Many of Africa’s Oil and Gas Companies in Distress or Battling with Liquidity Post-COVID-19

Global law firm Baker McKenzie’s recent Global Oil and Gas Survey: Response to the Oil Price Crisis, outlines how before the outbreak of the COVID-19 pandemic, the global oil and gas industry was at an inflection point. At the start of 2020, with oil, natural gas, and LNG markets each in a state of over-supply, the Energy, Mining and Infrastructure (EMI) industry was faced with a challenging dilemma: how to successfully manage the disruptive threats posed by the energy transition, while simultaneously navigating a relatively low commodity price environment with balance sheets still recovering from the last downturn in 2015-2016.

The report explains how, almost a year later, no one could have predicted the unprecedented events that have unfolded in 2020 due to the effects of COVID-19. The sharp decline in energy demand caused by the pandemic’s impact on the macroeconomy, and the global collapse of oil prices, has raised a host of new issues for the industry. The pandemic has intensified uncertainty around future investment and accelerated pressure from investors to clarify the implications of the energy transition on their operations and business models.

Wildu du Plessis, Head of Africa for Baker McKenzie, notes that businesses in the upstream oil and gas sector in Africa are suffering significant distress, having been hit hard by COVD-19 impacts, but also by a significant amount of depression in oil and gas prices. In particular, refining companies in the sector are at a pinch point, especially with regard to transportation fuels such as jet fuel and gasoline, where there has been little happening around the world.

“We have noted an increase in demand for legal guidance in the oil and gas sector in Africa around bankruptcy proceedings, restructuring, asset or equity sales, the optimisation of assets, opportunities to increase liquidity, and litigation around claims that come out of distressed environments,” he says.

On the mergers and acquisitions side, Du Plessis explains that the industry has been in a state of distress for some time, and COVID impacts, as well as energy transformation requirements,  increased the amount of companies in the sector that are either in distress, or battling with liquidity and looking for advice in carving out non-core and infrastructure assets, for example.

“Many oil and gas companies are actively looking to reshape their portfolios, swap out assets, navigate difficult sales processes, change their mix, or capitalise on green initiatives,” Du Plessis explains.

“To provide clarity for oil and gas companies in this challenging environment, Baker McKenzie published a multijurisdictional survey that provides a summary of the response of 24 key oil producing jurisdictions, including seven in Africa, to the 2020 oil price crisis and the drop in demand resulting from the COVID-19 pandemic. For each of these jurisdictions, oil and gas experts have outlined the government’s response to the crisis, the ensuing sector vulnerabilities, as well as certain critical issues to watch out for — including the implications for the energy transition for each country. The information will be of use to those in the EMI sector that are planning their post-pandemic renewal strategies,” Du Plessis adds.