The new scramble for Africa’s Oil

Published: 09-FEB-05

Investment in Africa’s offshore oilfi elds “is really going crazy”, says Dr Philip Lloyd of the Energy Research Centre at the University of Cape Town. Intensive oil and gas exploration over the past decade has increased Africa’s oil reserves by 25%, according to an executive from ChevronTexaco, which alone is investing US$20bn in African projects over a five-year period, focusing on deepwater discoveries.

Angola’s offshore oil reserves alone are potentially larger than that of the North Sea, according to Keith Bryer, BP’s Africa comunications manager, who says BP’s investment in oil in the former war-torn country is “US$8bn so far and rising”.

But with all this money coming into countries with relatively small economies, contradictions are emerging, not least of which is one of capacity. The region, estimates Herman Jonker, a South African local government official, has “no capacity to fill even 10% of the industrial capacity required for $10 bn a year of investment”.

Most of the supplies consumed by the oil industry are flown in from Europe and the US, and although some of the oil-producing African countries have “local content” deals with the big oil companies drilling in their territories, few countries have the capacity to adequately meet demand for the precision engineering services and the myriad other products required by the industry.

Because of this lack of capacity, the costs of services and supplies – themselves often imported - in West Africa are exorbitant. As a result, European and US firms have the lion’s share of business – as much as 99% - that comes from servicing the oil industry in West Africa.

Factors highlighting lack of capacity include the sheer scale of demand, the consistently high quality demanded and, given that an offshore drill operates at a cost of between $100 000 to $250 000 a day, timeous delivery of products.

Delays are not easily tolerated in the high-pressure oil business and successful port economies like Singapore have warehouses and customs procedures dedicated to servicing the oil industry. Oil companies which have to wait days for an imported product to clear customs will route it elsewhere. What is required are customs procedures tailored specifically to meet the urgency with which the oil industry operates. The question of quality in an industry that operates according to exacting precision specifications means African businesses often lack the certification standards required by the industry. The “unsatisfactory results” of substandard quality that can arise when in-country expertise has produced equipment in a local-content agreement has already led to calls from executives for a “reasonable risk-reward matrix”, meaning that if a project suffers as a result of a local-content agreement with an oil-producing country, then the government of that country should endure some of the losses that the oil company experiences.

Then there is the historical question of stigma. African countries are often tainted by a reputation for corruption, inefficiency and substandard production and services. This is often the result of ignorance of third world production capacity, but it is more worrisome when negative perceptions arise as a result of experience of corruption and inefficiency.

The US, the largest importer of oil in the world with about 7% of global production heading to its shores, currently imports between 15% and 17% of its oil requirements from West Africa. It is looking to increase this to 25% by 2015. This means that any question marks to doing business in Africa will be particularly damning for African oil-producing countries looking to increase their economy’s share of oil revenues.

The benefits for the oil-producing countries of moving from an ad-hoc relationship with oil money to a more streamlined, proactive and formalised approach speak for themselves. The US is eager to move away from sourcing oil in the volatile, dangerous and unpredictable Middle East region – by far the world’s biggest producer of oil – and the oil in sub-Saharan Africa’s waters is enticing.

Being largely offshore, political and social risk is much lower. The oil boom along Africa’s west coast is ultimately politically driven. The US’s thirst for oil is virtually unquenchable. Dr Lloyd, citing British Petroleum’s Statistical Review of World Energy, says the US uses about 20 million barrels of oil per day (bpd). Saudi Arabia produces about 9m bpd, which leaves the US looking for other sources.

Together, Nigeria and Angola pump almost 80% of West Africa’s oil. Angola produces 1m bpd and is aiming to double this and Nigeria, Africa’s biggest producer of oil, is producing 2m bpd and is aiming for 3m bpd. Other African producers include Algeria (1.6m bpd), Libya (1.4m bpd), Egypt (750 000 bpd) and Sudan (230 000 bpd).

There is also Equatorial Guinea. Although it has been producing around 230 000 bpd, its upstream industry is the fastest growing in Africa, at 31% a year, so this is set to increase significantly. This compares favourably with Angola’s upstream oil industry, which is growing at 22% a year, and Sudan, at 10% a year.

