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West Africa’s oil and gas sector faces a pivotal few years

Instability in the region has impacted upon exports, but can these countries overcome this to become reliable wordwide players?

A few years ago, one oil supplier above all others – Nigeria – vexed the thoughts of traders in New York. A pipeline outage or saboteur’s attack in the Niger Delta would have an immediate impact on oil prices. The rebels knew how important their country’s oil was to the US and causing havoc in the market across the Atlantic was part of the ploy.

In 2004, Nigeria’s light, sweet crude oil accounted for about 10% of US imports, giving Africa’s biggest oil producer an outsized influence on the price of American fuel. Refineries in the US northeast depended on Nigeria. Unrest in the country, which frequently shut in much Nigerian oil, was one of the supply-side forces that helped send crude prices into the stratosphere in the years up to 2008.

The years since then have not been kind to Nigeria’s oil industry. The US now has a more reliable source of home-drilled oil, equal in quality to the West African crude that its refiners once depended on. Nigerian exports to the US have dwindled from more than 1 million barrels a day (b/d) nine years ago to 230,000 b/d in December 2012. Worse still, the US may one day begin exporting some of its own crude, too: new competition for Nigerian crude in the Atlantic basin (see article). Elsewhere in Africa, promising oil and gas discoveries are also now competing for attention.

Domestically, things are not well in Nigeria’s energy sector, either. Beyond the social inequity that has long scarred the Delta – fomenting resistance among local folk who have seen little of their region’s oil wealth improve lives – new security threats are mounting, both offshore and in the country’s north (see article).

That environment will make it difficult for Nigeria to lure the kind of investment it needs as it targets a doubling of oil output to 4 million b/d; the construction of new refining capacity; and the installation of new energy infrastructure. Yet investors have other worries, too. A proposed revamp of the tax and contractual regimes – designed to clean up the bidding process, among other things – has been revised countless times and seems no closer to enactment. It would raise taxes on oil firms, too. The cash is needed, not least because the country has lost so much money to oil theft and corruption in recent years. But Nigeria can’t afford to scare investors away, either.

Silver lining

Yet the picture is not entirely gloomy for Nigeria. As the big Western oil firms struggle there, smaller companies, many of them local, are cropping up to fill the gap. Asian money continues to provide capital – and Asian consumers have become reliable buyers of West Africa’s crude. For all Nigeria’s problems, its oil output has remained relatively steady. The economy has been expanding rapidly and consistently, growing by 6-8% since 2008. After a sharp dip in 2010, foreign direct investment is on the rise, according to the World Bank.

The outlook for the rest of West Africa, meanwhile, is much rosier, as Petroleum Economist’s survey suggests. The coming few years could be transformative for the region. Drilling of pre-salt structures that extend from Namibia up to Mauritania, believe analysts, may unlock a vast new trove of oil comparable to that found across the Atlantic offshore Brazil. Angola is leading this pre-salt charge, hoping that fresh discoveries will help offset the rapid decline of its producing fields. Gabon and others are hopeful, too. New deep-water development is also under way, with rising output from Ghana’s Jubilee field heralding the arrival of a significant new oil source of oil. Delays have kept that field from reaching its plateau as quickly as planned. But it was only discovered in 2007, in waters previously overlooked by explorers. Oil began flowing three years later – a speed of development hardly matched by producers elsewhere in the world. This year will also see West Africa add a new liquefied natural gas (LNG) exporter to the world’s supply, as Angola LNG comes on stream. Its spot-market focused sales strategy will see it target buyers in Latin America and Asia.

New licensing in the region (even Equatorial Guinea signed new upstream contracts at the end of last year), more successful drilling of the kind seen in Angola and Ghana in recent years, and continued strength in oil markets should be a boon to West Africa’s upstream in the coming years. Further consolidation among companies is likely, as some majors (like Total) shed assets and firms with promising acreage (like Maurel & Prom in Gabon) attract predators. Expect the position of Chinese and other Asian companies in West Africa to keep growing. But there will remain space for Western oil firms, especially those (like Repsol) with expertise in the pre-salt and deep water.

The Energy Information Administration, the statistical arm of the US Department of Energy, reckons West Africa’s oil output will rise from 4.45m b/d in 2010 to 5.26m b/d in 2035 – production growth of 0.7% a year, or less than half that forecast for the Middle East. But it is easy to imagine that West Africa’s output could exceed those projections, especially if political stability prevails and pre-salt and deep-water drilling prove as fruitful as hoped. As West Africa’s role in the global oil market shifts, the next few years will be decisive for its upstream. 

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