are the notable players already acting to rebalance their portfolio more into gas, for instance, BP with their operations in Egypt and their purchase of LNG in Mozambique, and Shell through their 2016 acquisition of BG Group. The potential gas plays in South Africa also help to increase the country’s attractiveness for E&P.
On the other hand, I think the shale opportunities in South Africa have been overplayed in the past. The current estimates from the Petroleum Agency of South Africa (PASA) is far lower than the initially touted 400-plus trillion cubic feet (tcf) However, there must be some perspective here, as PetroSA operated very productively for two decades on the 1 tcf they found. The challenges regarding shale relate more to environmental and market concerns.
On the question of market demand, PwC recently completed a study on the demand for natural gas and our conclusion is that there is certainly demand for it based on a couple of different factors: gas-to-power initiatives, substitution of coal-fired power and other sources, the anticipated price trajectory for electricity, and the expected economic growth South Africa will see in the future.
However, there is a chicken-and-egg situation where suppliers say they will invest in gas if there is a demand, and the market says they will buy it if supply can be guaranteed. This is where the government needs to play a strong role in terms of providing the enabling environment, as the gas market would probably need to be kickstarted with LNG imports until gas is found in the country. The government should invest in the infrastructure and regulatory framework that would foster a more attractive environment for the creation of a gas market in South Africa.
With all these factors in play, how should PetroSA, as South Africa’s NOC, position itself?
PetroSA finds itself in a very difficult position because they rely on effectively one almost depleted asset. There will inevitably be difficult decisions to be made in terms of the future sustainability of their current operations, and this is exacerbated by the political implications of any decision they make. To position themselves for future success now, I suspect they will need to manage the short term survival crisis to deal with the day-to-day cashflow and operational challenges, while at the same time develop a longer term sustainable future operating model. Realistically, some form of recapitalization is necessary but the unfortunate reality is that the country’s finances at the moment does not allow for that.
PetroSA also needs to take a longer-term view to see what the role is they should be playing in South Africa’s energy future. They need to recognize that their current balance sheet does not allow them to make significant investments on their own and so they would need to work through partnerships with resource holders and international companies.
NOCs need to recognize that they occupy a privileged position because they work on a mandate from the government. This creates opportunities for them to work with international players that are looking for ways to enter the local market. In South Africa, for instance, the downstream market has proven to be very attractive for international players from the likes of Glencore, Vitol and Trafigura, who all have access to crude and product, and are looking for markets. Such partnerships could create the opportunities and business case required for PetroSA to maintain existing operations and renew their future prospects.
In the past decade, Africa has really become known as the ‘final frontier’ for E&P, and it has become an important playing field for explorers like Total and ENI to build their reputation here. At the same time with the resurgence of ‘mature countries’ like Norway and Brazil, how should companies assess the investment case for Africa?
Part of what is driving interest in mature regions like Norway and Brazil is the choice companies have to make between developing proven reserves through to production and exploring high-risk, high-return plays in frontier markets. This all depends on the risk profile of individual companies. Companies like Total and ENI, for instance, do see Africa as integral to the future growth of their companies. I am quite encouraged by ExxonMobil’s entry into Mozambique as well, because the size of their investment demonstrates a certain level of confidence not only in Mozambique but the continent as a whole.
The reality is that assets in the North Sea are mature while companies that invest in Africa will find lots of unexplored new territories with huge potential – that will continue for decades to come.
Another piece of the puzzle is also the significant opportunities downstream given the growing populations, rapid urbanization, need for electrification and so on. There has historically been very little beneficiation of the hydrocarbon resources found on the continent so this will also drive expansion of the downstream sector on the continent. Africa is going to be the food basket and workforce of the world and it will need continuous investments into energy over the next few decades.
What is also interesting about the continent is that there are so many different plays depending on the maturity and size of the country. Looking at Uganda’s significant refinery and pipeline developments, for instance, a 60,000 bpd refinery would be uneconomic in many places. But it makes sense in Uganda given the specific nature of the oil found there and the country’s landlocked position. With the crude and a ready market in the country and region, the commercial proposition makes far more sense. Companies looking to invest in the continent need to understand the particularities and the dynamics of each country and region. In Mozambique, for instance, a large-scale LNG export facility has been planned to monetize the gas discovery, but there is also a domestic gas obligation that represents a huge investment opportunity for downstream players within the country.
To come back to PwC as the global leader in professional services for the oil and gas industry, given the huge complexity of the industry in Africa that we have been discussing, what makes PwC the ideal partner for companies here?
At the most basic level, we are energy and oil and gas experts based in Africa with operations and presence across the whole continent, so we have that critical understanding of the industry that clients can access anywhere across Africa.
Secondly, we also understand how the industry works in terms of the trends and challenges, and how to influence the transformation of not only a company but also the entire industry. We have a proven track record of achieving that around the world. The bottom line is that for companies to operate and grow successfully, they need to understand the market and build the necessary capabilities to adapt to market changes. This is where PwC brings enormous value to our clients.
In this vein, a major priority for PwC at the moment is digital transformation, and within that, a key challenge relates to cybersecurity. Companies need to understand how to implement and harness technology in a secure and responsible manner. Whilst this is critical, we also recognize that this is not necessarily a core competency for oil companies. We therefore provide managed solutions in this space to allow oil companies to focus on their core functions.
We also have a focus on NOCs around the world, and in particular, in Africa, as NOCs play a particularly important role on the continent. Fundamentally, NOCs need to recognize that they have to transform just like any other oil company to become a national energy company. This means different things to different NOCs in different countries. There is a lot of strategic thinking required in terms of accurately defining the role an NOC should play in different countries, so a priority for us is to engage with NOCs to ensure that they have the right strategy to properly align with the respective needs of their country in order to support economic growth and national development.
It all goes back to our mission statement, which is to build trust in society and solve important problems. This is what we stand for and is at the core of what we do.