Via The Energy Business Review, an interesting look at Africa’s evolution into an energy powerhouse.  As the article notes:

The significant worldwide growth in energy demand (expected to rise by some 57% by 2025), has put Africa firmly on the industry’s radar. According to BP’s Statistical Review of World Energy Report (June 2010), in 2009 (the BP 2009 Statistics) Africa consumed only 3.7% of the global commercial energy supply but its share of global energy production was some 12%. But is Africa’s potential one of the short to medium term answers to supply tightening?

An increasing import dependence from the western world coupled with significant and accelerating new demand from emerging economies, such as China and India, has placed pressure on Africa’s 38 net oil exporting countries to develop their reserves and increase production for further export. George W Bush’s strategy of reducing oil imports from the Middle East in 2006 increased the importance of Africa in the supply mix, and industry commentators predicted that Africa’s growth as an energy region had become a long term trend.

With many of the international oil companies prevented from conducting business in certain parts of the Middle East and facing challenging environments in producing countries such as Russia and Venezuela, Africa appears as needed relief with much to offer:

– relatively stable and market contractual frameworks and extensive access to acreage;
– the world’s highest ratio of ‘light’ and ‘sweet’ crude oil, preferred by refiners in significant consuming countries;
– 83% of its oil resources coming from fields yielding more than 100 million barrels.

The majority of African oil reserves (and production) is located in Libya, Nigeria, Algeria, Angola and Sudan, which together currently account for more than 90% of continent’s reserves. According to BP 2009 Statistics, Africa’s proved oil reserves rose from 59.1 billion barrels in 1989 to 127.7 billion barrels in 2009, a share of 9.6% of total world reserves.

The past – An overview

With oil prices reaching a record of $147 per barrel in July 2008, Africa experienced a jump in the exploitation of its marginal fields and investment and interest in newer frontiers. Industry estimated that between 2002 and 2006, publicly listed oil companies tripled their spending in Africa, a rate that was 20% more than their spending across the world during the same period. The International Monetary Fund calculated that in 2006 private capital flows to Africa amounted to $45bn up from $9bn in 2000, with a substantial part of such funds flowing into energy related investments. In return, Africa represented an important part of the global portfolio of some of the large investors in the oil and gas industry: in 2008 Exxon Mobil sourced 30% of all its liquids production from Africa; Shell sourced 12% of its global oil and gas production from Nigeria alone and Eni produces more than half of its 1.8 million barrels a day of oil from Africa.

Africa has also attracted small and mid-sized oil companies. These have been able to secure licenses that have either been overlooked or relinquished by oil majors, hoping that these might result in significant discoveries. One of the success stories in Africa is, of course, Tullow Oil. Tullow has built its reputation principally on its oil findings in Africa, particularly countries that were not traditionally regarded as significant hydrocarbon plays. The company has enjoyed a very high exploration and appraisal success rate. In 2009, Tullow drilled a total of 15 exploration and appraisal wells in Africa, achieving an 87% success rate. In the last few years, Tullow has achieved continued success with its findings in Ghana and Uganda by drilling in newly acquired assets and making discoveries in these two countries that had been outside of traditionally perceived exploration areas. Tullow’s efforts have resulted in the company booking the large Jubilee off-shore discovery in Ghana and achieving a projected production profile of some 200,000 barrels a day over the coming years from its Ghanaian and Ugandan assets.

Another feature in the recent development of Africa’s oil and gas sector has been the rising interest of China, other Asian countries and national oil companies. Chinese national oil and gas companies have executed exploration or supply deals with Algeria, Libya, Gabon and Congo often in combination with supporting infrastructure development. CNOOC, China’s largest offshore producer acquired a $2.7bn stake in a Nigerian oil block in 2006, its largest ever foreign acquisition and Angola, one of Africa’s fast growing oil producers, became China’s top supplier of oil. In June 2009 Gazprom, the Russian state owned company, signed a $2.5bn deal with Nigeria’s state operated NNPC to invest in a new joint venture that was established to build refineries, pipelines and gas-fuelled power stations in Nigeria.

What does the future hold?

North Africa

North Africa benefits from both its proximity to European markets allowing for the construction of a well developed pipeline system linking production sites to Spain and Italy and it is also well placed to target markets in the Atlantic and Pacific basins with LNG.
Algeria is already a significant operator in the European market providing the continent with about 13% of its total gas consumption. Rapid investments in Egypt’s gas sector over the past decade has seen the country rise to become world’s sixth largest LNG producer and Libya has made every effort in opening its hydrocarbon fields to international oil companies after years of isolation as a result of US and United Nations sanctions.

Commentators speculate that each country has upside potential with under-explored reserves particularly in gas. Libya is regarded as widely under-explored with potential in both gas and oil sectors. According to country’s national oil company and BP 2009 Statistics, Libya’s proved gas reserves amount to approximately 54,400 billion cubic feet. Whilst less than Algeria, Egypt and Nigeria, Libya also has the continent’s largest proven oil reserves at 44.3 billion barrels . Sanctions have hit Libya hard but it remains a highly attractive prospect – witness: Petro-Canada, OMV, Occidental and Eni all of whom have negotiated extensions to their contracts by 25 to 30 years which will allow them to maximise recovery from existing discoveries.

Sub-Saharan Africa

Over the past decade in particular, Sub-Saharan Africa has offered up significant upstream oil and gas opportunities. China’s fast growing oil companies have sought to book reserves to meet the demands of their domestic market. Each of CNPC, CNOOC and Sinopec have emerged as participants in frontier territory such as Sudan, where the development of the oil gas fields and export infrastructure has turned the troubled country into the third biggest oil exporter in the Sub-Saharan Africa. Chinese investment is also increasingly important in Angola, turning one of Africa’s fast growing oil producers into China’s top supplier of oil. According to the China’s General Administration of Customs data, in April 2009, Angola exported some 4.3 million tonnes of oil into China ahead of both Saudi Arabia and Iran.

East Africa

In the 19th century, Portuguese travellers noticed a thick, greasy sediment wash up on the shores of Mozambique which led them to suspect that oil may lie beneath this part of East Africa. Recent finds in the region have prompted companies to start investing time and effort in East Africa. The area has been neglected over several decades principally for geopolitical reasons which led to few companies willing to risk drilling in volatile countries such as Uganda, Mozambique or Somalia. However, with new technology, lower risk in some of these countries and increasing oil prices, investment interest is on the upturn.

Tullow was one of the first oil investors in the region and discovered two billion barrels of oil in Uganda. In February 2010, Anadarko Petroleum Corp was reported to have found the first major discovery offshore Mozambique: the Windjammer exploration well, about 30 miles east of the Mozambique coastline in the frontier Rovuma Basin. East Africa’s fault line running from Somalia to Madagascar known as the ‘Davie Fracture Zone’ has drawn particular attention following speculation of oil deposits that could be as significant as those in the North Sea or Middle East. In 2008 and 2009, Kenya issued 18 new licenses and although there has not been, to date, any success stories there, hopes remain high.

West Africa

The first commercial quantities of oil were struck in Nigeria in 1956. 44 years later, Nigeria had become the workhorse of the African oil sector with 2.6% of the world’s total production in 2009 . The majority of its reserves are found in the Niger Delta basin, an area of 75,000sq km which stretches into Cameroon and Equatorial Guinea. In 2009, Nigeria’s proven oil reserves stood at 37.2 billion barrels, in addition to its proven gas reserves of 5.25 trillion cubic.

A major development in recent years has been the emergence of the three new production countries: Chad, Code d’Ivoire and Mauritania. Chad begun oil production only as recently as 2003 and after several promising discoveries is already second largest producer in that part of the continent. Chad’s oil production comes from two fields in the Doba basin, Kome and Miandoun and is exported through the Doba-Kribi pipeline. With continued exploration activity by major oil companies in several new fields, notably in the Doseo and Lake Chad basins, Chad’s proven reserves are now estimated at some 900 million barrels.

Cote d’Ivoire, with a daily production of 98,000 barrels, has estimated proven oil reserves of 100 million barrels. The majority of its oil wells are located in shallow marine areas off the coast. Gas was first discovered there in the 1980s but its development has only recently begun in earnest. Mauritania has also had its share of success with production at the Chinguetti oilfield. Mauritania’s oil and gas production was further increased with the developments of the Banda, Tiof and Tevet fields coming on stream.

And finally, Ghana has had a success story of its own. The Jubilee field discovery with proven reserves of some 800 million barrels of oil will begin production in the second half of 2011.

