Sub-Saharan Africa goes offshore in bid to be a bigger player
By Vaughan O’Grady
Many of sub-Saharan Africa’s newest and most promising oil finds have been offshore, making it easier to transport the oil to the thirsty refineries of the major economies. But that is by no means the only reason for the recent boom in oil exploration and production throughout the continent.
Sub-Saharan Africa — the African regions south of the Sahara — can be a challenging place for an oil company to operate: Infrastructure is often limited — and sometimes nonexistent; governments may be difficult to work with; and financial transparency and health and security are by no means guaranteed. No wonder a lot of major oil companies have for many years taken the apparently easier option of working in established oil-producing areas like Europe, the U.S. and the Middle East.
Until now, that is. In recent years, countries not previously associated with oil, like Ghana, Madagascar, Chad, Uganda, Kenya and Mozambique, have been attracting the interest not only of independent oil companies, which are more willing to take a chance on relatively untried markets, but of some of the majors like Exxon, Eni and Chevron, and even national oil companies with such diverse origins as Austria, China, Malaysia and Portugal.
Of course, sub-Saharan oil exploration is not new. Nigeria has for decades been the continent’s leading oil producer and one of the world’s major exporters. More recently, peace in Angola has boosted oil exports and fueled a reconstruction boom.
“Angola has become fertile ground for exploration since the country began its program of reconstruction in 2002,” says London-based Robert Wine, spokesman for BP Angola, a unit of the U.K. oil major. Large resources have been found in deepwater, technically challenging, offshore blocks, but companies such as BP, in conjunction with Sonangol, have the global expertise to develop these economically, he says. Sonangol is an Angolan parastatal that manages the country’s hydrocarbon resources.
New territories
Recently, however, activity has been moving from these established areas to new territories. There are a number of reasons for this. Oil quality is one.
“West African oil is mostly low-sulphur and light to medium gravity, which means it’s attractive to refiners,” says Roy Jordan, oil economist at Energy Market Consultants UK Ltd., a London-based company that specializes in the analysis and forecasting of long- and short-term developments in international oil and gas markets. This is in part because they are under pressure from Western governments keen to eliminate sulphur from transportation fuels for environmental reasons — a much less expensive business if the oil is low-sulphur already.
Africa is also conveniently situated geographically to serve both North American and European markets. The west coast is especially well positioned.
Thomas Pearmain, London-based energy analyst, sub-Saharan Africa, at forecasting company Global Insight Inc. of Boston, explains that oil from this area has open sea lanes to the U.S. He adds: “West African crude is predominantly light and sweet and tends to be in high demand by the refineries on the East Coast of the U.S., as it is more easily refined.”
This positional advantage is further enhanced by the fact that many recent finds are not on the mainland. As Andrew Grosse, exploration and technical director of Sterling Energy in London, an upstream oil and gas company, points out: “In Africa, a fair amount of the prospective open acreage is offshore and most of our acreage is on the western margin of Africa, within easy reach of the U.S. East Coast.”
Going offshore lessens the security, health and infrastructure problems that could be associated with onshore work in Africa. But the oil still has to be brought to the surface in difficult conditions. It’s just as well, therefore, that modern drilling technology has made it easier to get at. “Technological advances have really helped in deepwater exploration; companies are now exploring and producing in more than 2,000 meters of water,” Mr. Grosse says.
Mr. Jordan of Energy Market Consultants cites other important technological advances such as horizontal drilling, which applies both onshore and offshore, and improved application and evaluation of seismic activity, which allows a quicker and better view of where reservoirs could be. Equally important, he says, are improvements to transportation technology. Floating production and storage facilities are supporting oil company efforts offshore. “This means that they can produce the oil, store it and then transport it — all close to the well offshore,” Mr. Jordan adds.
Quality and technology may help make oil and gas exploration in sub-Saharan Africa easier but, as Mr. Grosse points out, the real drivers are much simpler: availability and access. The North Sea and the U.S. are mature areas where production is declining. By contrast, estimated onshore and offshore reserves for the African continent are significantly higher (as much as 10% of the world total, according to some analysts) and most of it, until recently, underexploited.