All in all, Africa pumps about 8m bpd, , but compares more favourably with, say, Saudi Arabia when one considers the rapid growth and the political factors.

This explains the massive investment in Africa – but how much is actually going into the economies of the oil producing nations?

The extent to which African economies are benefiting from such massive investment – as opposed to simply receiving oil royalties, which go into government coffers (with some of this tending to become unaccounted for) – depends on the extent of local content agreements set up with the investors, and then the industrial capacity to see these local content agreements through.

While some of the West African nations have such agreements in place, Nigeria has been pushing for increased local content, which a few years ago was at only 5%. In 2002, Nigeria’s central government reportedly set a deadline to provide 50% of goods and services demanded by the oil projects in its waters by this year. Oil companies do not always go along with such plans, though, and local content clauses have been known to delay several deals.

A clause for increased local content reportedly upset the development of the US$1bn Agbami offshore oil field owned by the NNPC/ ChevronTexaco joint venture. A settlement was reportedly reached whereby 30% - or US$1.2bn – of the expenditure on the the three oil and gas projects in Agbami now goes into the Nigerian economy.

Shell Nigeria reportedly claims to have a target of 35% Nigerian content annually in its contracting for goods and services, but it is often the lower-skilled work that goes to Nigerian contractors. This throws up the question of capacity: with a manufacturing sector that that tends to account for around 10% of GDP in several countries in sub- Saharan Africa: with the exception of South Africa, there is simply not the industrial base to provide for such a level of local content.

As a result, the quality demanded by the oil industry is not always immediately met by local contractors, who themselves face the dilemma of being dependent on demand to expand, but seeing the demand going elsewhere because of their lack of capacity.

Into this vacuum is stepping South Africa, the economic powerhouse of the African continent, with the increasingly coherent, if not yet formal, argument that African countries that lack capacity should help multinational companies accrue “local content” points if and when goods and services are contracted to firms in other African countries.

The logic of this fits neatly into the Nepad (New Partnership for Africa’s Development) paradigm, that states that development needs to be mutually enhanced and that economic – and related – development cannot happen in isolation.

Taken like this, the concept of “secondary points” comes into play, and is a concept that is being coherently formulated by the Cape Oil and Gas Supply Initiative (COGSI) as South Africa works toward securing some of the investment fl owing into West Africa and to localise business – in a continent-wide sense.

Years of concerted efforts, including visits by delegations representing South African government and industry for the past three years to the Houston, Texas offshore technology conference - the biggest offshore and gas event in the world - culminated last year in the launch of COGSI, a vehicle specific to the purpose.

According to a briefing document by the South African provincial government of Western Cape, a key stakeholder in the COGSI, “the opportunity exists to lobby on a government level for an agreement to allow for ‘African Content’ in the absence of the ability to meet local content conditions”.

Herman Jonker, an ex-officio member of COGSI through his position in the Western Cape’s Economic Development and Tourism department, puts it this way: “Through Nepad, South Africa can link with oil-producing countries to try and convince them that Africa could gain more than it is currently by getting involved in industrial activities of exploration and production.

“Since oil-producing countries have a very low industrial base and South Africa has a much higher industrial base, the obvious solution would be for oil-producing countries to give South Africa or other African countries preferred access to these [oil industry] contracts,” said Jonker What is required, he says, is political lobbying for African host countries to recognise African Content as a preferred source of procurement. Of course, the South Africa-West Africa link would be a reciprocal one, using skills training, technology transfer and even broader development aid.

Already, the fact that the 18th World Petroleum Congress is taking place in South Africa in September, is indicative not only of Africa’s prominence in the global oil industry but also of South Africa’s increasingly important role within that. Described as “the Olympics of oil industry gatherings”, and held only once every three years, this is the first time that this key event is taking place on African soil. South Africa’s Minerals and Energy Minister, Phumzile Mlambo-Ngcuka, has said that South Africa would host the congress on behalf of Africa as a whole.

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