When oil was found in Uganda in 2006, president Yoweri Museveni held a national prayer ceremony in thanks, and said the discovery “will accelerate our progression to middle-income country status”. But discoverer Tullow just sold its assets in the country and oil is still to flow, fourteen years later. With oil prices low and clouds over the future of petroleum darkening, a growing number of countries confront the dilemma of attracting investment.
When hydrocarbon prices were high, demand buoyant and resources seemingly scarce, roughly between 2003 and 2014, competition for new assets was fierce and governments could set their own terms. Hydrocarbon discoveries seemed like a path to easy wealth, as major finds were made in Uganda, Brazil’s deepwater “pre-salt”, Iraq’s Kurdistan region, Ghana, Israel, the Falkland Islands, Mozambique and Tanzania, Cyprus, Kenya, Senegal, and Guyana and Mauritania.
But oil prices have been depressed since late 2014, even before the pandemic and despite the Opec+ group restraining, since 2016, the production of its adherents, who account for almost 60 per cent of world crude production and nearly 80 per cent of reserves.
At a recent conference, Gerald Kepes, a consultant, said out of the five hundred geological basins worldwide considered prospective for oil and gas, about two hundred would historically have seen at leastone exploration well drilled each year. But recently, this has dropped to just a hundred, with only fifty to sixty of the basins – mostly the prolific, low-cost ones in the Middle East, Russia, Brazil, West Africa and the US – seeing significant ongoing activity.
Outside the major oil-exporting states, appetite for investment in oil and gas has dwindled because of poor returns and concerns over the sector’s sustainability. Energy companies now account for less than 2 per cent of the S&P 500 share index. Since 2014, ExxonMobil’s share price is down 57 per cent and its market capitalisation is $185 billion; in the same period, Tesla is up 21 times and it’s valued at $578bn.
BP forecasts the all-time peak in oil demand may already be behind us. Commitments by the EU, Japan, South Korea, China and the new administration in the US to reach net-zero carbon emissions between 2050 and 2060 promise a future of lower hydrocarbon consumption.
States with significant undeveloped hydrocarbon resources thus face a stark choice. They can try to move quickly to start or raise output, while there is still a market, even if prices today appear relatively low. Or, they can take their time in development, hoping for optimum conditions, with the risk that their fields are never developed. Otherwise, they could simply abandon plans to extract fossil fuels, and instead bet on low-carbon energy sources and key minerals for the new economy, such as lithium.
What they should not do is to accumulate debt, plan grandiose public works and raise their people’s expectations, in the hope of major hydrocarbon revenues just round the corner, without the policies to get there.
From the thirteen aforementioned jurisdictions, only five have begun production from their new resources. Yet governments often appear relaxed about the slow pace of progress, with lengthy wrangling over issues such as pipeline routes and taxes on the transfer of assets.
“I am not worried about the delay…There is no short cut for sustainable development of a resource meant to create lasting value for Ugandans”, Mr Museveni told a conference this October. Progress on exporting liquefied natural gas from large offshore fields has stalled over discussions related to taxes, in contrast to neighbouring Mozambique.
This applies not just to new exploration frontiers, but also to established producers with large reserves, such as Mexico, Venezuela, Algeria and Iraq. In September, Mexican president Andres Manuel Lopez Obrador said he might reverse his country’s energy liberalisation next year, despite new finds by several international oil firms. They have been frustrated by attempts by state oil company Pemex to muscle in on their fields.
Algeria has long been famous for stifling bureaucracy, with straightforward projects delayed for many years waiting for approvals. New energy minister Abdelmadjid Attar did recently reassure the Middle East Economic Survey of a more constructive approach.
Meanwhile, Iraq’s ambitious plans to up capacity to 7 million barrels per day from about 4.8 million depend on improving contracts that offer international companies just $1 or $2 per barrel produced, ensuring payments are made on time, and organising the provision of treated water for field operations and offtake to avoid the flaring of unwanted gas.
New producers often confront the desire to maximise government revenues while not scaring off investors. After a five-month dispute following elections in March, Guyana finally confirmed Mohamed Irfan Ali as its new president; he had promised to renegotiate contracts with oil companies that were seen as overly favourable to them.
It is not just about the level of production share and tax that governments expect. Investment conditions have to be attractive. That means a speedy and efficient bureaucracy, fair and transparent legal system, adequate supporting infrastructure, and constructive relations with local communities and non-governmental organisations.
Petroleum-rich, often low-income, countries will increasingly confront this conundrum as market and climate challenges grow. One solution may be to pair new oil and gas projects with support in low-carbon development strategies. Both governments and their investors need to move beyond zero-sum wrangling to new thinking about resource wealth.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis