High Prices Fuel Exploration Frenzy

Africa’s oil and gas industry has never looked healthier than it is at present. High oil prices mean increased revenues for producers and as new fields come on stream, the continent’s contribution to global oil and gas supplies assumes a major significance. With limited amounts of acreage available for exploration in other parts of the world, previously unconsidered African oil fields are attracting huge interest from international oil companies. Now that a barrel price of $100 has become commonplace, even small production volumes can become lucrative.

The effect of high prices on exploration plans is clear to see. Growing investment in Kenya, Tanzania and Mozambique is discussed below but even regions with doubtful sovereignty are attracting the interest of smaller, or independent oil companies. For example, Africa Oil Corporation of Canada has signed a deal with Denovo Capital Corporation to set up a joint venture named Horn Petroleum, which will explore for oil in the self-declared state of Puntland in northern Somalia. In the short term, two exploration wells will be drilled in the Dharoor Valley.

Sustained high oil prices are certainly benefiting long-standing African oil producers. The Algerian government expects export revenues this year to be 20% higher than in 2010 if prices remain at their current level.

The government of Cameroon has already announced a 20% increase in income in the first half of this year to CFA1.108 trillion ($2.2bn). State owned oil company Société Nationale des Hydrocarbures (SNH) enjoyed a 25% rise in income over the same period. Cameroon is a relatively modest oil producer in Gulf of Guinea terms, but hydrocarbon exports still make a big impact on national economic fortunes.

Ghana is forecast to enjoy economic growth in excess of 15% this year, as production from the Jubilee Field finally feeds through into the nation’s coffers.

The Nigerian government will base its 2012 budget on an average oil price of $75 a barrel and average production of 2.48m b/d. This seems realistic in terms of pricing but much less so with regard to output, given that renewed conflict in the Niger Delta could easily push production below 2m barrels a day (b/d).

A sovereign wealth fund is planned to help balance revenues in the long term but the current budget assumptions leave the economy somewhat vulnerable to global economic shocks. Razia Khan, the head of Africa Research at Standard Chartered, commented: “Nigeria is in an especially vulnerable position having run down its previous oil saving. Now, in 2011, with much more elevated levels of spending and demands on government, there isn’t very much to draw on in the event of a shock.”

Opec member states produced a total of 30.15m b/d in August, the highest figure since 2008, partly as a result of the recovery in Nigerian oil production to 2.4m b/d. This is lower than the 2.6m b/d average recorded in 2006, before the latest round of violent unrest and oil theft began in the Niger Delta, but substantially higher than during most of the intervening five years. Nigeria has now overtaken Angola to resume its position as the biggest oil producer in Africa.

Improved security

The biggest oil producer in Nigeria, Shell Development Petroleum Company (SPDC), has increased its production from 230,000 b/d in the second quarter of 2010 to 290,000 b/d in the same three-month period this year.

The chief executive of Shell, Peter Voser, explained: “The security situation is improving but still I would call it something to watch. Quite clearly, in general it has improved considerably compared to a few years ago. We are making progress in Nigeria and we are producing higher volumes compared to the past.”

Production at the NLNG liquefied natural gas (LNG) project has also recovered, as gas supply infrastructure has been repaired and the rate of new attacks fallen. Despite the upturn in the security situation, the Nigerian oil industry still faces a number of challenges if it is to fulfil its potential. The government has long harboured ambitions of increasing proven oil reserves to 40bn barrels and production to 4m b/d but fighting in the Delta has not been the only factor to hold back development.

Poor relations between the state-owned Nigerian National Petroleum Corporation (NNPC) and its foreign partners on several projects have delayed investment, particularly when the international oil companies have complained about NNPC’s failure to provide its share of investment. Everyone concerned accepts that the state oil company needs to be reformed but there are a number of different views on how this should be achieved.

Some within the government favour the break-up of the company to improve transparency in the sector, with separate oil production, gas and regulatory subsidiaries broken up into their constituent parts. Others favour the creation of a single state-owned company, similar to Petronas of Malaysia, which would operate on a more commercial basis, investing in other countries and acting as the operator of oil and gas projects within Nigeria itself. Despite its success in other parts of the world, such a model has not been successfully replicated in any significant oil producer in sub-Saharan Africa.

Difficulties have already arisen over Shell’s decision to sell some of its Nigerian assets. Shell, Eni and Total have agreed to sell their stakes in four onshore Niger Delta blocks to smaller companies, which will now partner NNPC in developing the acreage. However, Conoil, Eland Oil, Starcrest, Niger Delta E&P, Petrolin and Kulczyk Oil Ventures of Poland are reported to be unwilling for the NNPC to take over as operator of the four blocks, although they have already paid a 10% deposit for their equity shares.

Joint development deals

High oil prices are also forcing governments to compromise on issues of sovereignty. Many of Africa’s maritime boundaries have yet to be delimited, meaning that oil and gas exploration in disputed areas has been held up.

However, many politicians are now prepared to put political differences with their neighbours to one side to enable the exploration and development of hydrocarbons via joint development zones (JDZs) or other forms of cooperative exploration.

For example, the government of Angola is keen to open up more acreage to exploration further north and so is seeking joint development of disputed maritime territory with neighbouring Democratic Republic of Congo (DR Congo) and Congo-Brazzaville.

In July, Angolan oil minister José Maria Botelho de Vasconcelos announced that Luanda and Brazzaville had agreed to joint exploration from 2013. Although a delimitation agreement has not been signed, the two governments have finally, after a decade of talks, reached a deal on hydrocarbon development in the disputed area in question, which is known as the Lianzi Unitisation Zone. Botelho de Vasconcelos said: “We have held half-yearly meetings, the results of which will be visible starting in 2013, when we will start producing oil jointly in areas of common interest.”

However, less progress has been made on joint exploration of territory between Angola and DR Congo. The two countries share theoretical boundaries close to the mouth of the River Congo, where the region’s political geography is complicated by the location of Angola’s Cabinda Province. The territory still hosts much of Angola’s onshore and shallow water oil production.

Botelho de Vasconcelos said that he was keen for DR Congo to speed up talks: “We have been working with our neighbours in the mixed commission, which was set up in 2009, in which we analyse the situation relating to the possibility of setting up joint exploration in areas of common interest.”

The high value of oil is helping to create such common interests, thereby encouraging much broader cooperation between neighbouring states.