Sonangol diversifies across the energy chainSeptember 9, 2020
Sebastião Gaspar Martins, chairman of Sonangol, talks to The Energy Year about how the company is navigating the Covid-19 and oil price dual crisis and its efforts to diversify its portfolio and optimise offshore production. State-owned Sonangol is responsible for activities spanning the energy value chain in Angola.
How has Sonangol managed to adjust its activities since the dual crisis emerged?
The coronavirus pandemic and the oil price crash hit the global energy industry like a perfect storm. Nobody was expecting it. It has affected not only Angola but the global economy as a whole and Sonangol has not been immune to the impact of the crisis.
We have faced these troublesome times by implementing a strategy that has allowed us to continue our business operations while making sure that we were keeping all our employees safe in a remote work environment. We have managed to maintain business continuity across the different activities of our value chain and we have kept all of our critical projects underway.
We have been forced to make a revision of our budget to ensure that we could move forward with the projects that we consider to be critical, not only in upstream but also in downstream. Additionally, thanks to our regeneration programme we have managed to build up a level of resilience that enables Sonangol to cope with the challenges stemming from the current environment as well as those presented by future pandemics and other unforeseen industry events.
How has the company managed to leverage digitalisation to meet the challenges of the crisis?
When it comes to embracing and promoting digitalisation, we have taken action very seriously. We have been trying to eliminate paper from our business and cyber security has been fundamental in making sure that the change from paper to digital was carried out in a safe way. We have not finished this process yet; we are moving towards using electronic signatures and are working to keep the company safe and secure against any kind of cyber attacks.
In the downstream, Sonangol is pretty much the only entity importing and distributing refined petroleum products in the country. While digitalisation can positively influence various business activities, we have to be able to make sure that our transportation and distribution network is not exposed to potential failures or setbacks while we are going through this transformation. I believe we have made great progress, and even though we keep facing difficulties we have been able to identify the right solutions.
We are also in contact with different companies that are at the forefront of digitalisation and are developing new technologies in Europe and the US. We feel that leveraging digitalisation and tailored technologies will be essential for the future of upstream development in Angola and the entire world. The information that we can get access to through digitalisation and better data management is going to be critical for our activity. Any entity that is willing to work with us in this area is more than welcome to enter Angola.
What is Sonangol doing to further diversify its upstream portfolio amid the global downturn?
At the end of 2019, we signed a sales and purchase agreement with Total for offshore blocks 20 and 21 in the Kwanza Basin. These two blocks will also be essential in the promotion and opening of new opportunities in and beyond the Kwanza Basin in ultra-deep waters. We have a great relationship with Total and we are confident that the IOC’s recognised offshore expertise will help to quickly unlock the discovered resources in these blocks in order to continue sustaining the country’s production.
Together with Total, we are currently looking at setting up a joint company that will be tasked with pursuing similar opportunities. We are also excited by the prospect of exploration opportunities onshore, not only for oil but also for gas, and we hope to see many local and international companies participate in future developments there.
It is great to see new companies placing their trust in Angola’s upstream sector. Our recently finalised [August 2020] deal under which Qatar Petroleum entered into a farm-in agreement with us and Total on the ultra-deepwater Block 48 is a clear testament to the attractive investment opportunities present in the country’s energy industry in spite of the current global situation.
So far, we have been able to demonstrate openness and stability in our contractual activities and managed to present terms that provide assurances to investors. In addition to the Kwanza Basin, the Namibe and Congo basins offer a great deal of investment opportunities for those interested in both offshore and onshore exploration works.
Given the low oil prices, what steps has Sonangol taken to reduce and optimise production costs in the country’s offshore blocks?
Production costs are essential in deciding whether a project moves forward or not. Deep and ultra-deep waters come with very high production costs and we know that can jeopardise upstream activity in the current industry climate. We also know that one of the ways to overcome the high costs associated with the development of offshore fields is by utilising new technologies and ensuring high rates of production.
On the other hand, we currently have some marginal fields (onshore and offshore) where fiscal terms can be improved in such a way that the projects can be viable even with high production costs. When we say high production costs, we are looking at no more than USD 20-25 per barrel, which is still fairly good. If prices stabilise around USD 50-55 per barrel by year’s end, we might be well within the range to be able to secure gains from the development of these marginal fields.
