Financial Times: The oil majors: Trickier times ahead for big fish

By Dino Mahtani
Published: January 28 2008 06:10 | Last updated: January 28 2008 06:10

Over the past 15 years, Africa has featured prominently on the global exploration map of international oil majors looking to open up new frontiers and book new reserves. Soft fiscal terms in oil rich countries and high oil prices more recently have driven exploration programmes of some of the bigger companies into the deepwater areas of the Gulf of Guinea, which has a prolific oil bearing geology.

With many of the international oil companies locked out of the most productive basins in the Middle East, or up against hostile government policies in producers such as Russia and Venezuela, Africa has come as something of a reprieve.

Projects such as Shell’s Bonga offshore development in Nigeria, and BP’s Greater Plutonio offshore project in Angola have helped redefine the possibilities of scale in the offshore sector, with similar projects on the continent expected to add hundreds of thousands more barrels of production in the coming years.

Investment by large companies has over the past few years become more central to African oil producers than ever. The International Monetary Fund calculates that in 2006 private capital flows to Africa amounted to $45bn, up from $9bn in 2000, with the bulk of that flowing into energy related investments. Africa in turn reflects an important part of the global portfolio of some of the biggest companies. ExxonMobil, the world’s biggest oil company, sources 30 per cent of all its liquids production from Africa. Shell, Europe’s biggest company sources 12 per cent of its global oil and gas production from Nigeria alone.

But despite the relative exuberance of the last few years, there are increasing signs that the big companies could be in for a much trickier time in the years ahead. Some companies, such as Devon, Occidental and Woodside, have recently drawn down their African portfolios, sensing that margins in Africa could be topping out. Even Shell has begun a restructuring plan in Nigeria, in response to some of its woes there.

“In the past the risks that affected companies in Africa were technical, but the above-ground risks are counterbalancing this scenario,” says Bob Frylund, vice president of industry relations at IHS, the energy consultants. Over the past two years, the continent’s main producing countries have signalled or even demonstrated their willingness to use high prices to push for tighter fiscal terms and conditions and actively court state-owned companies from Asia and elsewhere.

In Nigeria, the climate for independent multinationals is particularly nervy after they turned their back on the country’s last three new oil and gas licensing auctions, with many executives privately complaining the terms were too tight. That, along with funding disputes between majors and the government over joint ventures, partly prompted Tony Chukwueke, Nigeria’s industry regulator to publicly chide the majors. In a speech in November, he said Nigeria was ”looking for new players” and was “getting tired of the Shells and Exxons”.

Africa’s largest oil producer has also rattled nerves by announcing plans to revisit the terms on some of the multibillion dollar offshore developments, which are on a cost recovery basis.

Similarly in Algeria, the continent’s largest gas producer, the government has intensified its bid for control of the hydrocarbons industry, passing an amendment to give it the right to control 51 per cent of any hydrocarbons project.

Even Libya, one of the continent’s more underexplored producers, has begun to tighten its grip on its oil industry, despite initially pursuing a strategy of courting multinationals after the end of international sanctions. Talaat Barsoum, a geologist who has worked extensively in Libya, says high oil prices mean the government is now “so stuffed with cash” that it can afford to dictate tougher commercial terms.

The government set its terms so tightly in a gas only licensing round last year that only a handful of companies walked away with licences, two of which were Gazprom and Sonatrach, the state-owned companies of Russia and Algeria.

While Angola, the fastest growing oil producer on the continent is yet to follow suit, multinationals now have to deal with the imposition of an Opec quota of 1.9m barrels a day just as production is expected to ramp up to levels beyond that figure.

Under such conditions, big independent companies will undoubtedly feel the pinch of competition from state-owned companies from Asia more acutely. Chinese state-owned companies have signed exploration and offshore agreements from places as diverse as Algeria, Libya, Gabon and Congo. CNOOC, China’s largest offshore producer acquired a $2.7bn stake in a Nigerian oil block in 2006, its largest ever foreign acquisition.

So far, acquisitions by China and its other energy hungry rivals in Asia represent a fraction of the investment brought by western companies. But paranoia is increasing among the multinationals, especially now that Gazprom is in discussions with Nigeria over securing gas supplies.

Copyright The Financial Times Limited 2008