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allAfrica.com: Nigeria: E&P Operations in Country Among Most Unprofitable

Vanguard (Lagos)
Hector Igbikiowubo With Agency Reports

CRUDE oil exploration and production activities in Nigeria is now one of the most unprofitable among developing countries of the world owing to the activities of militants in the Niger-Delta who engage in kidnappings, arson, sabotage of products pipeline, among other unwholesome practices.

Mr. Peter Voser, the chief financial officer of Royal Dutch Shell, said last month that the profit on the oil major’s Niger- Delta production was $3 – $4 per barrel whereas in the United States it was around US$20 per barrel. The drop in profitability is accentuated by cost of production including insurance, cost of security, sustained community development and a number of other considerations with cost implications.
 
However, international oil firms have not been dissuaded from chasing after Africa’s hydrocarbon reserves to satiate the hunger for sources of energy supply for their fast paced economies.

It was gathered that a record 106 oil and gas exploration licenses were awarded in Sub-Saharan Africa in 2006, and the figure could be surpassed in 2007, international energy consultant, 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 nationalization of oil and gas fields in South America make investment in these regions difficult, while Europe and the United States 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 opportunities that cannot be missed.

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

Two months ago, gunmen killed nine Chinese oil workers in an attack in Ethiopia. Analysts said their employer, Sinopec (0386) 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.

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.

Posted to the web 5 June 2007

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