Who owns Africa's oil?

Written by Nicholas Norbrook   
Monday, 01 February 2010 00:00 

Major oil exporting countries like Angola and Algeria are trying out new, smarter versions of resource nationalism as Nigeria’s petroleum industry reforms are delayed and new West and Central African producers tackle the task of shaping new oil and gas industries. 


But there are also signs that the continent is changing. After several decades of indigenisation programmes, there is now a critical mass of highly-skilled local staff, who are peeling off to create local companies that have the know-how to compete with the oil majors. “I have people who have worked for oil companies in seven countries on three continents”, says Wale Tinubu, CEO of Oando, one such company in Nigeria. “Our service division is run by the former head of Schlumberger’s UK training centre. If he can build capacity there, then he can do it here”.


National oil companies are also starting to evolve from distributing oil money for political patronage to become competent companies in the vein of Brazil’s Petrobras and Malaysia’s Petronas. Two of them have started winning contracts overseas, which requires a level of professionalism previously unimaginable from African state institutions.

There are also signs that the politicians are starting to understand the importance of ‘smart’ resource nationalism – building up their own energy industry and understanding the economic imperatives that the discovery of oil brings. Too often, politicians in oil states allow exchange rates to appreciate, grateful for the political points that cheap imports bring and ignoring the devastation wreaked on the rest of the economy.

A booming commodity


War in the Middle East and the emergence of energy-hungry countries like Mexico and China have put ever-greater strain on oil markets. With the price of oil steadily rising throughout the decade, a slump in the dollar pushed international investors into commodities, and oil hit the vertiginous price of $147 a barrel in July 2008. After the credit crunch hit global markets at the end of 2008, prices fell to a low $30 a barrel.

Despite this burst bubble and the minor panic it caused among lawmakers in African countries who had made budgets with assumptions of far-higher revenue, confidence in the sector did not disappear. Legendary Texas oil man T. Boone Pickens predicted oil would return to $70-$80 a barrel by the end of 2009. At the height of the freeze in the credit markets, Tullow Oil, a minor company turning major on the back of its African finds, “closed a $2bn debt facility with a consortium of banks and about $600m in fresh equity on the stock market with minimal discount to the price at the time”, according to vice-president for Africa Business Tim O’Hanlon.

As the decade drew to a close there was a flurry of activity in the sector, particularly in West African offshore and central African onshore. In 2006, Tullow and Heritage Oil discovered the largest African onshore deposit of over 2bn barrels on the border of Uganda and the Democratic Republic of Congo. The oil will require shipping to the coast by road or rail, or the construction of a 806-mile pipeline to the coast – not likely to happen before 2015. East African prospects were also found in Madagascar, Mozambique and Tanzania.

Discoveries in Ghana’s Jubilee field, announced in June 2007, was the starting gun for a new wave of interest in West 
Africa, with Sierra Leone the latest to announce a discovery in September. Liberia is now cashing in by announcing a new offshore licencing round, while all eyes are on Vanco’s Orca 1-x test drill in Côte d’Ivoire. Gabon recently unveiled an offshore round for 40 blocks, while São Tomé 
finally announced a drilling programme in its waters by Addax, whose 2009 purchase by China’s Sinopec injected a considerable amount of cash.


Market dynamics

This brave new world for African oil has been driven by price hikes, which make the expensive process of exploring a risk worth taking. The move offshore, enabled by advances in technology, requires deep pockets – hiring the drill boat that discovered oil in Ghana cost about a million dollars a day. 


Another important dynamic has been the multiplication of competition, with Chinese and Indian companies joining the European and US array of majors. Where oil production was traditionally controlled by a small elite whose monopoly was seen as unhealthy, new challengers have made it easier for governments to negotiate terms. 


Swim like a minnow




But much of the running in recent times has been done by the minnows who are more willing to take the risk. For Tullow’s O’Hanlon, this is down to the resource constraints faced by the industry at large: “The big companies have enormous reserve- replacement issues, and with the same number of staff they need to find an elephant every year just to keep their resource space, let alone grow. Therefore, they cannot afford to concentrate on what they would consider economically-marginal projects. That leaves huge swathes of very economic projects available for people who can get the costs down."

