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Angola faces oil production and development problems

The one-time tiger of the oil world has lost its way

Angola's escalating oil production has fuelled China, buoyed the US, and helped save the world from yet-higher crude prices. But recently the country has lost its way: production is static, development work is sluggish, and a planned exploration offer has been revised and delayed.

Some say the loss of drive reflects a policy vacuum, possibly related to the retirement plans of the president, José Eduardo dos Santos, who has run the country since 1979. Dos Santos – known for his micro-management of the oil sector – was out of Angola for a long period last summer and there were rumours he was having medical treatment in Spain. In November a state-run newspaper reported that, at 71, he is considering his succession plans.

Although the petroleum minister, José Maria Botelho de Vasconcelos, has held the position for over five years (and also for three years in the past), it is evident that dos Santos drives policy matters. It was he who engaged with the US companies in the country’s civil war years, when the US was backing the forces opposing dos Santos’ MPLA government. It was dos Santos who pioneered the tax terms which encouraged the companies to extend the search into Angola’s ultra-costly deep waters.

The companies – the majority of Angola’s oil is produced by Chevron, Total, ExxonMobil and BP – say the authorities are very slow to respond to even routine requests, while nothing happens on contractual matters until the highest levels of government have given the nod. The state oil company, Sonangol, is responsible for licensing and licence management, but also has to seek high-level approvals before signing papers.

Yet the authorities seem to be unaware of the industry’s problems. Early last year, Sonangol said the country’s oil production was on-track to climb to 2.0 million barrels a day (b/d) in 2016, while in November the petroleum minister advanced the date to 2015. But in reality output is likely to decline, because the older deep-water fields are watering-out fast.

Production peaked at 1.85m b/d in 2008 but then slipped, and has been static in recent years. With the older fields losing production at 10% or more each year, recent start-ups have only just compensated for the losses. International Energy Agency figures say production ran at 1.78m b/d in 2012 and at 1.74m b/d over the first 11 months of last year.

The new-field developments in deep and ultra-deep licences, needed to counter the decline of older fields, are not coming forward fast enough. For three years, no large deep-water development has been launched – yet the large operators have projects planned, from their banks of good discoveries. The projects likely to be given the go-ahead this year will not be flowing until 2016-17.

Development constraints

Reasons for the slow-down in development work are largely financial – but, the operators say, within the authorities’ powers to address through the tax system.

Developments in Angola’s deep and ultra-deep waters are extraordinarily expensive. With reservoirs at relatively shallow depths below the seabed, the oil tends to be cool and of medium gravity – characteristics which demand vast and costly seabed installations, to collect crude from numerous wells and to supply injection water. BP’s PSVM development, brought on stream in December 2012, stretches 34 km across the seabed and will have cost over $14bn when all wells have been drilled.

Meanwhile, costs are being raised by the government’s local-content rules. Operators are required to source specified products and services from Angolan companies, often at higher cost than from international firms, and are required to employ at least 70% of Angolan nationals (although this is rarely achieved). Levies must be paid for training. Rapid growth after the civil war has made Luanda one of the world’s most costly capitals for expatriates.

Mirroring their optimistic forecasts for production, the authorities are optimistic that they can increase the pace of licensing new exploration territory – according to the petroleum  minister in November, from this year up to 15 new blocks are to be licensed every two years. Hopes are being pinned for the next decade’s production on the country’s extensive pre-salt prospects, and 11 pre-salt areas – Blocks 19, 20, 22, 24, 25, 35, 36, 37, 38, 39 and 40 – were licensed in 2011.

However, the evidence shows that subsequent licensing moves are going slowly. A target of opening-up 15 pre-salt onshore blocks before the end of last year has slipped to the first quarter of this year, according to the petroleum minister in October. But in December he was reported as saying that Sonangol would explore five of the blocks itself and, if successful, would then invite bids for them as development licences – a change-of-plan which might indicate that international companies were less than enthusiastic about the offer.

The minister has also been trying to interest Russian companies in the areas, and the authorities want to allocate 50% of each licence to Angolan participants. The latter is a disincentive for the international companies, which prefer to partner with other international oil firms. Several little-known Angolan companies, alleged to have links with members of the government, already have licence interests.

The international companies are also unenthusiastic about the authorities’ pressure to license new areas on risk-services agreements, instead of the usual production-sharing agreements. While production-sharing agreements give the company access to crude, the return for success under risk-services agreements is a financial payment per barrel produced. The first risk-services agreement was signed by Cobalt, the private-equity backed US company, which made its entry into Angola when it took Blocks 9 and 21 in 2010.

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