LSE’s Raj Verma says West African oil is on the rise. A version of this article originally appeared on the LSE IDEAS blog.
Oil prices have increased dramatically since the beginning of the new millennium due to high demand. From US$26 a barrel in 2000, oil prices peaked at approximately US$147 in 2008. Since then, prices have declined due to the financial crisis and repressed global growth. The recent turmoil in the Middle East and North Africa has affected the global supply and pushed the price of oil to approximately US$110 a barrel. Consequently, major oil-importing countries like the US, China, India and Japan among others, have shifted their attention to sub-Saharan Africa.
From the perspective of the global oil industry, African, especially West African, oil is important for the following reasons: first, compared to the Persian Gulf countries which have proven oil reserves of 752.5 billion barrels, and constitute 54.4 per cent of proven world oil reserves, Africa has proven oil reserves of 132.1 billion barrels of 9.5 per cent of the world oil reserves. West Africa constitutes approximately 50 per cent or 60 billion barrels. While African oil reserves are still dwarfed by those in the Persian Gulf states, the proven oil reserves of Nigeria and Libya are higher than those of the US, China, Brazil, India and many important petro-states such as Azerbaijan and Mexico.
Second, proven reserves in, West Africa, as well as the rest of the continent, have increased at a much faster rate when compared to the rest of the world, and specifically the Middle East. According to Goldwyn, if Africa meets its potential, it may increase its production substantially over the next two decades, and serve as a pillar of global energy security by providing a major source of diverse oil supply. Analysts believe that Africa could hold further significant undiscovered reserves.
Third, at a time when other oil-producing countries are reasserting state control over their oil industries, resource nationalisation has been virulent in Africa. Even though approximately 55 per cent of the world’s proven oil supplies are located in the Middle East, access to the nationalised oil resources in Saudi Arabia has been restricted for decades and a large chunk of the proven reserves are likely to remain underexploited for some time to come. Other major reserve holders like Russia and Venezuela are limiting the opportunities and investments options for foreign investors.
In contrast, African states, especially countries like Nigeria, Angola, Gabon, Ghana, Equatorial Guinea, Chad and others, have been keen on developing oil production at a fast speed and have allowed multinational firms to enter, which is demonstrated by the projected increases in African oil production. The US Department of Energy estimated that total African oil production is set to rise by 91 per cent between 2002 and 2025, from 8.6 to 16.4 million barrels per day. To put this in perspective, world oil production capacity is predicted to grow by 53 per cent between 2002 and 2025, from 80 to 122.2 million barrels per day (mbpd).
Consequently, Africa’s oil production is scheduled to grow at a faster rate than elsewhere, helping to satisfy the world’s rising demand for fossil fuels. For instance, while the world production of oil has increased from nearly 75 mbpd in 2000 to 82 mbpd in 2010, an increase of approximately 8.5 per cent, during the same period, oil production in Africa increased from 7.8 to 10 mbpd, an increase of approximately 22 per cent. Oil production in West African countries during the same period has risen at an even faster rate during the same period.
Fourth, African countries continue to be attractive to foreign investors. In a 2006 ranking of 114 oil-exploring and oil-producing countries, Africa’s oil producers scored very highly in terms of attractiveness: Congo (Brazzaville) was ranked 8th, Angola 9th, Nigeria 11th, Libya 12th, Mauritania 17th, Sudan 18th, Cote d’Ivoire 20th, Gabon 23rd, and Equatorial Guinea 24th. From a purely business perspective Africanoil has various advantages. Although it is difficult to obtain any figures due to commercial confidentiality, oil production and exploration in Africa can be very profitable by international standards.
Fifth, the commercial costs of oil exploration and production in Africa are relatively low, especially if African offshore operations are compared with those in the North Sea or the Gulf of Mexico. Additionally, a key attraction of Africa for oil companies is the high success rate in drilling operations, that is, the number of successful oil and gas-well discoveries divided by the total number of drillings.
Another advantage is that the quality of African oil, particularly that of West Africa, tends to be high. It tends to have relatively high API (American Petroleum Institute standard) gravity and low sulphur content which is easy to refine and hence sought after by refineries (with a few notable exceptions such as Egyptian crude).
Seventh, the predominance of new offshore discoveries in West and Central Africa has also made these regions attractive. Deep-water drilling is exorbitantly expensive and risky, restricting development to a handful of companies with the technology and wherewithal to manage the exploration risks. Offshore drilling also partly mitigates political risk especially in conflict-ridden Africa, by enabling the operator to conduct business miles away from the host country’s mainland. In Nigeria, all new discoveries and production are offshore as are Angola’s oil and gas reserves. By 2020, approximately 95 per cent of oil production in sub-Saharan Africa will be offshore and approximately 85 per cent of this production will come from Nigeria and Angola.
Additionally, the absence of the Organisation of the Petroleum Exporting Countries (OPEC) quotas makes Africa attractive. Apart from Libya, Angola and Nigeria, countries like Chad, Equatorial Guinea, Gabon and others are not OPEC members. IOCs can sell whatever share of oil they are entitled to under their agreement with the host government.
In the coming years, Africa’s importance is going to increase. It is not hard to fathom that national oil companies (NOCs) from China, India, Brazil, Japan, South Korea, Malaysia and other countries, and IOCs from the US and Europe have increased their operations in Africa particularly West Africa. Consequently, the competition between NOCs from emerging countries and established IOCs from the US and the EU has increased and is set to increase further. Due to the increased competition for oil, to diversify their sources of energy and meet their energy security requirements, Western governments, especially that of USA and China, have increased their engagement in the Africa.
Although African reserves are Lilliputian relative to reserves in the Persian Gulf states, Africa may become the new Persian Gulf. If Africa achieves greater political stability and more investment in the oil sector, it might lead to greater oil discoveries in the offshore region which may increase oil production. It is too early to state that Africa is the new Persian Gulf but it does have the potential to become one.