African nations lay oil hopes on new, more tentative exploration pacts

With shifting projections around peak oil and wars in Ukraine and Iran spurring renewed interest in African oil and gas exploration, countries across the continent have been working hard to lure IOCs to their basins in the past year.

Those efforts were on show again at Africa Energy Week – a giant annual oil and gas conference in Cape Town over Oct. 12-16 – with countries from Senegal and Algeria to Namibia and Uganda pitching investors on their upstream opportunities.

Against this backdrop a new deal type has emerged on the continent: low-commitment Memorandums of Understanding to examine geological data across offshore licenses. And the world's largest oil companies have been using these arrangements to hoover up acreage up and down the continent.

But will these deals lead to actual investment, drilling, production and revenues, or are they just a low-stakes way for IOCs to fill their portfolios with promising acreage?

'We're hot, you're not'

The past year has seen a slew of reconnaissance agreements and MOUs between African countries and oil majors, leading some industry watchers to declare an "exploration renaissance".

For years, IOCs were lukewarm on African exploration amid a backlash from environmental groups against projects like TotalEnergies' EACOP pipeline in East Africa and dominant energy transition narratives.

Deals signed since last November include an MOU between ExxonMobil and Gabon to examine exploration opportunities on offshore licenses, and Shell's reconnaissance agreement with Sierra Leone.

Italy's Eni has been active, signing deals with Sierra Leone, Guinea-Conakry and Equatorial Guinea, while TotalEnergies and Chevron inked deals with Liberia and Equatorial Guinea respectively. Petrobras, BP and others have also taken on acreage across the continent.

Unlike most production sharing contracts – a traditional first step paving the way for exploration and production – these deals do not come with drilling commitments.

But for officials in Equatorial Guinea, which has seen crude output fall from a peak of around 380,000 barrels/day in 2005 to just 50,000 b/d due to underinvestment, field maturation and limited exploration, they serve a key purpose.

Addressing journalists on the sidelines of AEW, Antonio Oburu Ondo, the Central African country's hydrocarbons minister, said drilling decisions are built on quality data above all else.

"It is an instrument that actually focuses the companies on seeing how is the geology," he said of the reconnaissance licenses. "To me this is a great instrument because it achieves exactly what the company wants to achieve."

It also allows companies to assess offshore acreage without incurring local content obligations, Ondo said, actually increasing the chance of them ultimately spudding a well.

"A commitment to drill, it has to be based on the information," the minister said. "So instead of... loading them with more obligations that will actually impede them, [we] remove all those obstacles so that the path to drilling is easy."

Foday Mansaray, Sierra Leone's top oil official, agrees. "There's no use in putting a drill option in the contracts if it's going to negatively impact investors and us," Mansaray told Platts in an interview earlier this year. "Nobody wants a dry hole."

Meanwhile, Jim Swartz, chairman and managing director of Nigeria/Mid-Africa at US supermajor Chevron, said on the sidelines of AEW that they were "a way for companies to say we're going to spend some time and look at the data before we make bigger agreements."

Not all are convinced, however. In an interview with Platts in Cape Town, Farid Ghezali, the new secretary general of the African Petroleum Producers Organization, said he was determined to strengthen the continent's national oil companies and support them in talks with IOCs, to ensure resource development benefits host countries.

"We are also going to present a new strategy on how to think about new partnerships with IOCs," Ghezali said. On the reconnaissance agreement trend, he said that "we need more commitment" and noted that pledges to drill wells have not been honored in the past.

One oil company source with operations in Africa said that while the deals could lead to real investment and drilling, they are also a useful way for companies to tie up acreage at the expense of their competitors.

For the countries, it also suggests upstream momentum, the source said. "It's a way for them to say to the other countries: we're hot, you're not," the source added.

Diversification drive

For oil and gas-rich African countries, these new arrangements could be make or break.

The trend comes at a time of huge upheaval in the oil market stemming from the Iran war, which has sent prices soaring and is favoring upstream producers with geographically diverse portfolios.

With flows of Middle Eastern oil and gas curtailed through the Strait of Hormuz, IOCs are scouring the globe for the new molecules that will meet rising global demand in the coming years. Officials in Africa spy an opportunity to convert that into real investment.

"What it highlights... for us is the positive aspects of having a diverse portfolio. And Chevron operates all across the world. We've only got less than 5% of our production in the Middle East," Brent Gros, Chevron's president of offshore, told reporters in Cape Town. "And so that's made volumes from the rest of the world that much more critical."

He added: "Africa is well positioned from an export perspective. It has rich resources and we are seeing improvements in fiscal and investment environment. We've added about 70% of exploration acreage to our portfolio in Africa in the last two years."

But competition is fierce, with African countries competing with jurisdictions in the Americas, Middle East, Asia and the Mediterranean. And companies are clear that geography alone cannot cut it – only projects with strong economics will find funding.

"Competitive fiscal terms are not just important at the onset of investment," said Gros. "These should be durable and offer long-term win-win propositions for both the host nation and the operator."