Encouraging foreign investment into the West African O&G industry – the investor’s view…by Paul McDade – CEO of Afentra

Investment requires stability….

The first consideration for any investor is the risk/reward profile of their investment.  Investing within the oil and gas industry can be notoriously challenging given the significant investment required and the variety of risks that range from sub-surface and technical issues through to macro drivers like commodity pricing and regional stability.  It is important for the investor to focus on what they can control, and ensuring the companies in which they invest are operating in secure regulatory and fiscal environments in which there is visibility and confidence is a primary focus.  This “country risk” is therefore scrutinized by both the company and the investors and lenders behind the company, and is a critical consideration for success. 

Clearly it is impossible to envisage unforeseen events that impact the investment risk however having confidence in the economic stability of the industry in which you operate, and confidence in the approach of the host government and regulator to oversee a stable fiscal environment designed to encourage investment into its industry, makes for a significantly lower risk investment proposition.

Taking the UK as a case in point, a country which was perceived as relatively low risk from a technical perspective and a jurisdiction in which companies historically would have had a high degree of confidence in process, governance and transparency, has now become an operating environment that is fiscally punitive in terms of its imposed Energy Profits Levy or “windfall tax”. Companies who would have been primarily focussed on investing in the UKCS are now actively investing into international jurisdictions which they consider have more benign and favourable fiscal backdrops.  This situation is taking place against a backdrop of the UK having a greater need for enhanced energy security post Russia/Ukraine, and is presently relying on the importation of LNG at a far greater cost. This combined with the carbon footprint of this approach being higher than developing its own discovered gas resources, make it hard to understand the political logic to the current situation.

The diminished appetite that remains for investment into the UK industry is in a state of paralysis pending the outcome of the UK’s election with Labour, the leading opposition party and favourite to regain power, promising to impose “proper windfall taxes” should they come to power – though as yet not defining what those would look like.  Certainly, companies that are now channelling their investment funds into other jurisdictions due to effective UK tax rate of 95% (and 100% in certain circumstances) feel strongly that the current UK rates are already punitive to the investor.

Industry transition enhances the importance of independents…

The UK’s North Sea was a pioneering region for the industry and contributed materially to the country’s economic success over the last half century.  It also enabled the UK to become a centre of excellence for the global energy industry, exporting its knowledge and expertise around the world as new basins opened up.  Prior to the imposition of these extreme taxes, the UK’s industry landscape changed considerably since the turn of millennium as an industry transition took place that saw mid-life to mature assets change hands from the IOCs to the smaller, nimble and focused operators who could manage them more efficiently and provide a credible exit for the IOCs who would turn their attention to new and more material developments.

Africa is in the midst of a similar transition with the IOCs actively seeking to divest non-core assets that are no longer material or able to attract capital in internal allocation processes.  To allow such a transition to take place effectively it is imperative that there is a credible pool of buyers that can demonstrate an ability to raise the capital to transact, and prove to the vendor and the host nation that they have the operating acumen to operate the acquired assets to the highest industry standards and in doing so, enable the country and its people to continue to positively benefit from the revenue generated from these assets.  It is therefore important that countries whose industry is in the process of attracting new investors to support this industrial transition, or indeed in the early stages of exploration, consider how best to encourage the creation of an industry ecosystem that enables the investment that will ultimately contribute to a positive impact to all stakeholders.

Our company Afentra was established in 2021 to capitalise on the opportunities presented by a nascent yet accelerating industry transition in Africa – a continent our founding team knows intimately following previous Executive roles at leading African independent Tullow.  Our purpose is to facilitate a just transition in which we seek to balance the importance of climate impact against the positive impact that oil and gas revenues have on the socioeconomic development of these countries.  By presenting Afentra as a credible counterparty of choice that has proven operating capabilities, access to funding and an unwavering commitment to environmental stewardship, we believe that our company has an important role to play in facilitating this industry transition which, by consequence, is a critical aspect in delivering a longer-term effective energy transition for Africa.

Angola making all the right moves…

At our launch, Angola was identified as a core target market for Afentra given the established industry and the aforementioned transition that we foresaw taking place in country.  Since entering the country through a series of transactions with state owned company Sonangol, Azule (the JV between BP & ENI), and INA we have witnessed first-hand that Angola is a country that is doing all the right things to adapt its approach to encourage the foreign investment so crucial to realising the full potential of its oil & gas industry.

Afentra participated in the Sonangol sales process and was impressed with the transparency and governance with which the process was managed.  Upon securing the assets, the government responded efficiently to the request of the Block partners to extend the licence on improved fiscal terms – thus enhancing the economics of future investments in the Block and in doing so encouraging the joint venture partners to invest in the considerable upside that resides in the assets.

Any approach can always be improved and certain levels of bureaucracy will always be a part of doing business in Africa, however the intent to openly engage in partnership with smaller independents and recognise the steps they need to take to encourage investment shows a level of pragmatism and foresight that is not seen often enough across the continent, and indeed in many other jurisdictions as evidenced by the UK. This approach should be adopted by any nation in Africa seeking to encourage international industry investment.

Sonangol as partner and License Operator has engaged positively with Afentra and has recognised the unique perspectives that we can bring to the partnership.  Afentra’s interest in the Block 3/05 license is currently the foundation of our business so we are highly focused and motivated to add value to the asset through our proposed technical initiatives and bring significantly more to the table than just the investment.  This collaborative partnership approach is a core aspect to Afentra’s model and is a concept that can often be overlooked in the industry.  Companies, whether big or small, that work together towards a common goal will achieve results that benefit all.  This approach, since our initial entry into the country, has helped us identify further compelling opportunities that we are currently progressing and will help us build a very meaningful business, and legacy, as we invest in the Angolan industry and seek to partner with more local companies.

Collaboration results in shared success…

Longer-term, the ambition is to build Afentra into a business of scale, producing tens of thousands of barrels a day, from a diversified portfolio of assets in Angola and other target countries.  Those target countries will be defined as having the similar dynamics we see in Angola in terms of an established hydrocarbon industry in the early stages of an industry transition – but the key defining factor for us, as should be the case with all industry investors, is whether there is an alignment between the host government and investing companies.

Countries that make efforts to encourage investment by ensuring a stable and fair fiscal environment, and an efficient and transparent operating backdrop will always oversee a more prosperous industry over the longer term than those nations that seek to impose punitive taxes and royalties and create unnecessary layers of bureaucracy and opaque practices.   Our industry is one that thrives on collaboration and shared vision – if foreign operators and local companies form mutually beneficial partnerships that support host governments in achieving their own objectives then that enables the countries, and their people, to benefit from considerable resource upside that remains across West Africa.

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