There are two business models in action. In one, the exploratory hopefuls like Kosmos in Ghana and Heritage in Uganda are hoping to strike a find and then cash out by being bought up by a major: Exxon and ENI respectively. But there are also the minnows who see Africa as one of the last great unexplored oil provinces and plan to use its reserves to grow into genuine players. Tullow and Anadarko appear to fall into this category, with Tullow saying it will exercise its pre-emption rights in Uganda to prevent ENI from buying up Heritage in January 2010.

Alongside these smaller companies are indigenous players, slowly brought into existence through ‘local content’ policies developed by governments keen to see the emergence of a national energy industry. Nigeria is a clear case of the best and worst examples of this. While some were simply the distribution of political largesse, especially in the era of former President Olusegun Obasanjo, others like Oando have reached beyond the oil marketing business to head into the upstream sector, where the big money is to be made. (Read more in an interview with chief executive Wale Tinubu).

A case of National pride

In Angola, too, there has been a similar rise in ability, with companies like Somoil and ACR playing a much more active role in the sector. Again, the fact that some of these are operating abroad underlines their professional stature. Many of those who work at these companies have come through the national oil company, Sonangol. Though some were surprised when it was announced that Sonangol had won two oil contracts in Nineveh, one of the most dangerous oil provinces in Iraq, an Angolan company is perhaps well-positioned to manage volatile post-conflict situations.

Algeria’s Sonatrach is similarly well-equiped to work abroad. Though highly politicised, it has avoided the Venezuelan curse of allowing politics to undermine competitiveness. In an interesting development, PDVSA, the national oil company of Venezuela, now sends its engineers to study at the Algerian Oil Institute.

In December, Sonatrach announced a $10m joint venture with Egypt’s national oil and gas companies and it has a slew of agreements with Sahel countries. For Jon Marks, editorial director of newsletter African Energy, “both Sonatrach and Sonangol are large national champions, both are used to 
investing in things other than oil and both reveal countries that have a robust nationalist vision of their position in the world.”

These vanguard national oil companies have a certain toughness when it comes to negotiating terms that Africa has lacked until now. This has helped them take advantage of the growing competition created by the arrival of Asian oil companies. The Nigerian National Petroleum Corporation has similar ambitions, but because of Nigeria’s weak politics, it remains a cash cow rather than a national champion. 


A battle of titans


Chinese companies competed head-to-head for the first time for Marathon Oil’s sale of 20% of Block 32 in Angola in June 2009. “There was a bidding war between Sinopec and CNOOC; they actually took each other on for the first time, which can be seen as Chinese companies for the first time behaving as grown- ups,” says Marks. The companies ended up joining forces for the bid. And at the end of the process, Sonangol exercised its pre-emption rights, taking the stake for itself – not the behaviour of a country pushed around by foreign interests (read more on why oil, politics and China make a combustible mix).


This toughness is not the usual resource nationalism that is seen when prices rise. By being smart about the way in which national priorities are advanced, countries can encourage the 
investment that is unquestionably needed from IOCs and achieve their own energy-sector goals. In Uganda, for example, President Yoweri Museveni has extracted a commitment from Tullow for the construction of a refinery.

Nigeria’s Petroleum Industry Bill is slowly moving through parliament. There are sections of the bill that are problematic, with IOCs claiming that it makes investment 
unprofitable. Should the bill pass in a strong form, it could lead to the development of 
Nigeria’s offshore in as successful a manner as Angola’s.


The focus is now on Ghana’s handling of its oil sector. Accra still has not passed its petroleum bill after 18 months. Corruption issues emerging in the mining and energy sectors are a worrying sign. But there is an open administration in place that has already shown that Kosmos cannot be ignored when it comes to the sale of assets in which the government has a stake. 


The government has said that there will be no gas flaring, which should boost the power sector. The Central Bank Governor Kwesi Bekoe Amissah-Arthur claims he will do everything in his power to sterilise the oil money arriving. Fingers are crossed that one of Africa’s oldest democracies will do enough to break the curse.