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Angola seeks fresh investment and new markets

As the US reduces its imports, the country looks elsewhere to sell its oil

State energy firm Sonangol is confident that new offshore production will enable Angola’s oil production to rise sharply over the next couple of years, as new output outweighs losses due to technical problems elsewhere. But some doubts remain over the sector’s longer-term outlook, given an uncertain demand prognosis. 

Sonangol has set a target of boosting oil production to 2 million barrels a day (b/d) in 2015, a rise of around 16% from today’s levels and a figure that would roughly match output from Africa’s largest oil producer, Nigeria. Francisco de Lemos José Maria, the company’s chairman, said recently that it plans to invest $8 billion in oil and gas exploration over the next 10 years and confirmed that it plans to open bidding for 15 onshore blocks in the Kwanza and Congo basins later in 2013, according to state news agency Agop.

A 16% rise in production would represent a marked increase in growth compared to recent years, when output has been dogged by maintenance and technical issues, notably in the Greater Plutonio project. Production rose by 4.5% to 1.73m b/d in 2012 from 1.66m b/d in 2011, when such problems hit output. The company reported a drop in net profit last year to $1.24bn from $3.3bn in 2011. No reason has been given for that decline.

The onshore licences – for 10 blocks in the Kwanza basin and five in the Congo basin – offer further opportunities to drill in pre-salt geology, which Angola hopes will throw up finds of a similar magnitude to pre-salt layers across the Atlantic in Brazil. Both geological formations were created around 150m-160m years ago, shortly after Africa and South America, formerly part of the same landmass, started drifting apart.

Licences to drill in Angola’s offshore pre-salt were offered to a number of foreign companies in 2011, including BP, Statoil, Total, Eni, ConocoPhillips and Repsol. These have proved a big draw for majors that mostly missed out on the juiciest opportunities in Brazil’s pre-salt bonanza, which remained firmly under the control of Petrobras.

Angola is also attractive as a counterweight to North American unconventional-oil investments, with many of the companies operating in Angola being big players in the US and Canada. “More investment is shifting to North America, but in terms of maintaining large diverse portfolios, Angola remains very important to a number of the majors,” says Rebecca Fitz, an analyst at consultancy PFC Energy.

Lessons from Brazil

BP has taken a keen interest in Angola’s offshore pre-salt, building on its strong existing position in the country and its experience in Brazil, where it spent heavily to get acreage in the Campos basin. It has also added weight to its position by teaming up with Petrobras in some pre-salt acreage.

Most efforts in the pre-salt have so far been focused on seismic mapping, rather than drilling, although drill bits are likely to be employed more extensively in coming months, especially following significant early finds. Houston-based Cobalt International and Denmark’s Mærsk announced pre-salt discoveries in December 2011 and January 2012 respectively. Cobalt said its Cameia-1 well and later Cameia-2 well showed the Cameia field, which lies in 1,700 metres of water on Block 21, contains a large hydrocarbon accumulation in a high-quality reservoir. Some analysts have speculated the field could hold more than 1bn barrels of oil.

Cobalt said last year it would hire workers and contractors to support its activities in western Africa and that it had secured a three-year contract for a deep-water rig in Angola. The Cobalt and Mærsk finds added to two other discoveries in the pre-salt made in earlier times, one in the 1980s and another, by Mobil, in the 1990s. With the appetites of investors already whetted by offshore pre-salt prospects, the auction of little-explored onshore blocks promised for later this year might be expected to generate considerable interest. However, these blocks are under-explored for a reason – the security risks related to the country’s long-running civil war. 

Aftermath

The war formally ended in 2002, but tensions have remained, especially in the oil-rich Angolan enclave of Cabinda to the north, subject of an independence struggle. There is also continuing resentment over inequality within the country – exacerbated by oil wealth – which has produced a construction boom and conspicuous wealth for some in the capital Luanda, while leaving most Angolans living on less than $1 a day.

So while the security situation has improved sufficiently for the government to seek onshore investment, it remains to be seen how enthusiastic potential drillers will be.

Security issues are not the only factor for investors to consider. Angola, Algeria and Nigeria have seen sales to the US – a key market for Atlantic basin producers – slump as the US turns to domestic shale oil and gas to meet its energy needs.

The US was once Angola’s biggest oil customer, favouring its light, sweet crude. But Angola’s exports to the US slipped to an average of around 220,000 b/d in 2012, compared with over 500,000 b/d in 2008, according to data from the US Energy Information Administration (EIA).

