PETROANALYSIS || ARTICLE

Major oil companies, and China, look for win-win in Africa

Published on

September 27, 2018

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Article by

Stuart Wilkinson

Africa is in the oil-hunt spotlight as drillers are turning their attention back to the continent’s potentially vast resources.

International Petroleum Companies in Africa

Rigs working in waters off Africa have increased to the highest in two years, according to Baker Hughes data. Consultant Rystad Energy expects 30 offshore exploration wells to be drilled this year compared with 17 last year.

Acquisitions along the west coast, seen as a geological mirror of the other side of the Atlantic where huge discoveries have been made from Guyana to Brazil, have also accelerated. Shell secured its first exploration acreage offshore Mauritania in July and Exxon bought stakes in Namibian fields in August.

Companies drilled almost 100 exploration wells in African waters each year on average from 2011 to 2014, as Brent prices stayed above $100 a barrel, according to Rystad’s data. Then came crude’s slump and spending suffered because the best prospects are in deep waters, making them expensive to drill.

Oil has since recovered, however, making exploration attractive again, and for companies willing to take the risk there could be significant rewards since there is a high probability of at least 41 billion barrels of oil and 319 trillion cubic feet of gas yet to be discovered in sub-Saharan Africa – equivalent to more than 5 years of U.S. oil consumption and 12 years of gas consumption.

Last year, for example, Kosmos used oil’s downturn to buy up licenses where it acquired five offshore blocks in Ivory Coast. At the same time, it also sold stakes in fields in Mauritania and Senegal to BP in 2016, as the British company was building its natural gas business in anticipation of rising demand. Kosmos and BP have said they’re continuing exploration in the assets. And in another part of the continent, London-based Tullow Oil Plc is scheduled to drill a well offshore Namibia, hoping to revive prospects there that went quiet after at least 14 wells failed to find commercial oil deposits. (1)

“The majors starting to move into these areas for exploration again is probably the first sign of things picking up.” (…) Africa “may be one of the first to get hit when the price goes against explorers, but equally it’s perceived to be one of the places where people are keen to get involved when the price is supportive.” (2) Wood MacKenzie

With regard to sub-Saharan Africa, GlobalData indicates that Nigeria is set to lead the way with 10 planned oil and gas projects expected to start operations between 2018 and 2025, followed by Mozambique with two projects. In terms of announced projects, Nigeria leads the field with 13 projects, followed by Angola with five announced projects. In total, 64 planned and announced crude oil and natural gas projects are expected to commence operations in the region between 2018 and 2025.

Among these, 20 represent the number of planned projects with identified development plans and 44 represent the number of early-stage announced projects that are undergoing conceptual studies and that are expected to get approved for development.

The company estimates that total crude and condensate production from the announced and planned projects is expected to be around 2 million barrels per day in 2025 and the total natural gas production in 2025 is to be about 8.1 billion cubic feet per day.

Regarding the proposed capital expenditure of $40.7 billion is expected to be spent on development of the planned projects and $117.1 billion on key announced projects.

Nigeria, Mozambique and Angola head the list of planned capex spending with approximately $17.3 billion, $7.7 billion and $5.1 billion respectively during the period 2018 to 2025. (3)

A constant Chinese interest in Africa

Up to the year 2000, China’s three state owned petroleum companies – CNPC, Sinopec and CNOOC – were represented in just one African nation: Sudan, where the state-owned China National Petroleum Corporation was a major stakeholder in the Greater Nile Oil Project Company.

Later, in the context of rapid Chinese growth, China set out to diversify its natural resources imports and ensure energy security amid. By 2014, Sinopec alone was active in 16 African countries: Algeria, Angola, Cameroon, Central African Republic, Chad, Egypt, Gabon, Ghana, Kenya, Libya, Mauritania, Niger, Nigeria, Sudan, South Sudan and Tunisia. CNPC is currently active in Tunisia, Algeria, Libya, Niger, Chad, Nigeria, Sudan, and South Sudan; and CNOOC has interests in Gabon, Uganda, Nigeria, Algeria, and Republic of the Congo.

