Is US shale production a threat to Africa?

Is US shale production a threat to Africa? Although Nigeria and Libya are both producing far less crude oil than they are capable of, the African continent in the middle of an oil and gas boom. New producers are emerging in the form of Ghana, Uganda, Tanzania and Mozambique, while Kenya and perhaps even Ethiopia could join this list. Yet the continent does not operate in a vacuum and must be mindful of global trends. It is the high international price of oil that has triggered all of this upstream activity but a new source of oil production is already displacing African exports in the world’s biggest market. Report by Neil Ford

New technologies, including horizontal drilling and hydraulic fracturing – often known as fracking – have allowed oil companies to develop reserves in the US that were previously out of reach, at least on commercially viable terms.

Fracking involves pumping water and chemicals into shale formations in order to create fractures to release the hydrocarbons contained inside. The technique has long been available but had previously been too expensive to use. A combination of technological improvements and high oil prices has now made it an attractive option.

Over the past five years, US oil production has increased by about 50% to about 10.3m b/d, behind Russia with 10.8m b/d and Saudi Arabia, with 11.1m b/d. Although domestic consumption has increased over that time, the country now imports 39% of its oil consumption, down from 62% in 2008, and it is therefore reducing its imports from traditional suppliers. US oil imports from Nigeria, for instance, fell to 194,000 b/d in February, the lowest figure for 18 years.

The US has now overtaken Russia to become the world’s biggest oil and gas producer, with 22m barrels of oil equivalent a day (boe/d), for the first time in 30 years.

The country’s shale oil and gas reserves were developed in the first instance by independent oil companies, including Continental Resources and EOG Resources, in two main regions: Eagle Ford shale in southern Texas and Bakken shale in North Dakota.

Exploration has now moved on to other areas but geology varies from region to region and so new techniques may need to be developed for each case. The International Energy Agency (IEA) predicts that the US could overtake Saudi Arabia to become the world’s biggest oil producer by 2020.

According to recent statements, OPEC does not expect the shale oil boom to have a big impact on OPEC member states. Yet the oil producers’ cartel may now be trying to mask its fears. In its World Oil Outlook, which was published at the end of last year, the organisation stated: “Given recent significant increases in North American shale oil and shale gas production, it is now clear that these resources might play an increasingly important role in non-OPEC medium- and long-term supply prospects.”

Shale oil is certainly contributing to the slow erosion of OPEC’s influence. Global oil production currently stands at about 92m b/d, of which OPEC produces just 30.5m b/d, despite controlling about 80% of global reserves.

Speaking in London, IEA chief economist Fatih Birol said: “In the next few years we will continue to see growth in US shale oil, which is very good news for the US and the rest of the world. But I don’t think that this has either the resource base or the economics to replace Middle East oil.”

The view seems to be that new unconventional production will merely help to satisfy global demand that is continuing to rise, rather than displacing existing sources of production. As we discuss later, much of this demand may come from African consumers.

New sources of oil and gas should help to stabilise oil prices at around $90-$140 a barrel. Oil prices need to remain high for shale oil production to be viable. There is no exact price boundary but most analysts agree that a $80 barrel would probably make shale oil too expensive to pursue.  OPEC secretary general Abdullah al-Badri said: “I do not think that with this quantity OPEC is in trouble. This tight oil is hanging on the cost. If the [price] were to drop to $60 to $70, then it would be out of the market completely.”

Impact of political factors
Although the US now requires significantly less oil from Africa, the oil industry is very much a global business and it is easy to identify alternative customers, particularly during the era of the $100 barrel. China is now set to become the world’s biggest oil importer, perhaps as early as the end of this year, while India and several other Asian economies will also require more oil over the next few years.

The real impact on global oil and gas supplies and prices will come if other countries have as much success in tapping their unconventional oil and gas reserves, as the North American revolution has increased interest in such technologies elsewhere in the world.

Australia, China and Russia all have vast reserves of unconventional hydrocarbons. In Africa, South Africa and particularly Botswana have untapped reserves of coal seam gas that could be tapped for local benefit but currently face stiff competition from cheap coal.

Mozambique also has some potential for unconventional gas and the Algerian government is now offering more attractive terms of investment for unconventional gas fields. The United States Energy Information Administration estimates that Algeria may have 220 trillion cu ft of technically recoverable shale gas resources, more than its 149 trillion cu ft of remaining conventional gas reserves.

However, new sources of oil and gas are not the only causes of high oil prices, as production problems in several countries also play an important role. As we discuss later, Nigerian output is at least 600,000 b/d lower than it would be without militant activity and perhaps 1m b/d lower than it would be with a settled investment regime. Western sanctions have cut Iranian oil production by at least 1m b/d and this figure is rising month on month because of the difficulty of obtaining new technology.

A combination of protests and strikes have cut Libyan production by 800,000 b/d and deterred investment in new field development. Finally, 300,000 b/d of Syrian production has been shut-in because of the bloody civil war in that country. All of these factors help to push global prices higher, as a counterbalance to rising North American oil production.

In the rest of our report, we consider Angola’s elevation to the ranks of Africa’s liquefied natural gas (LNG) producers, despite some initial difficulties. North African gas producers are suffering from rather more than teething troubles that could see Middle Eastern gas imported into the African continent for the first time. Finally, we look at the likely commencement of oil production in Kenya, as Tullow strikes it lucky yet again, following on from its successes in Uganda and Ghana. The government of Ghana has now sanctioned the country’s second major oil project, to develop the Tweneboa, Enyenra, Ntomme (TEN) fields on the Deepwater Tano Area. A Japanese consortium has been formed to finance the TEN scheme’s floating production storage and offloading (FPSO) vessel. The ship will to be able to handle production of 80,000 b/d and 170m cu ft of gas a day, with storage capacity of 1.7m b/d.

The Deepwater Tano contract area is held by Tullow (47.175%) as operator, along with Kosmos Energy, Anadarko Petroleum, Sabre Oil & Gas, Petro SA and the Ghana National Petroleum Corporation.

New investment is also being pumped into the Tema Oil Refinery to expand its handling capacity from 45,000 b/d to 60,000 b/d. Managing director Ato Ampiah said: “We will be installing a new furnace valued at $7m and do some retrofitting of various parts of the plant within 18 months…We have made some progress in accessing the remaining funds to continue with the repairs and retooling programme.”