Asian companies target Africa's oil and gas: the most noticeable trend in the African oil and gas sector over the past year has been the increase in investment by Asian companies. Neil Ford reports on the Asian oil rush in Africa.

The Malaysian firm, Petronas, has long been active in Africa but the sector has broadly been dominated by Western firms and a handful of African state-owned companies, including the Nigerian National Petroleum Corporation (NNPC) and Sonatrach of Algeria, which have benefited from state patronage. Now, however, Indian and particularly Chinese investors have become increasingly interested in Africa, acquiring stakes in upstream acreage.

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Until recently, Asian investment was largely restricted to areas where Western companies were deterred from becoming involved. For example, fears that oil sector revenues were helping to fuel the conflict in Sudan ended large-scale Western investment in the country. Washington stopped US companies from taking up Sudanese acreage, while pressure was exerted on other Western firms to sell their interests in the country. As a result, by far the biggest oil producer in Sudan, the Greater Nile Petroleum Operating Company (GNPOC), is now almost entirely owned by Asian interests. Equity in the company is held by the Chinese National Petroleum Company (CNPC) (40%), Petronas (30%) and ONGC Videsh of India (25%), leaving just 5% for the Sudanese state-owned oil company, Sudapet. GNPOC operates the highly productive Heglig and Unity fields, which lie around 700km southwest of Khartoum, in the Muglad Bain. Oil from the fields is piped to the Suakin terminal on the Red Sea, largely for export to Asia.

GNPOC has proved so successful that Khartoum estimates that national oil production could reach 750,000 barrels a day (b/d) by the end of 2008. The country is now the third biggest oil producer in sub-Saharan Africa, after Nigeria and Angola. ONGC Videsh and CNPC have now taken up acreage in their own right and have established themselves as the biggest investors in Sudan.

However, over the past 12 months, Asian companies have begun to acquire acreage in the Gulf of Guinea in attractive areas which will soon turn them into major players in the African oil and gas market.

The deal that really appeared to change the face of the industry was the purchase by the China National Offshore Oil Corporations (CNOOC) of a 45% stake (worth $2.6bn) in Nigeria's OML 130 concession from South Atlantic Petroleum (SAPETRO) in April. The block lies at the heart of the deepwater acreage that is driving the current expansion of the Nigerian oil and gas sector. The main discovery on the block is the Akpo field, which holds around 600 million barrels of condensate and 2.5 trillion cubic feet (tcf) of gas. However, other discoveries appear likely, given the track record of upstream operators on neighbouring blocks.

An elated Fu Chengyu, the chief executive and chairman of CNOOC, describes the Akpo as "an oil and gas field of huge interest and upside potential, located in one of the world's largest oil and gas basins". The remaining equity in the block consortium is owned by Total (24%), Petroleo Brasileiro (16%) and the NNPC (15%).

CNOOC has also secured Equatorial Guinea's Block S concession, while another, less high profile Chinese company, Sinopec, has built up a sizeable portfolio of upstream assets in Angola, Congo-Brazzaville, Gabon and Sudan. During a visit to Angola by the Chinese vice president, Zeng Peiyang, Luanda awarded Sinopec the rights to develop offshore Block 3, while Chinese companies will be given a stake in the development of the planned 200,000 b/d Lobito refinery.

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The Angolan deal highlights one advantage that state-owned Asian oil and gas companies have over their private sector Western rivals. Most of the upstream deals secured by Asian firms have been part of wider inter-governmental agreements, whereby other Chinese companies agree to develop specific infrastructural projects.

For instance, as part of the Chinese-Angolan agreement, ZTE Corporation will invest $400m in the Angolan telecoms industry and Beijing has offered Luanda a series of interest free loans. In addition, Beijing has offered to invest in Nigeria's dilapidated rail network. The poor condition of infrastructure is often cited as the biggest source of limited growth in most African countries over the past 40 years. State-owned utilities and also private operators have often struggled to maintain colonial era water, power, telecoms and transport systems. Grand plans to extend power and fixed line telecoms networks to rural areas have often been unveiled but have largely failed to materialise. Yet Western firms have been very reluctant to invest in infrastructural projects that are admittedly unlikely to yield a profit. By offering substantial infrastructural investment, China can certainly encourage a warm welcome for its oil and gas companies, even where the oil and infra-structural deals are not specifically linked.

There are several reasons for increased Asian overseas investment but one factor stands out--energy security. China was actually a net oil exporter until about a decade ago. It now imports more than 3m b/d and this figure is likely to increase rapidly over the next two decades.

At the same time, Chinese appetite for gas is rising and although a great deal of gas will probably be imported from Russia and Central Asia via planned pipelines, liquefied natural gas (LNG) is set to become a significant power sector feedstock.

All this means that China will be increasingly vulnerable to fluctuations in global oil and gas prices and supplies. In order to maximise the security of its energy supplies, Beijing appears to have directed the mainly or entirely state-owned oil and gas companies to invest in overseas upstream acreage in order to ensure that production from those fields can be directed to China if required.

India is in a very similar position. Rising levels of economic growth and the pace of industrialisation have boosted demand for oil and gas that can only be satisfied by imports. Delhi hopes that ONGC Videsh and other Indian companies can satisfy a sizeable proportion of rising consumption from overseas holdings.

CNOOC outbid ONGC Videsh on the OML 130 deal and CNPC also managed to secure acreage in South America in the face of competition from ONGC Videsh. However, ONGC Videsh and CNPC seem to have built upon their Sudanese partnership and the two formed a joint venture to buy Petro Canada's interests in Syria. It is possible that a similar level of cooperation could yet result in joint ventures in Africa. Delhi has already signed an oil supply deal with the Nigerian government and Indian upstream companies are expected to take up African acreage over the next two years.

