OIL
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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