Royal Dutch Shell Plc  .com Rotating Header Image Firms overlook risks in scramble for Africa

Monday, May 28, 2007


LONDON – International oil firms have been scrambling for Africa in recent years, but in their hunger for reserves they may be taking greater risks than they realise, raising the prospect of a rush for the door in the future.

A record 106 oil and gas exploration licences were awarded in Sub-Saharan Africa in 2006, and the figure could be surpassed in 2007, international energy consultants Wood Mackenzie said in an annual review of the African oil industry.

The tens of billions of dollars flowing into the continent’s oil industry partly reflects a global surge in exploration prompted by high oil prices.

For Western and Asian oil companies, Africa has a special attraction.

They are far more welcome there than in most other places in the current trend towards resource nationalism.

“There has been an influx of investment into Africa and very much because the world’s other major oil provinces are not open or are open on much more restrictive terms,” said Kevin Rosser, head of the Oil and Gas Practice at consultants Control Risks.

The holders of the world’s biggest oil reserves in the Middle East, such as Saudi Arabia and Kuwait, have been hostile to investment from foreign oil companies for decades.

The Kremlin’s drive to bring the Russian natural resources sector back under state control and the nationalisation of oil and gas fields in South America make investment in these regions difficult, while Europe and the US offer diminishing opportunities.

This makes Africa one of the few bright spots on the globe for oil investors.

Improvements in technology that allow companies to drill in deeper waters and into more complex reservoirs have added to the feeling that Africa offers an unmissable opportunity.

RISKS REMAIN However, while Africa attracts oil investors, many of its old political and security risks remain.

“There is a danger that because the rewards are so enticing, they’ll downplay the risk,” said Paul Adams, director at risk consultancy Kroll, adding this could especially be the case for the many new entrants to Africa’s oil sector.

Last month gunmen killed nine Chinese oil workers in an attack in Ethiopia.

Analysts said their employer Sinopec may not have fully appreciated the complex politics and security risks they faced in the area.

The expansion of exploration into countries relatively new to the oil industry, such as Ethiopia, Niger and Mozambique, and the deterioration of the security situation in Nigeria, means even old Africa hands can be wrong-footed.

But security is not the only risk.

Roger Cagle, Chief Financial Officer of independent explorer Soco International, said some companies had a “naivety” about the economics and operational difficulties in Africa.

“Some people are ill-prepared to be where they are because they lack experience.

Their expectations of what will happen and what actually happens can vary greatly,” Cagle said.

New investors sometimes were overly optimistic about the economic terms they will enjoy, Cagle added.

In Nigeria, Africa’s top oil exporter, oil production is currently less profitable than in many developed nations.

Peter Voser, the Chief Financial Officer of Royal Dutch Shell Plc, said this month that the profit on the oil major’s Nigerian delta production was $3-4 per barrel whereas in the US it was around $20 per barrel.

Kidnappings and militant attacks have plagued the Nigerian delta since February 2006.

About 24 per cent of Nigeria’s roughly three million barrels per day production capacity is shut.

SHAKE-OUT LOOMS Not all investors are taking a cool enough approach to the economics of African investment.

“The biggest risk I see is of people overpaying for assets,” said Afonso Reis e Sousa, who advises clients on financing big energy projects in Africa, at advisory firm Taylor DeJongh.

With even oil executives admitting the industry has a herd mentality, many oilmen say the current rush into Africa could be followed by a dash for the door.

“If the oil price falls, they will pull out very quickly,” a senior official at state-owned Nigerian National Petroleum Corporation said of the companies piling into the continent.

Cagle said even without a drop in oil prices, a shake-out would likely come, as the less experienced companies find their operations are not as profitable as they had expected.

“The last phase of people who have moved in will leave,” he said.

However, despite operating in what analysts consider some of the least stable places on the continent – the Congo Republic, the Democratic Republic of Congo – Cagle cannot see Soco shifting its sights away from the continent.

“The potential here is far greater,” he said.

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