In his 2007 book, Untapped: The Scramble for Africa’s Oil (buy from Amazon.co.uk or Kalahari.net), John Ghazvinian suggested that there were at least six reasons why Africa’s oil is really “good” oil. Of course, any oil is good oil these days, but Africa’s oil producers has some distinct advantages that can work in Africa’s favour.
For the record, Africa’s top oil producers (bbls per year) are as follows (World list available here):
- Nigeria, 2.21 (14th in the world)
- Algeria, 2.12
- Angola, 1.9
- Libya, 1.8
- Egypt, 0.6
More importantly, I think, Africa’s top proven oil reserves (in billions of barrels) are as follows (World list available here):
- Libya, 47 (9th in the world)
- Nigeria, 37.5 (10th in the world) – still many untapped fields so the actual number is likely to be much higher
- Angola, 13.5 (15th in the world) – still many untapped fields
- Algeria, 13.4
- Sudan, 6.8
- Egypt, 4.3
- Ghana – recent discoveries in late 2010 has meant official estimate in January 2011 of 2 billion is now deemed very low (their newly opened Jubilee field has 1.8 billion barrels on its own – the second largest single field in the world).
Even with new discoveries on the West African coast, Africa still only supplies just more than 10% of the world’s oil. But there is huge hype around the continent. The United States already imports more oil from Africa than the Middle East, and China is increasingly looking to Africa for its energy security. Ghazvinian suggest the following reasons why Africa’s oil reserves are so exciting (much of this is taken from a summary by the author, available here):
1. The quality of the oil is high
The variety of crude found in the Gulf of Guinea (where Nigeria and Ghana have their offshore oil fields) is known as “light” and “sweet,” meaning it is viscous and low in sulfur, and therefore easier and cheaper to refine than other types. Middle Eastern crude, which tends to be lacking in lower hydrocarbons, is considered very “heavy” and “sticky.” This is particularly appealing to American and European refineries, which have to contend with strict environmental regulations that make it difficult to refine heavier varieties of crude without running up costs that make the entire proposition worthless.
2. Reduced transport costs and easier routes to buyers
Africa is almost entirely surrounded by water which significantly cuts transport-related costs and risks. The Gulf of Guinea, in particular, is well positioned to allow speedy transport to the major trading ports of Europe and North America. Existing sea-lanes can be used for quick, cheap delivery, so there is no need to worry about the Suez Canal, for instance, or to build expensive pipelines through unpredictable countries. This may seem a minor point, until you look at Central Asia, where the Baku-Tbilisi-Ceyhan pipeline, stretching from Azerbaijan through Georgia and into Turkey, and intended to deliver Caspian crude into the Mediterranean, had to navigate a minefield of Middle East politics, antiglobalization protests, and red tape before it could be opened. Iran has similar problems of access, even if it sorts out its political issues. African oil faces none of those issues. It is simply loaded onto a tanker at the point of production and begins its smooth, unmolested journey on the high seas, arriving just days later in Shreveport, Southampton, or Le Havre.
3. Favourable business and political environment for oil companies
This advantage is very much in the favour of big oil companies, and represents the biggest threat to Africa and Africans. But there is no doubt that Africa offers a tremendously favorable contractual environment for oil companies. Unlike in, say, Saudi Arabia, where the state-owned oil company Saudi Aramco has a monopoly on the exploration, production, and distribution of the country’s crude oil, most sub-Saharan African countries operate on the basis of so-called production-sharing agreements, or PSAs. In these arrangements, a foreign oil company is awarded a license to look for petroleum on the condition that it assume the up-front costs of exploration and production. If oil is discovered in that block, the oil company will share the revenues with the host government, but only after its initial costs have been recouped. PSAs are generally offered to impoverished countries that would never be able to amass either the technical expertise or the billions in capital investment required to drill for oil themselves. For the oil company, a relatively small up-front investment can quickly turn into untold billions in profits. Unfortunately, these PSAs are often accompanied by corruption, bribery and lack of commitment to environmental standards by the oil companies.
4. OPEC is not a factor
Yet another strategic benefit, particularly from the perspective of American politicians, is that of the sub-Saharan oil producers, only Angola and Nigeria belong to the Organization of Petroleum Exporting Countries (OPEC). Thus they have not been subject to the strict limits on output OPEC imposes on its members in an attempt to keep the price of oil artificially high. The more non-OPEC oil that comes onto the global market, the more difficult it becomes for OPEC countries to sell their crude at high prices, and the lower the overall price of oil. Put more simply, if new reserves are discovered in Venezuela, they have very little effect on the price of oil because Venezuela’s OPEC commitments will not allow it to increase its output very much. But the new reserves discovered in Ghana potentially mean more cheap oil for everybody.
5. New discoveries are all offshore
Probably the most attractive of all the attributes of Africa’s oil boom, for Western governments and oil companies alike, is that virtually all the big discoveries of recent years have been made offshore, in deepwater reserves that are often many miles from populated land. This means that even if a civil war or violent insurrection breaks out onshore (always a concern in Africa, as in the Middle East), the oil companies can continue to pump out oil with little likelihood of sabotage, banditry, or nationalist fervor getting in the way. Given the hundreds of thousands of barrels of Nigerian crude that are lost every year as a result of fighting, community protests, and organized crime, this is something the industry gets rather excited about.
6. Speed of growth of the African oil industry
Finally, there is the sheer speed of growth in African oil production, and the fact that Africa is one of the world’s last underexplored regions. In a world used to hearing that there are no more big oil discoveries out there, and few truly untapped reserves to look forward to, the ferocious pace and scale of Africa’s oil boom has proved a bracing tonic. One-third of the world’s new oil discoveries since the year 2000 have taken place in Africa. Of the 8 billion barrels of new oil reserves discovered in 2001, 7 billion were found there. In the years between 2005 and 2010, 20 percent of the world’s new production capacity is expected to come from Africa. And there is now an almost contagious feeling in the oil industry that no one really knows just how much oil might be there, since no one’s ever really bothered to check.
Read more about Africa’s untapped resource treasures in a previous blog entry here.
Oil is a blessing and a scourge. It brings great revenues and the potential of huge wealth. But since the first oil rush in the southern USA to the recent rush in Nigeria, its history has a heart as black as its product. Corruption, destruction, violence and pillage seem to be part and parcel of this industry. Yet, it is where the money is. Countries like Dubai and Malaysia have proved it can be used for good. Countries like Iran use it strategically, if not for the benefit of all. Africa can still choose the high road.
Ghazvinian concludes this way: “All these factors add up to a convincing value proposition: African oil is cheaper, safer, and more accessible than its competitors, and there seems to be more of it every day. And, though Africa may not be able to compete with the Persian Gulf at the level of proven reserves, it has just enough up its sleeve to make it a potential ‘swing’ region — an oil province that can kick in just enough production to keep markets calm when supplies elsewhere in the world are unpredictable. Diversification of the oil supply has been a goal — even an obsession — in the United States since the Arab oil embargo of the 1970s. Successive U.S. administrations have understood that if the world is overly reliant on two or three hot spots for its energy security, there is a greater risk of supply disruptions and price volatility. And for obvious reasons, the effort to distribute America’s energy-security portfolio across multiple nodes has taken on a new urgency since September 11, 2001. In his State of the Union address in January 2006, President Bush said he wanted to reduce America’s dependence on Middle East crude by 75 percent by 2025.” President Obama has reiterated this desire.
Africa has a bright future if they don’t get sucked in by the wicked side of the black gold. Let’s all hope that doesn’t happen.