What progress has Sonangol’s divestment programme made in the past couple of months and how crucial is it for the NOC’s plan to achieve sustainable cost optimisation?
The divestment process started in 2018 and is well underway. It is within our strategic objective to divest the company’s non-core assets and keep focusing on the assets that are part of Sonangol’s core business. Under the restructuring programme, we will be divesting 72 companies, 20 of which the government is directly involved with. We have already opened the virtual data room and the bidding process for more than 50 entities.
We know that we need to do more to promote the programme and make sure the entire world is aware of the opportunities it brings to the market. We are making great progress every day.
There are other issues related to these assets such as preferential rights of the companies we are in partnership with. Most of these partner companies have expressed their interest in getting our equity on those divested assets, so under the bidding process we give the preferential right to the partner company to be able to top the best offer that comes from any investor. This will help to make the process transparent and ensure the best possible price.
The restructuring programme will strengthen our liquidity as the funds collected will be used for reinvestment into the core areas of our activity, which include oil, gas and renewables.
How important is it to divest the first assets as early as possible? How may the current environment affect buyers’ appetite?
It is extremely important, especially in the current environment of low oil prices, to be able to quickly divest our first assets in non-core areas and become more efficient in exploration and production. We cannot continue being diverted to areas that might take our focus away from what’s more important than ever: production.
People may say this is not the ideal time to sell assets. However, we have seen in the past that some investors like to go shopping despite the difficulties presented by the market. So, it may just be the right time for many companies to take advantage of investment opportunities now while the oil price is still relatively low, instead of waiting for the market and activity to recover again. Once that happens, the price of these assets will increase too.
What do you expect from Sonangol’s downstream activity in the coming years?
We are looking at aggressively expanding our presence in Africa. The Democratic Republic of the Congo, Zambia and Namibia are markets that offer plenty of opportunities downstream. We see the demand for refined petroleum products going up in our region and all neighbouring countries.
The joint venture we signed with Total in 2018 to develop retail operations in Angola will enhance our capabilities and skills in the distribution and commercialisation of downstream products. Total is one of the best partners we could get to establish ourselves in the retail sector as it is one of Africa’s leading players when it comes to refined petroleum products.
How is Sonangol maximising local content across its activities given the ongoing disruptions to global supply chains?
The current period should be looked at as a window of opportunity to boost local content. Given the current difficulties around moving skilled people and products in our industry, it is obvious that local supply chains must be used and prioritised. We have to develop our own internal skills and use some of our already established domestic supply chains. We must develop new scopes for managing and attending to the future demand in our sector. It is a great opportunity for locals to upgrade themselves to a level where they can be of service to help national players and IOCs present in the country.
The government is working very hard to develop the country’s new law for local content and all the stakeholders – including the education system, entrepreneurs, the national oil company and IOCs – are working hand in hand towards boosting local capacity and capabilities.
We are currently developing a marginal field project and our goal is to have it fully executed in Angola by an Angolan workforce. This does not mean that the project will be of 100% local content, but it is making steady progress towards that goal.
In fact, we are also looking at setting up a very high standard of localisation at our refinery project in Cabinda, which will have a processing capacity of 60,000 bpd for production of diesel, gasoline, fuel oil and other products. Phase 1 of the project is expected to start operating with 30,000 bpd of processing capacity in early 2022.
How is Sonangol planning to pursue the energy transition?
Oil and gas will still be our main focus but we are moving towards new energy sources and plan on gradually incorporating renewables in our activity. That is why we have established partnerships with entities such as Eni, with which we signed an agreement in 2019 to build a 50-MW solar photovoltaic plant in the province of Namibe. This project is part of the nation’s plan to develop 600 MW of solar by 2022.
Additionally, we entered into an agreement with Total to develop another solar plant in Lubango. We are looking at developing cleaner energy sources and we are aiming at producing more gas for local energy consumption and for other areas such as petrochemicals. So, we are following the same trend as most IOCs and NOCs but without losing our focus on oil and gas. It’s crucial that we develop our presence in the area of cleaner energy sources step by step and via partnerships with well-established players globally.
We feel that we are finally moving into the implementation phase of our restructuring process. By the end of 2021, Sonangol will be a very different company that is fully focused on the entire oil and gas and energy value chain. This is where the government wants us to be. We want to be business oriented; we want to be involved with production, distribution, refining and storage; and we want to establish productive collaborations with those players that have proven to be leaders in these areas.