Low oil price may affect African projects - CNBC Africa

Low oil price may affect African projects

Commodities

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Low oil price may affect African projects. PHOTO: Accountingclub.ca

This is according to the latest analysis on the oil and gas industry released by professional services network, PWC.

“Oil and gas explorers will be relooking at their budgets and deciding where to allocate their limited capital spend given the substantial decline in the oil price. Overall, low oil prices could have an impact on production undermining certain players in the market,” said Chris Bredenhann, PwC Africa oil and gas advisory leader.

PWC said that the West Texas Intermediate (WTI) price for crude oil recently plunged below 49 US dollars per barrel after reports of an oil oversupply in the United States. Current reserves are at their highest level in 80 years.

(READ MORE: When will the oil price rise again?)

In its ‘Fit for 50 US dollars oil in Africa’ analysis, PWC stated that Africa has seen major success in the exploration for hydrocarbons over the last 10 years in West Africa and, more recently, East Africa too.

“Oil & gas companies now need to plan for the upturn that is sure to follow to ensure that the potential boom does not go bust,” added Bredenhann.

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However, PWC explained that the drop in oil prices is expected to have a major impact on Africa, which is already grappling with poverty, food shortages, HIV/AIDS and the outbreak of the Ebola virus in West Africa.

Also, oil and gas companies continue to face challenges such as regulatory uncertainty, fraud and corruption, poor infrastructure and a lack of skills.

“While oilfield service companies will venture to cut back on spending, they will also be under extreme pressure by the oil companies to drop their prices,” said Bredenhann.

Oil and gas players most likely to be affected include frontier areas, host governments, major gas projects and oilfield service companies.

On the other hand, PWC still believes that there are great opportunities for investment in Africa, particularly within onshore exploration. Also, some players are moving ahead with development programmes even though they don’t have plans to expand with exploration drilling.

 “We also see that there could be significant potential for firms that are strong in research and development,” added Bredenhann.

(READ MORE: Oil prices fall after last week's surge, strike action)

New players with strong balance sheets may also find potential opportunities to enter the African market at a low cost.

“A number of issues must, therefore, be addressed. This can be done by starting with an organisational stress test including strategic, financial, operational and commercial elements. In situations of low commodity prices, many companies respond with knee-jerk cost reduction programmes,” concluded Bredenhann.

“This could be more effective if they took the time to understand what specific costs are, how they compare to peers and what reductions are truly possible. Cost reduction programmes need to be targeted and realistic.” 

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