That means both existing and new oil from Angola will need to find new markets and that probably means selling more to Asia. “There are more challenges on the demand side than might have been the case five years ago, but there still appears to be a clear market for Angolan crude, particularly in Asia,’” says PFC’s Fitz.

However selling to Asia could result in a drop in revenues, partly because of the greater distance to market. More importantly, countries such as China will be able to be more selective over where their oil comes from and how much they pay, as countries formerly selling to the US seek new customers. The process has already started, with Angola selling more oil to both China and India than the US last year. Another potential constraint for oil companies in Angola could be a shift in emphasis at Opec, of which Angola is a member. At present, the country exceeds its group production quota. It isn’t alone among the group’s members in doing so. But any significant dip in the price would probably tighten the group’s discipline, forcing over-producers like Angola to rein in output.

Analysts say that longer lead times to develop new acreage presenting ever-greater technical challenges, together with decline rates of perhaps 10-12% a year at existing deep-water wells, are likely to keep production in check in any case.

However that situation could change if the pre-salt turns out to hold Brazilian-scale riches. “If the pre-salt does realise its promise then there could be an issue with Opec quotas, but it’s too early to tell. It requires a good deal more exploration to prove up,” says PFC’s Fitz.

Angola LNG poised to make its debut – again

Angola is also set to join the club of liquefied natural gas (LNG) exporters later this year, after a string of delays at the new Angola LNG facility.

At the end of February, Sonangol officials were suggesting the $10 billion, 5.2 million tonnes a year project could be up and running within six weeks. However, industry observers suggest June may be a more realistic start up date. The plant, which is located at the mouth of the Congo River on the country’s northern border, had originally been due on line in early 2012.

When it does come on stream, Angola LNG will be selling its LNG into the spot market, rather than on long-term contracts, reflecting the changing face of the global LNG business since the project was first conceived. Much of the gas was originally contracted to go to a Mississippi import terminal in the US. With the advent of rising shale-gas output in the US, however, that export market has since collapsed.

Chevron, which owns 36.4% of the project, has said it will seek long-term contract buyers in the future, but has said the plant will rely on spot-market sales to Asia and Europe to begin with. Sonangol, the state company, is happy to go along with that plan, too. It holds 22.8% of the project, while BP, Eni and Total each have 13.6% stakes.

Figure 1: US oil imports from Angola
Figure 1: US oil imports from Angola

Even allowing for the expense of transporting LNG to distant Asian markets, rather than to the Atlantic basin, the project is still likely to please its developers. Angola LNG was developed primarily as a way of monetising associated gas from oil wells to avoid flaring it, an ambition that will be realised when the first LNG cargoes leave the country.   

However, while there is no shortage of demand for spot LNG at present, a switch to more assured contracted sales in the longer term would seem desirable for the developers. “Angola indicated that it plans to sell the LNG on the spot market, but that’s not easy at times when you have to balance plant and shipping operational requirements,” says David Ledesma, an LNG consultant and fellow at the Oxford Institute for Energy Studies.

One destination that could take supply in the future – and possibly on a contracted basis – is South America, now among the largest LNG importing regions in the world. It is also conveniently placed – being a relatively short tanker voyage across the Atlantic from Angola.  The largest South American LNG importers, Argentina and Brazil, both take virtually all their supply from the spot market, but that may change.

“Argentina and Brazil may continue to buy on the spot market, but I wouldn’t be surprised if either acquired some volumes on a firm contract basis at some point,” Ledesma says.

While LNG marketing from projects around the world is often conducted by ventures formed among the developers themselves, Sonangol has chosen to establish an LNG trading venture with a third party. The company said recently it was creating a trading company with DT Group, a venture partly owned by energy trading firm Trafigura. Sonangol’s trading vehicle, Sonaci, said the new firm, Sonaci DT, would both trade volumes from Angola LNG and source products on the international markets.

“I can see the logic of going with another company that is going to give Sonangol independent trading advice, rather than relying on the joint venture shareholders,” says Ledesma.

Future expansion of Angola’s LNG capacity will depend on the success of the next wave of oil exploration in the country. If those discoveries match those of the past, then a use will need to be found for associated gas, whether it be locally or for export – and there is always the chance that a large non-associated gasfield could be discovered. 

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