An overview over the most relevant development areas or major crises related to the O&G upstream cannot overlook the dynamics related to African countries facing the Mediterranean Sea. It is known the pivotal role that Algeria has had over the last year and that it still has in facing the supply crisis originated by the shortage of Russian gas. Likewise, Egypt's capacities as a strategic actor are well known due to its vast resource endowment and the proximity to Cyprus and Israel. We have spoken about these countries, but also about the developments related to Sub-Saharan gas producers and new market players, with Carole Nakhle, Chief Executive Officer at Crystol Energy.
The Russo-Ukrainian war redefined priorities, placing energy security at the top of the states' agenda. Having to do without Russian gas, European countries in particular have taken steps to seek alternative resources. New investments in upstream O&G have been made, new fields discovered etc. However, this fossil fuel development policy is increasingly colliding with strict climate policies. Western oil supermajors are being buffeted by opposing currents. Some shareholders — and politicians — want them to pump more; others, along with climate activists, want to accelerate their shift to clean energy. What do you think about it?
Energy security – the availability of affordable, reliable and sustainable supplies of energy – has always had a strategic importance particularly in countries which depend on energy imports to meet domestic needs. Put simply, without energy, economies don’t function.
However, the priority that is given to energy security varies with the perception of abundance or scarcity of supplies and subsequently prices. In periods of abundant energy supplies and lower energy prices, energy security is overshadowed by other priorities; in recent years the main priority has been climate change. However, during periods of perceived scarce and/or threatened energy supplies which typically translate into higher prices, it regains its top spot in government priorities. Russia’s invasion of Ukraine has signigicantly contributed to the latter and energy security has occupied central stage since. That happened on top of rising energy prices, which were climbing post covid and contributed to notable inflationary pressure in major economies around the world. This has pushed many governments to place greater emphasis on the ‘affordability’ dimension of energy security, as they feared public discontent especially that high energy prices are largely felt by the lower income household and subsequently caused protests in some countries, including in Europe. Under such circumstances, in Europe in particular, governments have called for more production of oil and gas and the strong ‘anti’ hydrocarbons sentiment that was increasingly popular before the crisis has softened significantly.
But that alone is not enough to spur investment in a sector where projects are by their own nature very long term. Just as consumers want security of supply, producers also want security of demand. If they cannot guarantee that market for many years to come, the investment today simply doesn’t make sense for them. So asking companies to invest significant capital to increase supplies but at the same time say that you want to kill the demand for fossil fuels say by banning diesel/gasoline cars, is unlikely to go down well with investors. In this respect, the EU-Norway energy cooperation announced in June 2022 is a sensible example where the emphasis on the long term market for oil and gas is striking. The published agreement states “Recognizing that Norway has significant remaining oil and gas resources and can, through continued exploration, new discoveries and field developments, continue to be a large supplier to Europe also in the longer term beyond 2030... The EU supports Norway’s continued exploration and investments to bring oil and gas to the European market.”
The recent energy crisis has therefore been a wake up call; it has brought a greater degree of realism to what became a deeply polarised debate. It did not cause an abandonment of green policies; on the contrary the green agenda has received greater push, but it has also significantly extended the shelf life of oil and gas.
Algeria has strengthened its position as Europe's second largest gas supplier overtaking Russia, whose imports have dropped significantly in recent months. According to Sonatrach, it will invest 30 billion dollars to improve natural gas production. What do you think about the role of Algeria in the global energy markets? Will Algeria be able to maintain the current production rate in the coming years or even increase its exports, as repeatedly stated by Sonatrach's CEO Hakkar.
Almost all gas exporters ‘benefited’ from the energy crisis in Europe, partly through record high gas prices and partly because they gained market share at the expense of Russia in an important large market that is Europe. Algeria is one of those beneficiaries, especially that it is an established gas supplier to the continent which absorbs most of its exports. In that respect, it was one of the first countries the EU considered in its quest for alternative suppliers to Russian gas. Algeria has the export infrastructure in place, both in the form of pipelines and LNG.
While there is no shortage of gas resources in the country (both conventional and unconventional), Algeria has its own challenges that can limit the notable expansion of its exports. To increase the latter, first production has to increase, and for production to increase, more investment is needed. But investment will not come simply because a country has resources. Above ground factors particularly government policies including the fiscal regime play an important role. Algeria has struggled to attract international capital that is commensurate with its resources because of unattractive policies and regulations. Second, assuming that production increases, if domestic demand maintains its growth momentum, it can easily absorb the addition increase in production leaving exports almost unchanged. The growth in domestic demand is another challenge Algeria has to tackle in order to capitalize on its gas reserves in international markets.
The same trend visible in Algeria goes for Egypt. In 2022, Egypt’s oil and gas exports saw some progress. Hence, the exported gas in 2022 was worth $8.4 billion, compared to $3.5 billion worth of gas exports in 2021, a 171% increase year-on-year (YoY). What is the outlook for Egypt’s energy sector? How could you foresee Egypt's increasing its exports to Europe in the foreseeable future?
To a certain extent Egypt is in a similar situation to Algeria, but its export market is more diversified. Like Algeria, Egypt also wants to expand its footprint in international gas markets particularly Europe but for this to happen, the country needs to expand its production AND tame its local demand.
Egypt’s gas reserves are smaller than those of Algeria, however the country benefits from a more colourful corporate landscape and to a certain degree better relationship between the government and international investors (and more lenient fiscal terms). Furthermore, even if domestic production does not expand significantly, Egypt is better positioned to benefit from discoveries in neighbouring countries which lack the export facilities. For years, Egypt has been pursuing its ambition to become a regional gas hub, but such an ambition is taking time to materialize because the region is politically fragmented.
ENI has recently completed an FLNG project in Mozambique and launched the production of Congo FLNG. The company is advancing other similar projects in sub-Saharan Africa, while peers like Total are having difficulties in resuming onshore projects due to various issues, ranging from surging inflation and chronic political instability. Do you think that FLNG projects have a better chance to be realised in sub-Saharan Africa? Here, what are the prospects for major O&G projects?
The FLNG option has worked better in Mozambique unlike onshore terminals which are more vulnerable to insurgency and terrorist attacks – a major problem that pushed Total Energies, for instance, to declare force majeure and suspend operations. FLNG also allows access to offshore gas fields that would have otherwise been left stranded because of lack of infrastructure. So the technology has many features that makes it attractive to gas rich countries in Sub-Saharan Africa where gas exploration and exploitation is not as developed as that of oil.
Both FLNG and building onshore terminals are capital intensive and take time to construct. While FLNG is a more flexible option, onshore terminals usually have a bigger capacity (Total’s onshore terminal in Mozambique has almost four times the capacity of the FLNG) and subsequently benefit from economies of scale. The two technologies should not be seen as competing; each is more suitable for specific conditions. In this respect, the way forward is a combination of both.
