The competition for African oil
from a business perspective

From the perspective of the global oil industry, the importance of Africa as a source of global oil supplies is undeniable. While African oil reserves are still dwarfed by those in the Persian Gulf states, the proven oil reserves of Nigeria (35.9 billion barrels in 2005) and Libya (39.1 billion) are higher than those of the United States (29.3 billion) and China (16 billion) and dwarf those of the United Kingdom (4 billion) and many important petro-states such as Azerbaijan (7 billion) and Mexico (13.7 billion). Even though almost two-thirds of the world’s proven oil supplies are located in the Middle East, the access to the nationalized oil resources in Saudi Arabia has been restricted for decades and a large chunk of the proven reserves are likely to remain underexploited for some time to come. In contrast, African states have been keen on developing oil production at a fast speed and have allowed multinational firms to enter, which is demonstrated by the projected increases in African oil production.
The US Department of Energy estimated that total African oil production is set to rise by 91 percent between 2002 and 2025, from 8.6 to 16.4 million barrels per day. To put this in perspective, world oil production capacity is predicted to grow by 53 percent between 2002 and 2025, from 80 to 122.2 million barrels per day. Africa’s oil production is therefore scheduled to grow at a faster rate than elsewhere, helping to satisfy the world’s rising demand for fossil fuels.
African countries continue to be attractive to foreign investors. In a 2006 ranking of 114 oil-exploring and oil-producing countries, Africa’s oil producers scored very highly in terms of attractiveness: Congo (Brazzaville) was ranked 8th, Angola 9th, Nigeria 11th, Libya 12th, Mauritania 17th, Sudan 18th, Cote d’Ivoire 20th, Gabon 23rd, and Equatorial Guinea 24th.
While it is difficult to obtain any figures because of commercial confidentiality, oil production and exploration in Africa can be very profitable by international standards. A key factor is fiscal regimes, although tax rates vary widely between African countries (e.g. Equatorial Guinea and Gabon are much more attractive than Nigeria and Angola). The commercial costs of oil exploration and production in Africa are relatively low, especially if African offshore operations are compared with those in the North Sea or the Gulf of Mexico. Just as importantly, a key attraction of Africa for oil companies is the high success rate in drilling operations, that is, the number of successful oil- and gas-well discoveries divided by the total number of drillings. As a key geological advantage, the quality of African oil tends to be high; African crude oil tends to be of relatively high API gravity (which stands for the American Petroleum Institute standard) and low sulphur content (which is sought after), with a few notable exceptions such as Egyptian crude.
In comparison with crude oil from the Middle East, crude oil from West and North Africa is closer to the markets of Europe and the United States, so an oil tanker journey from Nigeria or Angola is at least several days shorter, and the buyer can therefore save money on the payment of tanker charter and insurance. Furthermore, North Africa has a key advantage of supplying oil and gas via pipelines to Europe, and there are currently plans for expanding and building new pipelines from Libya and Algeria to Spain and Italy, as well as a pipeline from Egypt through Turkey to Europe planned for 2011. The most ambitious plan is to build the 4,300-kilometre long Trans–Sahara pipeline from Nigeria through Algeria to Europe (rumoured to require an investment of US$10 billion), for which a feasibility study has recently been completed.
To sum up, while any generalizations are difficult and there are undoubtedly exceptions, African oil and gas resources offer clear commercial advantages to international oil firms. This helps to understand why African oil production over the next decade will be expanded at a quicker pace than the world average. But can we argue that there is a Scramble for Africa from a business perspective?
If a Scramble for Africa has taken place, one would expect that companies engaged in African operations have both increased in quantity and have a more diverse make-up. One measure of this commercial engagement is the number of oil companies that hold oil and gas licences in a given country. In the largest petro-state, Nigeria the current number of companies with an Oil Mining Licence (OML) and an Oil Prospecting Licence (OPL) is 77 (as of September 2006), of which 45 are indigenous Nigerian firms. To put this into context, in 1966 and 1986, 8 and 12 oil companies respectively had OMLs or OPLs in Nigeria. By 1998, and still before the current influx of Chinese and other emerging market firms, their number had already risen to over 50.
In terms of the make-up of companies, there is a more readily visible diversity, given the influx of Chinese, Indian, Brazilian, and other companies from both the public and the private sectors.
Senior executives of Western firms privately express their concerns about the influx of new players, and they see them as a potential threat to their position. One of the most often heard complaints of Western managers is that the new Asian firms often pay little attention to social and environmental concerns.
On various occasions, the new players have encroached on territories previously in the domain of the giant multinationals such as Exxon, Shell, and BP. In Angola, the authorities declined to renew an oil concession to Total in favour of Sinopec. During the second licensing round in Libya in 2005, European and Asian companies received almost all of the oil licences with just one exception; winners included companies from Japan, Russia, Turkey, Indonesia, India, and China. During the 2005 licensing round in Nigeria, the government awarded two deep offshore oil concessions to the Korea National Oil Corporation.
Therefore, by the measure of the diversity of companies entering Africa, one can indeed speak of a Scramble.
However,one should caution against overemphasizing their impact. With the notable exception of Brazil’s Petrobras, which is recognized as one of the world’s most experienced oil firms in offshore petroleum technology, the other oil firms from emerging markets are relatively inexperienced market players.
Indeed, in a number of cases such as Gabon, the new entrants have focused on marginal fields, which have been either abandoned by major oil companies or considered commercially unviable by the established larger multinational firms. Furthermore, the Chinese commercial engagement in the oil sector focuses on supply contracts and buying shares in existing oil fields; with the notable exception of the Sudan, the Chinese state-owned firms do not yet operate any significant oil-and-gas–producing fields of their own. Deep offshore oil fields in the Gulf of Guinea are considered the greatest and most profitable prize in Africa; here, the dominant companies are Exxon, Shell, BP, and a handful of others, while most other companies lack the financial and above all the technical capability to seriously rival them. Therefore, the new players do not necessarily directly threaten the position of the established Western firms with regard to the most attractive business opportunities.
The impact of Chinese and other emerging market oil firms on the ground is still relatively small. For instance, over 95 percent of the oil produced in Africa’s largest petro-state, Nigeria, is generated by only five companies: Shell, Exxon, Chevron, Total, and Agip; this situation is unlikely to change soon either in Nigeria or in some other key petro-states. If a major shift is going to happen in future, it will take years to materialize.
While China has become one of Africa’s main trading partners, its foreign investment is still lagging behind. According to the United Nations Conference on Trade and Development (UNCTAD), ‘notwithstanding growing interest among Asian investors, most of Africa’s FDI inflows originate mainly from developed countries (Western Europe, the United States) and South Africa’. The top five investors to Africa are France, the Netherlands, South Africa, the United Kingdom, and the United States, which accounted for ‘more than half of total inflows to Africa’ in 2003 and 2004. The Chinese impact will be felt to a much greater extent over the coming years, but the currently available data do not yet point to a shift in investment.