OIL AND GAS
A global perspective
With 65 per cent of the world's oil reserves located in the Middle East, it is immediately apparent that global distribution of oil is not equitable. North America, the Far East and Western Europe consume approximately 77 per cent of the world's oil, yet collectively they only produce 44 per cent. In these areas, 100 years is an unrealistically long period. The Middle East, in contrast, although containing 65 per cent of the world's oil reserves, only produces about 30 per cent, and consumes about 6 per cent of the world's supply.
This disparity highlights the increasing strategic significance of two global organisations, the Organization of Petroleum Exporting Countries (OPEC) and the Organisation of Economic Cooperation and Development (OECD).
Increasing concerns about diminishing energy reserves and environmental hazards are applying pressure on the gas industry to utilise a higher percentage of gas. As a result, legislation has been introduced to control operators, and many countries are increasing their use of gas primarily for domestic consumption in order to decrease the amount of oil imported, or to increase the amount of oil that can be exported. Growing utilisation has improved infrastructure and gas is becoming a primary focus for exploration in many areas.
Countries tend to consume the gas that they produce, with the exception of Western Europe, which is one of the largest consumers, and Eastern Europe and Africa, which currently produce more than they consume.
Oil and gas on the African continent
Africa is a vast continent with many countries with different levels of development and with significant variations in economic structure. Crude oil and its derivatives accounted for 57 pr cent of Africa's exports in 2000 - boosted by the high prices recorded during that year.
With the growing political uncertainty in the Middle East, the United States is turning more and more to Africa for oil. In 2000, Africa's crude oil production surpassed 4 million barrels a day - more than Iran, Venezuela or Mexico. Currently, 16 per cent of US oil imports come from sub-Saharan Africa - almost as much as from Saudi Arabia. It is predicted that by 2015 this will have reached 25 per cent, with the vast majority coming from a stretch of coastline between Nigeria and Angola (the Gulf of Guinea).
Nigeria, along with Angola, has long been an oil giant; however countries that many people would have trouble finding on a map - Equatorial Guinea, Gabon, and the Congo Republic - each produce hundreds of thousands of barrels every day. All along the Atlantic coast, from the western Sahara to South Africa, exploration companies are boasting significant new offshore finds. Recently Chinese President Hu Jintao visited Gabon and signed key bilaterial trade accords on oil exploration. Runaway economic growth in China was responsible for a third of the world's growth in oil demand last year. Despite recent declines in production Gabon is the third-largest producer of oil in sub-Saharan Africa.
The upstream oil industry is key to the continent of Africa, with proved reserves of 75.4 billion barrels (7% of the world's total). In 1998 it produced 7.8 million barrels per day (381 million tons/year) of over 40 types of crude oil. Five countries dominate Africa's upstream oil production: Nigeria; Libya; Algeria; Egypt; and Angola. Together they account for 85 per cent of the continent's oil production.
Other oil-producing countries are Gabon, Congo, Cameroon, Tunisia, Equatorial Guinea, the Democratic Republic of the Congo, and Cote d'Ivoire. Exploration is taking place in a number of other countries that aim to increase their output or become first-time producers. Included in this list are Chad, Sudan, Namibia, South Africa and Madagascar, while Mozambique and Tanzania are potential gas producers.
The downstream oil industry in Africa comprises some 44 refineries in 25 countries, with a total distillation capacity of 3,000 thousand barrels per day - this represents 4 per cent of the world total. The major refining centres are: Egypt; Algeria; South Africa; Nigeria; Libya; Morocco; and Kenya.
South Africa also produces synfuels. In addition to fuels, Africa has an active lubricants industry that encompasses base oil refining, lubricant blend, distribution and marketing.
All the major international oil companies have a presence in Africa, but there are also local African oil companies. The World Bank and other bodies have undertaken studies and produced reports on the African oil industry. In recent years, there have been several conferences devoted to the African oil industry in both the upstream and downstream sectors. In September 2005 Africa will host the World Petroleum Congress for the first time. This will be held in Johannesburg, South Africa.
The gas industry is set for a roller-coaster growth ride with gas moving towards becoming a global industry. The geographical dislocation of reserves to market is being partly mitigated by new cost-effective ways of linking stranded fields and customers. At the same time, liberalisation of markets is heralding new choice for customers, more dynamic, liquid gas trading conditions for gas companies, and a changing balance of risk and reward for all players. The dominant pipeline market in gas will always be regional, but companies' strategic sights will increasingly be global.
Africa's proven gas reserves have grown strongly over the past 20 years, and in 1995 totalled about 6.3 trillion cubic metres with potential reserves estimated at 17.65 trillion cubic metres in 2010. Fifty per cent of the gas in Africa is non-associated gas (ie gas produced from gas fields which do not produce any crude oil).
Of the proven gas reserves in Africa, Nigeria has the largest, with the balance concentrated in a few other countries - Algeria, Egypt, Libya, Angola, Mozambique, Namibia, and Tanzania. In Sub-Saharan Africa, gas reserves could possibly exceed oil reserves.
Gas in sub-Saharan Africa
Total natural gas reserves (proven and probable) are estimated at 4,765 billion cubic metres, and present recoverable reserves are estimated at 870 billion cubic metres. The most notable reserves are concentrated in Cabinda and environs (Angola), the Pande, Temane and other fields in Mozambique, and the Kudu fields in Namibia, where initial drilling results by the Shell-Engen-Texaco consortium have indicated that this field may have adequate reserves to meet the needs of the entire Southern Africa region. By the end of this year the Ibhubesi Gas Group will have spent $110 million on exploring the Ibhubesi gasfield which is some 280km northwest of Saldanha Bay. If the exploration proves successful, not only will a gas- ired electricity generating station be supplied, and gas feedstock to PetroSA's manufacturing plant supplemented, but this development will spur industrial growth and development in the Western and Southern Cape regions.
