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Asia's Africa scramble continues

Asian companies are expected to bid hard in Nigeria's forthcoming licensing round. But that will be just one more sign of their increasing influence over African oil. Tom Nicholls writes

NIGERIA is set to hold a licensing round for 50-60 blocks early this year. It will probably take place before April's general election, enabling President Olusegun Obasanjo to go out on a high note and enhancing the credibility of the governing People's Democratic Party (PDP) and its presidential candidate, Katsina state governor, Umaru Yar'Adua. It is also likely that Asian companies will feature prominently, as they continue to expand their upstream portfolios in Africa.

At the time of writing, Nigeria's Department of Petroleum Resources (DPR), the oil and gas regulator, had provided no information on the acreage that will be offered. However, blocks that were won in the 2005 licensing round (see box), but for which signature bonuses were not paid (see Table 1), are likely to be included. The offering will be promoted in an international roadshow, probably starting this month.

Chinese and Indian companies, in particular, are expected to win blocks. Their chances of success will certainly be enhanced if the government makes upstream access conditional on investment in downstream and infrastructure projects, as it has in the recent past.

Last May, 15 blocks were awarded in a so-called mini bid round (simply a smaller version of the full-scale round planned for early 2007). Upstream development rights were linked to commitments to invest in domestic infrastructure and Indian and Chinese energy companies proved the most successful bidders. China National Petroleum Corporation (CNPC), for example, was awarded four licences. In exchange, it will invest $4bn in local infrastructure; projects include revamping a refinery in the northern city of Kaduna, building a hydropower plant and installing a fast-rail system from the capital, Abuja, to the economic capital, Lagos.

Equity ownership of foreign energy resources has become China's preferred method for securing supplies for its booming domestic market. The political value of energy security for Beijing – continued buoyant economic growth, job creation, wealth creation and, ultimately, social stability – means Chinese companies are generally prepared to pay far more for oil and gas assets than Western companies, with their rigid focus on financial returns.

"Western international oil companies (IOCs) have been unable to compete with the terms offered by some Chinese companies, which are prepared to risk investing in loss-making propositions," says Thomas Pearmain, an analyst at Global Insight, a consultancy.

The CNPC deal was also closely linked to high-level diplomacy – another significant advantage that state-owned companies have over their private-sector counterparts. The previous month, China's President Hu Jintao had brokered the deal on a visit to Nigeria.

The phenomenon is evident across Africa. Angola now supplies China with over 0.5m barrels a day (b/d) of its total output of 1.4m b/d and has become the country's largest source of crude. Chinese companies are becoming increasingly influential in Angola's upstream sector, helped by fruitful government-to-government contact, oil-backed loans authorised by Beijing, juicy signature bonuses and the offer of large investments in downstream and infrastructure projects.

Similarly, Chinese companies are significant investors in Sudan, their involvement deepening following the withdrawal of Western companies such as Canada's Talisman Energy. Last year, half of Sudan's oil exports were lifted by China. Chad, meanwhile, is the latest country to be winning Chinese favour (see box). And Chinese drilling activity is even under way in Niger: CNPC holds 80% of and operates the Ténéré concession, adjacent to the Agadem Block, where Malaysia's Petronas and ExxonMobil have made six oil discoveries and one gas discovery. CNPC also has investments in Algeria and Mauritania.

And it is not just Chinese companies. India has adopted a similar approach – acquiring upstream assets in an attempt to guarantee energy supplies to its domestic market. Although Indian companies have sometimes been outbid by their Chinese rivals, they are also willing to pay a strategic premium for assets. In the May mini licensing round, a consortium of India's Oil and Natural Gas Corporation (ONGC) and Mittal Steel won licences for two blocks, paying signature bonuses of $50m and $75m; in exchange, they will undertake investments costing $6bn in a refinery, a power station and a railway.

A deepening of India's involvement in Nigeria seems likely: according to local reports in India, the petroleum minister, Murli Deora, last month talked to Nigerian oil minister Edmund Daukoru about further refinery investments, long-term crude supply contracts and the possibility of Indian companies investing in liquefied natural gas projects in the country.

Petronas has arguably been the most successful national oil company (NOC) in terms of developing an overseas portfolio and has built up a strong position in Africa. South Korean companies, meanwhile, are attempting to catch up with their Chinese, Indian and Malaysian counterparts in the race to gain access to African energy supplies. In November, the country signed a $10bn railway construction deal with the Nigerian government under an infrastructure-for-oil arrangement (PE 1/07 p27).

Western companies and governments are already alarmed by the steady advance of competitors from Asia, especially because NOCs are usually not subject to the same strict investment criteria. However, competition could increase dramatically if the Asian companies that have inferior social and environmental policies start to match the standards of their Western rivals, argues Control Risks, a consultancy.

For now, China's state-owned energy companies, for example, are far adrift of the practices of IOCs and indeed many of the more sophisticated NOCs. Rolake Akinola, west Africa analyst at Control Risks, says companies with less rigorous social-responsibility policies will eventually start to emulate the corporate standards that Western companies are generally adopting in order to improve their chances of picking up contracts – by, for example, encouraging local economic development and job creation, and improving standards of environmental stewardship.

