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The Wall Street Journal: Global Oil Firms Confront Fresh Obstacles in Africa

By SPENCER SWARTZ
July 13, 2007

COTONOU, Benin — Big foreign oil companies are finding it harder to make money in Africa because of the region’s often unstable politics, output restrictions and moves by some governments to rewrite contracts.

Africa remains one of the last big regions open to foreign oil exploration — and companies of all stripes are still benefiting from record energy prices. But fresh obstacles threaten to crimp future production in a region that is crucial to global energy supplies.

Africa’s economically recoverable oil and natural-gas reserves account for almost 10% of the world’s total. U.S. and European consumers are increasingly reliant on West Africa nations such as Nigeria for crude oil that is easy and inexpensive to refine into products like gasoline because of its low sulphur quality.

African producers such as Nigeria and Angola now ship about as much crude oil to the U.S. as Persian Gulf producers such as Saudi Arabia, according to the U.S. Energy Information Administration.

To meet this rising demand and improve their own growth prospects, companies like Exxon Mobil Corp. of the U.S. and Total SA of France and smaller firms such as Anadarko Petroleum Corp. of the U.S. have plowed billions of dollars into the continent at a time when they are effectively shut out of drilling in tightly protected energy sectors in much of the rest of the world.

In Russia and Latin American countries such as Venezuela, governments buoyed by high oil prices have recently moved to take control of energy-exploration projects and raised taxes on foreign operators.

Some of these same problems are now popping up in Africa. Governments in Algeria, Chad and Equatorial Guinea have rewritten contracts or oil laws to advance national interests. Operational risks, including security of staff and infrastructure, have swelled in places like Nigeria. State-run oil companies less focused on profit are snatching business from their Western peers.

Angola, one of the fastest growing producers on the continent, joined the Organization of Petroleum Exporting Countries in January. While the government is quickly boosting output at expensive offshore projects, Angola will soon get an OPEC output quota — perhaps within a year — that could crimp operations for big investors like Total, BP PLC of the U.K. and Statoil ASA of Norway when OPEC cuts output.

OPEC member Libya — which currently pumps about the same amount of crude oil as Angola — was allocated production cuts of 102,000 barrels per day after OPEC cut output twice in recent months. Its current quota stands at 1.62 million barrels a day.

Underscoring the increased competition from state-run oil companies, Austrian oil-and-gas firm OMV AG tried to widen its presence in Libya in a recent oil-licensing round, but it came away empty handed.

“The national companies offered more attractive terms. Competition from them is getting tough,” says OMV Chief Executive Wolfgang Ruttenstorfer. National companies were willing to take smaller profits on the projects offered by the Libyan government, he says.

OMV and other Western firms have advantages of technology and access to capital over most state firms, but the gaps are narrowing, Mr. Ruttenstorfer adds.

Shokri Ghanem, head of Libya’s state-run National Oil Co., says Libya wants investment from wherever it can get it. “We’re open for business to all companies, private or state.”

At least $5 billion in business in Africa has gone to state oil companies, including those of China and India, over the past year or so, up from a fraction of that a decade ago, according to Global Insight analyst Simon Wardell.

Venezuelan state-run Petróleos de Venezuela SA is set to sign deals in Algeria, Sudan and Benin, said Petróleos de Venezuela’s exploration vice president, Luis Vierma, at a recent energy conference.

Another problem is rising government payments across the continent. In May, Anadarko said it may lose $450 million this year because of a new windfall-profits tax in Algeria.

The tax came into effect under the North African nation’s revised oil law, which also restored state control to exploration projects. Anadarko declined to comment further on the matter.

In Nigeria, meanwhile, continuing violence and kidnappings in the Niger Delta makes it unclear when Anglo-Dutch oil company Royal Dutch Shell PLC will restart oil production that was shuttered because of militant and criminal violence that has cost the company hundreds of millions of dollars since early 2006.

Militant violence, driven by poverty and an unresponsive government, has shut roughly 25% of Nigeria’s oil production the past 19 months. Around 465,000 barrels a day of Shell-operated output is currently shut in Nigeria.

“We’ll only restart production when it’s safe to do so,” says Shell spokesman Rainer Winzenried. In May, Shell’s chief financial officer, Peter Voser, said Shell’s profit from the Niger Delta, where most of Nigeria’s oil is produced, was $3 to $4 a barrel versus $20 a barrel in the U.S.

For all the new problems, analysts are quick to note that most African nations are not, at this point, going the way of Venezuela by strong-arming companies into resigning contracts.

Write to Spencer Swartz at [email protected]

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