Oil to flow in two years: after years of waiting, it now seems certain that Mauritania will be producing oil in the next two years. Simon Taggart analyses what this will mean in terms of generating revenues and how it will impact on people's lives.

If all goes according to plan, Mauritania should be producing oil by 2005/2006 with the government beginning to reap appreciable benefits from 2008. With the completion of production tests on the Chinguetti 4-5 well in October, the scene was set for offshore field development of the deepwater Block 4. The oil companies, led by operator Woodside Petroleum of Australia, plan to declare the field commercial by the end of this year. A final investment decision would then by taken in the middle of 2004 with first oil being pumped by late 2005.

The degree of confidence in the field was indicated in early October. Then, before the well test, the partners announced they had already short-listed five contractors bidding to supply a leased floating production, storage and offloading (FPSO) unit for Chinguetti-for a project life of eight to 12 years, dependent in part on reservoir pressures. And they said they were looking for a unit capable of handling up to 90,000 barrels a day, rather than the 75,000 b/d figure previously publicised.

That the 4-5 well flowed at 12,500 b/d despite intersecting only part of the reservoir suggests the higher volume might be necessary when the planned six production wells come on-stream. The advantage of using an FPSO unit is that it can pump, process and store crude which is then off-loaded direct on to a tanker, rather than building an expensive pipeline to a terminal onshore. As it is, the project is budgeted at some $400m.

The Chinguetti field holds some 125m barrels of recoverable oil, according to Hardman Resources, which has a 21.6% stake. Hardman has been active in Mauritania since 1996 and is a little more bullish about the prospects than its larger compatriot Woodside. It sees initial plateau production at 75,000 b/d, the top end of Woodside's estimate.

Chinguetti crude is sweet and comparable to that found offshore Angola. Depending on the extent of processing carried out offshore it may be heavy, medium or light. The obvious markets are Europe and the US. However, South Africa and Asia would be economic options if the FPSO selected is large enough to store the two millions barrels of crude needed to fill a Very Large Crude Carrier (VLCC).

Although it was the Chinguetti find in 2001 that made a splash in the industry press, it is not the only find that Woodside and its partners have made. Some 20km to the cast in shallower water the Banda discovery was made in 2002. The recoverable reserves there could be in the order of 80m to 100m barrels. If they are in that range, production would likely be tied back to the Chinguetti FPSO. If they proved larger, separate development would be considered.

In addition to crude, Banda has substantial natural gas reserves-although as Mauritania does not have the infrastructure to utilise it, it might well be used for re-injection to boost crude recovery.

The Thon prospect failed to unearth more hydrocarbons but exploration drilling continues apace. Woodside and its partners plan to spud a well on the Tiof and the Poune prospects in coming months.

And theirs is not the only game in town. Scottish-based Dana Petroleum will drill a well in 1,700 metres of water on the Pelikan prospect on Block 7 by the end of the first quarter of 2004. The company says that well will "test an exciting prospect ... which has reserves potential of several hundred million barrels".

HOW WILL MAURITANIA BENEFIT?

So what does Mauritania get out of all this? The Islamic republic is one of the poorest countries on the continent by any yardstick. The UN ranked it number 139 of 162 in its Human Development Index last year. Some 50 % of the population of 2.5 million lives in poverty. On a purchasing power parity basis, per capita income for 2002 was some $1,900 while government revenues were just $421m and expenditure $378m. On a nominal currency conversion basis, the figures are much bleaker.

The mainstays of the export economy have long been iron ore from the vast mines at Zouerate close to the border with Western Sahara, and fisheries, from which the government earns revenue by licensing European Union vessels. In 2001, on a nominal basis, are exports were worth around $400m and fisheries somewhat less.

In this context, oil production would make a significant contribution to the coffers. For the first two or three years when Woodside and its partners are recovering costs, so-called 'profit oil'--that not set aside for cost recovery--will be 40 % of production and the government will be entitled to a little over a third of that. However, once the capital expenditure has been recovered, Mauritania's income begins to be appreciable.

According to a source familiar with the Production Sharing Contract, the government's share of oil production, assuming no further reserves are added, will increase to around 25-30% of the total after three or four years if production comes in at the expected rate.

If the oil price is assumed to be $22 a barrel then--well below the current level--the Mauritanian government would harvest $85m a year. On top of that, corporation tax and withholding tax would bring in another $15m, a tidy sum given the country's overall income and a reason why the World Bank's International Finance Corporation is expected to help with the financing of Hardman's capital expenditure.

These terms are considered good for the oil companies. The government lake of profit oil is considerably lower than is the case in established oil provinces. The reason for that is that Mauritania--like Morocco to the north--had to battle to attract oil company interest in the past.

That has changed. With the development of deepwater exploration and production techniques, US interest in diversifying its sources of crude imports away from the Arabian Gulf, and higher oil prices, oil companies in recent years have become more interested in North West Africa. The interest has been further stimulated by the successes in the Gulf of Guinea, which shares geological features with offshore areas to the north.

Little work was done in Mauritanian waters between the 1970s and the mid-1990s. Now the roll call of participants in the two consortia active there includes not only Woodside, which is anxious to mitigate its dependence on Australian projects, but also Petronas of Malaysia, an increasingly big international player; Italy's Agip, and South Africa's Energy Africa. Among the smaller participants are Fusion--another Australian outfit. Fusion's main asset was its single digit share in Chinguetti.

In another indication of the growing attraction of Mauritania, in May this year one of the UK's larger independent oil companies, Premier Oil, bought out Fusion's Mauritanian assets ill a deal that gave Fusion cash and royalties from future production there. The company's ongoing stake in Mauritania then fuelled a take-over bid from Sovereign in October.

REGIONAL REPERCUSSIONS

The flurry of activity in Mauritanian waters has had regional repercussions. Immediately to the north of Mauritania lies the Western Sahara, occupied by Morocco since 1975, its sovereignty still fiercely contested by the indigenous Polisario Front.

In late 2001, not by coincidence, just months after the Chinguetti discovery, the Moroccan government stirred up a hornet's nest by signing an agreement with TotalFinaElf of France and Kerr-McGee of the US, allowing them to do pre-exploration work in Western Saharan waters. Polisario appealed in the Security Council, pointing out that the territory has non-self governing status and is, in fact, the only remaining African de-colonisation issue under UN consideration.

The UN's legal supremo delivered a rebuff to Rabat, ruling that exploitation of Western Saharan resources could only occur if it was to the benefit of the population of the territory and by their agreement. Polisario, to make its point, then signed a co-operation agreement with Fusion under which the oil company did a study of the prospectivity of the Western Sahara in return for an option to explore in the case of the territory gaining independence.

In October, Fusion and its partner Premier handed over a report to the Polisario leadership confirming their view that the Western Sahara too was likely to be able to produce oil. Total and Kerr-McGee have now finished shooting seismic and their next move will underline once more the interconnectedness of oil with politics.

Ironically, Mauritania's good fortune could prolong the Western Sahara conflict by deepening Moroccan determination to cling to the territory and confirming Polisario's insistence that an independent Sahrawi state would be viable.