Outlook

Much has been made of the growing importance of Africa as an oil supplier to the United States. Washington expects Sub-Saharan Africa to supply 25% of its oil imports by 2015, up from 15% in 2005. Indeed, the co-chair of the US Council on Foreign Relations, Anthony Lake, says: "By 2010, Africa could be providing the United States with as many oil imports as the Middle East ... It is increasingly in US interests to locate new oil sources outside the Middle East." However, the fact that China already sources 28% of its oil imports from sub-Saharan Africa has received far less coverage. Given the recent spate of Chinese investment in African acreage and the likelihood that this process will continue, it is expected that China will import an increasing share of its oil needs from Africa.

While the oil price has fallen somewhat from the highs seen during the middle of 2006, it is still historically high and a return to a $15-30 barrel seems unlikely. The growth in Chinese demand for oil may slow over the next decade but little growth is expected in Chinese oil production over that time, so all new demand will have to be satisfied by imports. There may be enough oil in the world to satisfy growing demand over the next decade or two, but there is no doubt that the market will remain relatively tight and that competition for hydrocarbon resources will intensify. This should result in heightened competition between Western and Asian companies for Africa's oil and gas resources. It is therefore vital that African governments ensure that they have contract structures that ensure the best possible deal for host countries. Most of Africa's existing production sharing agreements (PSAs) and joint ventures (JV) were drawn up during a period when a $25 barrel price was considered on the high side, so this would be an ideal time to reassess the terms of investment as a whole. Most attractive upstream acreage in Africa has already been licensed, so there is now an ever greater number of oil and gas companies competing for an ever smaller share of the African cake. Renewed efforts in hydrocarbon exploration offshore Kenya and Tanzania, as well as onshore Uganda and Zambia, demonstrate that previously unprospective areas are now on the radar of international oil companies. Competition for more attractive acreage in the Gulf of Guinea is therefore likely to be more intense.

Western companies generally have much more financial muscle and technical experience than their Asian rivals, particularly when it comes to deepwater and ultra deepwater developments, which will come to dominate Gulf of Guinea developments in the relatively near future.

Yet it will be interesting to observe whether the lure of infrastructural investment and the motivation of greater energy security will enable Chinese and Indian companies to make real headway over the next few years.

RELATED ARTICLE: CAMEROON BAKASSI HOLDS THE KEY

Cameroon has never relied as heavily on oil exports as neighbouring Congo-Brazzaville and Gabon but oil still ranks as its biggest export earner. The government has therefore been alarmed by the sustained fall in domestic production, from 180,000 barrels a day (b/d) in 1985, to about 55,000 b/d today.

Transit revenues from the Chad-Cameroon pipeline have only partly offset this decline and Yaounde still struggles to attract investment in the landlocked Logone Birni Basin. Finally, as a result of its geography, Cameroon lacks the kind of deepwater acreage that has proved so prospective elsewhere in the Gulf of Guinea.

However, the transfer of the Bakassi Peninsula from Nigeria to Cameroon means that a reversal in the country's oil prospects is still possible. The Peninsula is widely described as being oil rich, but the dispute over its sovereignty virtually ruled out any attempt at oil and gas exploration in the area. Nevertheless, as a result of geological studies and the discovery of large oil fields in neighbouring areas, substantial oil discoveries are more than likely to be made.

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Interest focuses not on the Peninsula itself, but on the offshore areas that surround it. The settlement of the Bakassi dispute should enable the tripoint that divides Equatorial Guinea, Cameroon and Nigeria to be determined.

The delimitation of maritime boundaries in the area would then enable Yaounde to launch a licensing round for the long-sought-after Bakassi acreage. There will be no shortage of suitors for any blocks that are offered and although success is by no means guaranteed, it would not be surprising if Cameroon was to re-emerge as a sizeable oil producer within the next 10 years.

RELATED ARTICLE: Beyond Bonny Island 

The Nigeria Liquefied Natural Gas (NLNG) plant on Bonny Island has been rightly heralded for driving the growth of the Nigerian gas sector. Although the plant currently sources most of its feedstock from non-associated gas fields, an increasing proportion of the gas it consumes will come from associated gas that is currently flared and so will make a significant contribution to reducing flaring.

In addition, NLNG is helping to earn billions of dollars in export revenues for the nation. The company is owned by operator Shell (25.6%), Nigerian National Petroleum Corporation (NNPC) (49%), Total (15%) and Eni-Agip (10.4%), and already operates five liquefaction trains, with another under development. However, perhaps the greatest impact of the Bonny Island plant has been to demonstrate that Nigeria can become a major LNG producer and exporter. The country only began exporting gas in 1999, yet by 2012 it could become a global LNG producer to rank alongside Qatar and Indonesia.

Three planned LNG projects stand out. The Brass River LNG scheme is being developed by Shell and BG (the gas exploration division of British Gas), who signed a memorandum of understanding on the venture in January, although Chevron has given up its 17% stake in the consortium. The plant would initially have two trains with total production capacity of 10 million tonnes a year.

While Chevron pulled out of Brass River, the Japanese firms, Sojitz and Sumitomo, have joined the consortium developing the Olokola LNG project. In conjunction with BG, Chevron, NNPC and Shell they will develop a plant with production capacity of 20 million tones a year.

The third venture has been proposed by ExxonMobil and would be built on Bonny Island, next to the NLNG facility. In January 2005, ExxonMobil signed a memorandum of understanding with the state owned NNPC to develop a single train at the site with capacity of 4.8 million tones a year. The US firm has set a target of 2010 to bring the scheme on stream but a final decision on construction needs to be taken soon if this target is to be met.