"When there is no difference between the practices of Western and Asian companies and when countries such as Nigeria are securing better deals out of, say, the Chinese, that's when competition from the Asian firms will really start to kick in," says Akinola.

Nigeria on transparency drive

NIGERIA'S last big bid round was held two years ago and was initially deemed a success, writes Tom Nicholls. In March 2005, 77 blocks were offered and 44 were awarded. However, a large number of signature bonuses were not forthcoming and many of these bids were not converted into active contracts.

The government has subsequently attempted to prevent companies from offering outrageously high signature bonuses that they are unable or unwilling to pay by requiring bidders to stump up 25% of their proposed signature bonus on the opening of bids. That seemed to work in the mini-bid round that took place in May 2006: of 15 blocks offered, 11 were awarded.

However, this year's much larger offering will test the government's ability to organise a successful and transparent bid round, says Barrie Hogg, a west Africa analyst at Wood Mackenzie.

A sensitive issue
Transparency is a particularly sensitive issue in Nigeria. The 2007 licensing round was originally scheduled for launch in October. The delay has partly been attributed to the temporary suspension, in November, of Tony Chukwueke, head of the Department of Petroleum Resources (DPR), during an investigation into Addax Petroleum's controversial acquisition from Starcrest Nigeria Energy, a local firm, of a stake in the OPL 291 licence, a highly prospective deep-water block next to Chevron's Agbami oilfield.

Addax, a Switzerland-based, Canadian-listed company agreed to pay $90m to take control of the block. The government has since cleared Addax and Chukwueke of any wrongdoing, and the DPR director was reinstated in December.

However, it remains unclear how the virtually unknown Starcrest Energy, which is understood to have strong political connections, acquired the block in the first place. Last month, the government set up a special committee, chaired by the oil minister, Edmund Daukoru, to define rules for the processes leading to the award of oil blocks in an effort to improve transparency.

Analysts say it remains to be seen whether the action being taken as a result of those events is symptomatic of a genuine determination on the government's part to improve transparency or to boost its ratings in an election year.

Sinochem breaks Chinese mould

SINOCHEM is part of a consortium negotiating a farm-in to a highly prospective deep-water Nigerian block, writes Tom Nicholls. The deal may mark a change in the way the Chinese government approaches oil and gas investment, according to a well-placed industry source.

Most Chinese investment in Nigeria's oil sector has happened as a result of government-to-government negotiation; few asset acquisitions have occurred through private-sector negotiation. This deal – in which state-owned Sinochem's interests are being represented by Andaz, a Beijing-based oil and gas consultancy – may be a sign that China is giving its national oil companies greater autonomy in the pursuit of overseas assets. Freeing Chinese companies from tight central control and red tape, the source says, could result in an acceleration of overseas investment.

Little seismic has been done on the block in question, but its proximity to the Akpo and Bonga fields makes the acreage highly prospective. The right to develop the block is held by a Nigerian biofuels company and was granted in exchange for a pledge by that company to build an ethanol plant in northern Nigeria. If it does not take up that right, the block would revert to ONGC Mittal, which has offered a signature bonus of $100m, of which $25m has been deposited with Nigeria's Department of Petroleum Resources.
Sinochem, which has until now been overshadowed by CNPC, Sinopec and CNOOC on the international stage, is grouped with two other companies in the consortium – one from Asia and one from Europe.

There is no doubt that Chinese companies are keen to invest more in Nigeria's oil sector. In July 2005, China and Nigeria signed an $0.8bn crude-sale agreement, for 30,000 b/d of exports to China over five years. Last year, CNOOC took on four oil blocks in exchange for commitments to spend an estimated $4bn on infrastructure projects (see main story). In January 2006, CNOOC agreed to pay $2.27bn, plus $424m in expenses, to South Atlantic Petroleum for a 45% working interest in the OML 130 offshore licence, mainly covering Nigeria's undeveloped Akpo field.

Hu woos Chad

CHAD is the latest African nation to receive the royal Chinese diplomatic treatment. Early last month, Chinese president Hu Jintao dispatched his foreign minister, Li Zhaoxing, to Chad and six other African countries.

A few days later, EnCana announced the sale of its Chad exploration assets to China National Petroleum Corporation for around $200m, marking its withdrawal from exploration in Africa. EnCana has operated an exploration programme in Chad since 2002, drilling 11 exploration wells, with "encouraging results". The Canadian company says it is leaving Chad as part of its strategy to focus on North America.

Growing Chinese involvement in Chad is no surprise: last year, the central African country cut diplomatic relations with Taiwan and opened official links with Beijing as a prelude to closer ties. Beijing's decision to invest in Chad poses another challenge to the dominance of Western firms – in this case ExxonMobil and Chevron. There is speculation that China is considering building a pipeline across Chad to the Sudanese coast to export to its home market. According to Global Insight's Thomas Pearmain: "All the signs point to China investing heavily in Chad."

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