Challenges ahead

NOCs tighten their grip

Increased hydrocarbon demand and dwindling supply in recent years has turned Africa’s resources into an important investment destination resulting in African countries pushing for tighter fiscal terms and conditions.

Indeed, some companies such as Devon, Occidental and Woodside have decided to draw down their African portfolios. Even Shell, with the longest history of any oil and gas company in Nigeria, is now restructuring its portfolio by cutting costs and selling its assets in Nigeria. Oil and gas investors have raised concerns that Nigeria’s attempt to impose tougher fiscal terms on oil companies could result in further exits from the country. In relation to new investment there, the climate appears to have become more difficult after the international oil companies have shown no interest in the country’s last three new oil and gas licensing rounds, where many have complained that the terms offered by the government were too tight. The Nigerian industry regulator’s comment made in November 2007 stating that Nigeria is ‘looking for new players’ coupled with the country’s announcement of plans to revisit the terms of some of the multibillion dollar offshore developments has compounded concerns for the oil majors.

Similarly, in Algeria, the government has intensified its bid for control of the hydrocarbon industry by passing an amendment to give it the right to control 51% of any hydrocarbon project. Even Libya, the most underdeveloped producer in Africa has begun to tighten its grip on its oil industry, despite initially pursuing a strategy of courting multinationals after the end of international sanctions. And in Angola, the investors now have to deal with the imposition of an OPEC quota of 1.9m barrels a day just as production is expected to ramp up to levels beyond that figure.

In addition, independent oil companies have felt pressure from the increasing competition from national oil companies now active in the African energy space bringing with them, as they do, collateral investment opportunities to African countries.

Security

Another concern is whether countries can maintain the stability and security when the oil starts flowing and generating substantial revenue in taxes and royalties each year. Examples from across Africa illustrate the kind of problems oil wealth can unleash when it is managed badly. In the past, often a small cabal has monopolised income from crude to the detriment of the wider population which in itself has caused investment instability. Ghana is hoping to learn from the mistakes of its peers and seek to distribute the revenues more judiciously.

Gas supply

Traditionally, African gas supplies to Europe have come from North Africa via pipelines from Algeria and Libya or through transportation of liquefied natural gas (LNG) from Egypt. According to the BP 2009 Statistics Africa holds 7.9% of global gas reserves and it also processes some of the highest quality hydrocarbons reserves in the world and is relatively unexplored. The International Energy Agency estimates that gas production from Africa will grow by 5.2% a year to 277 billion cubic meters by 2015, which will result in Africa becoming the fastest growing gas region after the Middle East.

The development of the continent’s gas industry is not however without its challenges. Some governments are now amending legislation and existing host government instruments to forbid the flaring of gas produced with oil. Oil and gas investors are faced with a ‘chicken and egg’ situation: whereby they risk losing their projects by flaring gas but can not monetise the production due to lack of gas infrastructure, particularly in countries which are located further away from the northern part of the continent. The construction of such gas infrastructure requires substantial investments which can not sometimes be economically justified.

The sense of greater competition for Africa’s gas reserves has also been made more acute as African producers seek to secure supplies for their own domestic use. There is a commonality in the approach towards the satisfaction of domestic supply needs across the African countries, whereby host government instruments contain provision that grants the government a unilateral right to demand that production to be directed into domestic market if it is in the interest and security of the nation. This enables countries such as Algeria, which is now considering the need to fuel its power generation and petrochemical industries, to challenge the need for a wholly export oriented strategy.

NOC’s pre-emption

Governments’ increasing involvement in oil and gas projects has also had its effect. NOCs often seek the opportunity to claw-back rights from the foreign investors. One of the most common themes which has been seen in the market is the requirement for governmental consent to assignment. The most recent example is Exxon Mobil’s attempt to acquire Kosmos Energy’s stake in the Jubilee Field for $4bn. The sale was blocked by the Ghanaian government with GNPC stating that they will ‘encourage them (Kosmos) to sell to GNPC’ and that they were ‘prepared to offer them a fair market value’.

Conclusion

Africa, with all its challenges, remains one of the world’s principal oil and gas investment destinations. Whilst it is not possible to generalise across a diverse continent, it is a market that overall has matured to provide attractive exploration and development opportunities. Competition for these depleting resources remains tight but for those prepared to meet the challenges the rewards are potentially significant.”