Number of onshore blocks offered in the July 2015 bidding round10
Number of pre-qualified operators37
Head above water in AngolaFebruary 17, 2016
The current downturn in oil prices is affecting the Angolan oil and gas industry harder than other markets. Cost-intensive deep and ultra-deep offshore operations have been driving the country’s hydrocarbons production. The local industry must now reconfigure itself in order to maintain production levels. Paulino Jerónimo, executive administrator of the state-owned Sonangol EP, gives TOGY an overview.
How is the Angolan oil and gas industry responding to the current slump in oil prices?
The hydrocarbons industry as a whole has undergone restructuring to weather the oil price crisis. The main objective of restructuring has been to reduce exploration and production costs. A significant part of the current hydrocarbons activities will need to be re-evaluated and adapted to the new economic scenario.
Resuming exploration and production contracts signed when the price of oil was above $100 per barrel is challenging. In the first three quarters of 2015, the price of a barrel struggled to reach $60, and a significant hike in the coming months is not likely.
Major offshore projects such as Total’s Kaombo on Block 32, which is characterised by water depths of 1,400-1,950 metres, have a break-even price level of $80 per barrel. Right now, the global oil prices are far below that.
Operators need to reconfigure their operational outlook to reduce costs. The efforts in this direction have been exemplary so far. The industry has managed to increase production from 1.7 million barrels of oil per day (bopd) in the third quarter of 2014, when the oil crisis began, to an average of 1.83 million bopd in the first three quarters of 2015.
However, the industry will not overcome the current downturn anytime soon. Maintaining a satisfactory production level requires a concerted effort. Industry actors should think outside the box, and in this particular case, the block. Since early 2015, Sonangol has led the way towards cross-block collaboration. International oil companies might benefit from sharing data and assets with each other.
Different companies can use vessels, helicopters and even floating production, storage and offloading units on different blocks, reducing operational costs throughout the Angolan offshore sector. Players need to respond promptly, as the sector’s production volume will face important challenges due to falling oil prices.
How would a decrease in oil production affect the Angolan economy?
The levels of production for hydrocarbons have increased since 2014. The longstanding profitability of offshore activities has made this favourable contingency possible, helping the sector recover the costs of operations from the past six months. Covering future operational and capital expenditures will be the real challenge. Lower oil tax revenues are expected to affect the Angolan economy severely.
The most common form of oil and gas contract in Angola is the production-sharing agreement. The law stipulates that 50 percent of profit oil be paid to the government as the Petroleum Income Tax. Profit oil is the difference between total oil produced and oil sold to cover costs, or cost oil.
In the Angolan oil and gas industry, cost oil reaches 50 percent per barrel and is used to cover exploration, development, production and administrative service expenses. Profit oil is usually divided between the Angolan government, Sonangol and oil and gas contractors.
When the price of oil was between $100 and $110 per barrel, the industry was able to use only part of the cost oil to recover outlays from exploration and production activities. The market offered an attractive profitability margin, which drove the deepwater operations boom.
Nowadays the situation is different. With prices less than $45-50 per barrel, cost oil can no longer cover production expenses. This leads companies to defer costs to the following semester.
The market will probably feel the impact of the crisis most heavily in the beginning of 2016. Less profit oil will also lead to lower tax revenues for the national government, which in turn will slow down hydrocarbons activities and other critical infrastructural developments.
How is Sonangol planning on sustaining the country’s oil and gas production?
Angolan oil and gas reserves still offer many opportunities for the industry to grow. Major projects such as Chevron’s $5.6-billion Mafumeira Sul in Block 0 and Total’s $16-billion ultra-deep offshore Kaombo in Block 32 are important for the future of oil and gas production in Angola. Moreover, onshore formations are mostly unexplored and may provide a much-needed contribution to the industry.
Compared with deepwater reserves, the capital and operational expenditures of onshore formations are less demanding and offer rapid production times. In July 2015, Sonangol launched onshore exploration rounds for 10 blocks. The blocks being offered are KON 3, 5, 6, 7, 8, 9 and 17 in the onshore Kwanza Basin, and CON 1, 5 and 6 in the onshore Baixo Congo Basin. These blocks are estimated to hold an average of 700,000 barrels of oil each.
Sonangol has approved the pre-qualification of 85 companies and consortiums. A total of 48 companies are classified as non-operators, while 37 pre-qualified operators have submitted their proposals on October 1, 2015.
Of these, 62 are Angolan, indicating that the onshore sector provides local entrepreneurs an opportunity to grow. Among the international oil companies involved are state-owned Sonangol, Sinopec International, Italian operator Eni, Chevron, Colombian producer Ecopetrol and Portugal’s Galp Energia.
How can international oil and gas companies respond to lower prices? What changes need to be made in market dynamics?
The current downturn in oil prices might require international oil companies to make contractual changes in the production-sharing agreements they entered when the price of oil per barrel was above $100.
Deepwater sub-salt reserves could be a game changer for the Angola hydrocarbons industry. Recent exploration and production activities have fallen short of satisfying the initial enthusiasm. However, results below expectations should not discourage the industry. Pre-salt formations present uncommon challenges.
Geologic modelling will play a crucial role for the success of exploratory operations. Operators can study and predict the behaviour of the rocks under different hydrocarbons recovery scenarios using geological models. This practice can also identify the potential migration of hydrocarbons, reducing the risk of costly dry wells.
What developments do you see taking place with natural gas and the downstream sector in the coming months?
The $10-billion Angola LNG project creates hope for the country’s future in non-associated gas processing. With an expected production capacity of 5.2 million tonnes per year, the plant will be the major centre for non-associated natural gas production in the northern offshore blocks 0, 1, 2, 14, 15, 17 and 18.
Since April 2014, the plant has been undergoing repairs due to a pipeline failure. The facility is expected to reach 75 percent of its full capacity by the first quarter of 2016.
The plant’s products will be used for the country’s electricity generation as well as fertiliser production. The downstream sector is developing at a significant pace in order to reduce Angola’s oil imports, which account for 80 percent of the country’s consumption.
Two refineries are under construction. The Soyo refinery, located in the northern province of Zaire, will have a processing capacity of 110,000 bopd and will start operations in 2017. The Lobito refinery in the province of Benguela has an estimated capacity of 200,000 bopd and is scheduled for completion in 2016.
How can local talent support the growth of the Angolan oil and gas industry?
The population of skilled local personnel has increased significantly in the last decade. The government’s Angolanisation policy has allowed the local labour market to provide more specialised workers to national and international oil companies.
Education has also improved accordingly. We can now rely on several institutions such as the National Institute of Petroleum and the Integrated Centre for Technological Training to provide younger generations with the necessary skills to take advantage of professional opportunities in the hydrocarbons market.
International oil companies have been crucial in raising the bar for the entire industry. They also train job candidates who are graduates of universities and technical institutes.
Angolans are gradually rising to management positions in the oil and gas industry. This is a welcome trend that must continue indefinitely for the market to achieve full maturity.
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