Why it isn’t easy to finalise oil and gas investment deals

I have come to learn and appreciate that with oil and gas projects it is never a done deal until a Final Investment Decision (FID) is penned and ink dried. Prior to that it can be a lengthy and uncertain journey. That is why countries that discover their oil should reserve their celebrations until oil is either exported or locally commercialised. It is a case of not counting the chickens before they are hatched.

Take the case of Uganda which discovered crude oil thirteen years ago in 2006 and which to date no one can say with certainty when first oil will either be exported or refined locally. Or Kenya which discovered its crude oil in 2012 and which no investor has committed a date when it can export the first oil via Lamu. And I am here not talking about early oil which is a miniature and temporary project.

Tanzania which discovered its natural gas in 2004 has managed to commercialise the gas locally with electricity production, but a date for the first LNG (Liquefied Natural Gas) export is still uncertain. For the three regional neighbors, FIDs are conditional on something else being done or decided, mostly by the host governments who are not always renowned for speed in decision making.

Ghana on the other hand discovered crude oil in 2008 and was able to make its first oil export within two years in 2010, and since then production and exports have soared with natural gas now planned for local power production. Within ten years, oil and gas have become an integral part of Ghana’s economy.

One factor that counts strongly for Ghana is that their resources are offshore (in the ocean); away from onshore stakeholder community politics and activism the way we know it in Kenya. Offshore production has no land issues to contend with, and resource sharing debate is more national than local. Further there is no oil export pipeline required. A single multi-function mechanical unit out in the ocean will dig up the oil, store it, and load tankers for export on the spot...

Oil and gas is a cyclic global commodity phenomenon with about five year cycles. When global oil supply is plentiful and surplus, as it is now, prices come down and investment economics become less appealing, with investors becoming more selective on which projects around the world they are going to commit their “risk capital”. Further, the vast amount of US shale oil activity and potential and its relatively low unit costs have effectively prolonged the current low price cycle, and diverted investment attention away from other parts of the world.

An oil and gas project will normally have several participating investors, all with varying investment priorities, liquidity, and break-even references for investments. Yet the final decisions to commit investments have to be joint. The uncertain investors will be seeking to farm out their participation and this usually delays investments. If it takes too long to get projects producing, they become stranded assets.

During this cycle of surplus oil and low prices, multinationals are divesting from marginal and stranded assets. Take the case of Exxon which is consolidating its business by selling out marginal assets (like in Chad and Nigeria) to concentrate on prolific opportunities with large volumes, lower unit costs, and fewer investment risks. Exxon has chosen three priority areas, USA shale, Guyana offshore oil, and Mozambique natural gas...

Of course we have the so called state oil companies (Chinese and Russian) which will ignore the economics of the day and commit to develop oil and gas resources in partnerships with governments of developing countries. In such cases investor interests go beyond oil and gas and could include other strategic minerals, and even geopolitical alliances

Reduced investments in the current low price cycle will eventually lead to the next cycle of low supply and high prices. This is when marginal areas will become attractive, which is where Kenya was in 2012 when it discovered oil. Today, we should not blame investors for delayed investment decisions for indeed global investment climate may not be that conducive.