Gas in North Africa
In North Africa, Egypt's proven gas reserves are estimated at 0.43 tcm. Development, according to Egypt's Gas Master Plan, centre on the Nile Delta, with the possibility of an LNG plant. Libya has an estimated 1.3 tcm of natural gas, while in Tunisia, gas development is focused on the Miskar Field, 125 kilometres offshore, with a 23 billion cubic metres of recoverable reserves, representing British Gas's largest gas field development project outside the UK.
Total gas production in Africa is small in relation to proven reserves - about 80 billion cubic meters per annum, with Algeria accounting for two-thirds of the total production. Most of this is exported to Europe, Africa's traditional market for gas. Exploitation of gas reserves in other countries is hampered by a lack of local or regional markets and long distances from the international gas markets. Most of the gas produced in sub-Saharan Africa is flared, and about 11 per cent used for field operations. Inland use of gas is concentrated in only four countries - Nigeria, South Africa, Angola and Gabon.
There is also a proposal to build a 1,500 km pipeline from North Africa to Southern Europe. This pipeline could transport gas from Egypt, Libya, Tunisia and Algeria via Morocco and through the existing pipeline into Spain. Africa would then be a significant exporter of gas into Europe.
There are currently several projects under consideration to exploit Africa's gas reserves, the most notable of which are:
Accountin standards for the oil and gas industries
The era of cohesive, transparent, and transnational accounting standards is drawing near. The new global standards set out in the International Financial Reporting Standards (IFRS), driven by the twin dictates of transparency and comparability, will represent a vital passport to the capital markets for the companies who adopt them.
The embracing of these global standards will have profound implications, even as their implementation poses specific challenges. These challenges will go far beyond mere number-crunching: they will extend deep into the ways companies conduct and shape their accounting and reporting practices-and communicate with the outside world. Almost no part of these organisations will remain untouched.
The oil and gas industry-massive in scale and greatly dependent on global capital markets-faces special challenges. US Generally Accepted Accounting Practice (GAAP), with its well-developed range of specific reporting rules for oil and gas companies, has to date provided a common denominator for the sector. But it remains to be seen how well these precedents will sit with the emerging approach of the IASB (the International Accounting Standards Board), which is drafting the IFRS. The industry currently awaits the publication of the Industry-specific rules now under development.
Notwithstanding the common reliance on US GAAP principles, the accounting and disclosure practices of oil and gas companies do vary significantly under divergent national standards. Under IFRS, however, all financial information will be directly comparable between companies in countries that have elected to comply. Such consistency will be pivotal: it is expected to improve the transparency of reporting and make it easier for potential and actual investors to compare the performance of companies across different jurisdictions.
In the short run, however, the switch to IFRS is likely to trigger large swings in reported profits, reflecting fluctuations in derivatives values. Indeed, oil and gas companies often enter into derivative transactions, such as futures or forward contracts, to hedge cash flows against volatile commodity prices or to lock in a margin for the sale of commodities. Some companies will even find they have embedded derivatives they were previously unaware of. The IFRS mandates that all derivatives be hereinafter recorded on the balance sheet at fair value. This could present new challenges for the sector in the form of income volatility-in turn triggering swings in reported profits.
If oil and gas companies do not focus carefully on external communications, a lack of awareness and understanding across the broader financial community about these changes could create unnecessary turbulence in the form of investor concern and share-price volatility. Without a doubt, the adoption of IFRS will prompt more of a focus on investor relations and on reporting non-financial performance indicators along with the financial ones.
Converting to IFRS will be a tough proposition. It will require sound judgement on how the new standards can fit within this industry's unique operational and market environment. Decisions will need to be guided by, and implemented through, a rigorous change management process. Companies will have to collect new information, modify current reporting systems and, in some cases, install new ones. The number of data points required for accounting controls will increase. The alignment of management information systems with external reporting systems will be critical, not least so that all key people have a full understanding of what the new figures mean. And, last but not least, the move to IFRS may also have a fundamental impact on remuneration and pension schemes.
The move to IFRS will carry consequences, for many parties, far beyond what can be predicted at this point. Other countries will join the list, accounting standards will continue to converge, markets will adjust, entire industries will undoubtedly be transformed.
That's the big picture. In the meantime, there is abundant work to do. Both regulatory standard-setters and company CFOs are working overtime to determine how to make both external financial reporting and internal management reporting as seamless as possible-so that transparency is optimised, and apples can be compared to apples.
But in the long run, the benefits will outweigh the difficulties. As Richard Paterson, PwC Global Energy & Utilities Leader, puts it: "The challenges for oil and gas companies are immense. US GAAP has provided a common denominator for the industry over many years and North American-based companies will continue to use it. Ultimately the road to convergence is a one-way street but the jury is still out on how quickly it will become reality. IFRS is a major step along that road. In the meantime, companies will need to plan effectively to minimise the cost of changes in reporting, manage the implications of the changes for investor relationships and maximise the impact on transparency and comparability."
For individual companies, preparing well ahead of time and adopting the right approach will be vital not just to meeting the new standards, but to effective investor relations-and, ultimately, to performance and competitiveness.
Stanley Subramoney is Deputy CEO of PwC Southern Africa, and leader of the Energy & Utility Group in Southern Africa
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