In the Middle East, there are other challenges. Although the region contains most of the world’s oil reserves, access is often limited. In countries like Saudi Arabia, Western oil companies can only work on a service contract basis. Add war in Iraq, sanctions in Iran and continuing fears about security and supply and you have a less-than-attractive working environment.
There are problems elsewhere, too. As Mr. Pearmain of Global Insight notes: “Over the past couple of years there has been a trend known as resource nationalism, where countries which have commercial reserves of oil have been changing the terms of the contracts to increase the government’s revenue. This is played out throughout Latin America and in Russia especially.”
Africa, however, is different. Says Mr. Jordan of Energy Market Consultants: “In many countries in Africa, particularly where there hasn’t in the past been production, they have been obliged to make the terms and conditions reasonably attractive to bring people in to explore and then to produce.”
Meanwhile, oil prices have escalated, and demand — especially from booming economies like India and China — is growing. It’s hardly surprising, therefore, that previously ignored territories like Ghana and Uganda have become so attractive. And they are getting more attractive by the day. The share price of Tullow Oil, an exploration and production company listed on the London Stock Exchange, rose more than 150% in 12 months as estimates of the potential of its find off the coast of Ghana last year increased to nearly two billion barrels.
Inland Uganda is another promising prospect for the company, and a useful reminder that it’s not just offshore — or indeed West Africa — where opportunities can be found. For example, although Sterling Energy has operations in Cameroon, Gabon, Guinea Bissau and Mauritania, Mr. Grosse is particularly excited about his company’s acreage in Madagascar — and with good reason. It’s so promising a prospect that the company is being partnered by oil giant Exxon to exploit it.
Of course, companies like Sterling have historically been at the forefront of activities in so-called frontier territories. “The smaller companies have always been risk-takers,” Mr. Grosse says. But Exxon’s involvement is, he suggests, an indication of what’s happening within global markets at the moment. The majors need to keep up their volumes of reserves; hence Exxon has gone with Sterling into Madagascar. “It’s a frontier basin,” Mr. Grosse says. “There’s no production offshore but there are some very large prospects which if successful will make an impact even to companies of Exxon’s size.”
Nor are they alone. Not just the big private companies but, says Mr. Jordan of Energy Market Consultants, less familiar names. National oil companies from Austria, China, India, Malaysia, Portugal and South Korea, to name only a few are now, or have been, in Africa looking for oil. “One of the reasons,” Mr. Jordan says, “is that we are seeing a tightening in the world oil supply and therefore refiners in oil-importing countries are going to need access to crude in the future.”
And given the size of recent finds, Africa may be where they find it. As Mr. Pearmain of Global Insights points out, no one thought a two-billion-barrel oil field would exist offshore Ghana. And with Kenya, Madagascar and Uganda looking promising, perhaps “East Africa will be the next big play for oil exploration,” he suggests.
Of course it may be some time before any new fields reach the output of, say, Nigeria, where U.S.-based integrated energy company Chevron, through its subsidiary Chevron Nigeria Ltd., has been able to announce net oil-equivalent production in 2007 of 129,000 barrels a day, with new projects likely to add significantly to that number by late 2009.
Africa’s new frontier
Nevertheless, the potential of Africa’s new frontier is clear. Barring a continent-wide economic or social collapse, it appears that there are enough prospects to make sub-Saharan Africa popular with oil producers for some time to come. And with available oil supply tightening and non-OPEC production capacity and potential by no means guaranteed to rise, many analysts are convinced that three-digit oil prices are here to stay. “Anywhere where there’s a possibility of finding new oil is going to be potentially attractive to an investor,” Mr. Jordan says.
Clearly, a region that is conveniently situated for transport and offers a high-grade product which technology has made easier and cheaper to retrieve could be seen as attractive to investors. But the bottom line is much simpler. As Mr. Grosse of Sterling Energy points out: “In Africa there is still prospective acreage that can be licensed — so that’s exactly what’s happening.”
AI
