As reported in The Wall Street Journal, the petroleum potential of Africa, a key contributor of oil barrels to thirsty markets, is beginning to look dimmer because of the credit crunch and a host of endemic challenges.  As the article notes

“…Certainly, Big Oil’s continental land grab will continue. Countries such as Angola and those around the Gulf of Guinea continue to lease tantalizing exploration blocks in the deep waters off the Atlantic coast. That region has been the hottest play in a scramble that has doubled the acreage under exploration licenses in sub-Saharan Africa to an area 10 times the size of France in the past three years.

But the astronomical costs involved in developing those fields, combined with escalating violence in the oil-rich Niger Delta, the relatively short life span of West Africa’s producing basins, unpredictable market prices, and an expected culling of cash-poor small players means Africa’s days as a reliable supplier of additional oil may be numbered.

“We have benefited from additional oil volumes from Africa, but given the production profile of offshore fields, we need to see significant new discoveries to sustain that trend,” says Fatih Birol, chief economist for the International Energy Agency in Paris. “It’s not clear that will happen.”

Declining production will deprive a host of developing nations of sorely needed revenue. For countries such as Nigeria and Angola, oil exports account for the vast majority of government revenue and foreign-exchange earnings.

The continent is responsible for about 12% of global oil production of around 85 million barrels a day. But Africa’s contribution has been crucial to tight oil markets given the continuing slide in production in non-OPEC countries such as Russia and Mexico. The IEA expects non-OPEC producers will add new supplies of just 150,000 barrels a day this year, down from the agency’s original expectations of around one million barrels a day. Other analysts say non-OPEC supplies could actually fall this year.

For big state-owned and private oil companies, Africa has played an outsized role. It is responsible for adding nearly a quarter of the globe’s total increase in reserves over the past decade. That has been a boon for companies such as Royal Dutch Shell PLC, Exxon Mobil Corp. and Total SA, all of which have struggled to replace reserves on their books. Outside Africa, big new discoveries have proved elusive and host countries are tightening terms.

Africa’s crude is highly prized by refiners in Europe and North America because it yields far more lucrative refined products than oil from the Middle East. Even before the credit crunch took hold, experts had been warning of challenges to maintaining Africa’s upward trend in production, particularly in sub-Saharan Africa and the continent’s two OPEC members, Nigeria and Angola.

Consultancy Wood Mackenzie sees production in West Africa beginning to fall as soon as 2013. PFC Energy in Washington estimates that trend could take hold after 2014 when West African production peaks at 7.1 million barrels a day, compared with the current 5.8 million barrels a day.

But even those modest gains could prove to be elusive. In Nigeria, which competes with Angola to be Africa’s largest producer, deepening rebel and criminal violence targeting Western oil companies in the oil-rich Niger Delta is severely crimping supply. Nigerian Foreign Minister Ojo Maduekwe said last week Nigeria currently was producing just 1.5 million barrels of oil a day. That surprised observers who had pegged Nigerian production at closer to two million barrels a day.

The violence is also driving up costs. Chief Tunde Afolabi, chief executive of Nigerian oil company Amni International, says his production costs in the delta are 250% higher than those offshore once he factors in security outlays and kidnapping insurance for his employees.

The credit crisis and the falling price of oil will only deepen the Nigerian state oil company’s chronic funding shortfalls. Nigeria is supposed to contribute roughly $60 billion in oil-development costs in the 2008 to 2012 period, its share of funding of joint projects with international oil companies. It will need to borrow more than half that amount — no mean feat in current conditions.

In Angola, China’s largest single oil supplier, oil production recently fell to around 1.7 million barrels a day from a high about two million barrels a day earlier this year, the country’s oil minister said last week, blaming an accident in one offshore block. Such supply pinches may be transitory as new fields come on line, but they highlight the region’s production challenges.

Geology and project economics are a longer-term concern. The nature of oil reservoirs in West Africa’s key offshore fields means production peaks quickly. Major oil companies have a financial incentive to pump oil fast, and that speeds decline rates and shortens a field’s life.

“The major oil companies want a quick ramp-up in those fields” to recoup their massive development costs, says David Kirsch of PFC. “One reason Angola joined OPEC was to give it some leverage in managing that.” The Organization of Petroleum Exporting Countries assigns its members production quotas.

Africa’s hundreds of smaller explorers — known as chongololos after the continent’s scavenging millipedes — have been aggressive in picking up the scraps left by big oil companies and pushing into frontier regions.

But again, the global credit crunch is making the road to developing those plays much tougher.

Tullow Oil of the U.K. has been extremely successful with large oil finds offshore Ghana and on the Ugandan side of Lake Albert. But getting Uganda’s oil to market will require construction of a 750-mile pipeline to Mombasa on the Kenyan coast. Company Chairman Aidan Heavey says that effort pays only if oil is found in sufficient quantities and if benchmark prices stay above $80 a barrel. The price of oil fell $3.36 a barrel, or 4.5%, to $70.89 in Tuesday trading.

While he and other larger independent companies sitting on solid African prospects are likely to ride out the storm, others won’t be so lucky. “This is a tough time for small companies that don’t have production [to generate cash],” says Stewart Williams, senior analyst for sub-Saharan energy research at Wood Mackenzie. “Many will have trouble funding drilling programs.”