Today China receives 22 percent of its oil supply from Africa, at 1.4 million barrels per day. In June 2016, Nigeria, a key provider of Chinese oil, signed $80 billion in provisional contracts with Chinese companies to upgrade its oil and gas infrastructure. Sinopec, already active in in Nigeria’s upstream, was one of 38 Chinese companies involved in the deal.

Furthermore, the Chinese “One Belt, One Road” initiative which sets out to create new land and sea trade routes to ensure energy supplies for China, increase Chinese foreign trade and promote Chinese enterprise and products is expected to be a catalyst for further advances by Chinese builders and lenders.

China’s Belt and Road initiative

For most African countries, Chinese investment cannot come quick enough. The continent’s power sector alone requires $450 billion through 2030, with about 600 million people in Sub-Saharan Africa lacking access to electricity today.

Power projects built by Chinese firms accounted for 30 percent of new capacity in Sub-Saharan Africa from 2010 to 2015. Similarly, in power projects from 2010 to 2020, Chinese companies have built and are building an additional 17 GW of generation.

The oil and gas industry, specifically, is estimated to need over $2 trillion in investment between 2013 and 2035. (4)

China-Africa cooperation Summit

As reported by the Chinese news service Xinhua at the beginning of September, a declaration and an action plan were adopted at the 2018 Beijing Summit of the Forum on China-Africa Cooperation (FOCAC) in Beijing.

The Beijing Declaration: Toward an Even Stronger China-Africa Community with a Shared Future and the FOCAC Beijing Action Plan (2019-2021) repeated the call for China-Africa win-win cooperation and common development.

Chinese President Xi Jinping said that it had been agreed to develop FOCAC into a brand of China-Africa solidarity and cooperation, and a banner that guides international cooperation with Africa under the principle of consultation, cooperation and benefit for all, adding their decision to firmly uphold an open world economy and the multilateral trading system, while opposing protectionism and unilateralism.

African leaders spoke highly of the summit and agreed that it was a historic meeting strengthening Africa-China solidarity and cooperation. They expressed support and appreciation for the Belt and Road Initiative, believing that the joint building of the Belt and Road by Africa and China will speed up African regional integration. (5)

President Xi also announced a hefty US$60 billion package to complement another US$60 billion pledged at the 2015 summit. This breaks down into $15 billion in grants and interest-free loans; $20 billion in credit lines; a $10 billion fund for development financing; $5 billion to finance imports from Africa; and waving the debt of the poorest African nations diplomatically linked to China.

Beijing also signed memorandums of understanding with nine African nations related to the New Silk Roads/Belt and Road Initiative. Additionally, another 20 African nations are discussing further cooperation agreements. (6)

Worth noting here is that according to Brookings, China is moving away from loans towards investment: China is committed to set up a $10-billion special fund for development financing, reflecting its changing model of financial engagement in Africa. Evolving away from the previous “resources for infrastructure” model, China has been increasingly keen on utilizing financing provided by Chinese development finance institutions, such as China Development Bank and China-Africa Development Fund, to support Chinese companies’ equity investment in Africa. (7) □

References:
1) “African oil hunt returns as majors seek to unlock vast reserves”. Bloomberg, 4th September 2018
2) “Flush with Cash, Majors Seek to Tap Africa’s Vast Resources”. Bloomberg, 5th September, 2018
3) “Nigeria And Mozambique Dominate Capex Outlook In Sub-Saharan Africa To 2025: GlobalData”. Oil and Gas Middle East, 18th August 2018
4) “China Makes Inroads into African Energy”. Africa Oil and Power, 13th July 2017
5) “Beijing declaration, action plan adopted at FOCAC summit”. Xinhua, 5th September 2018
6) “It’s Africa’s choice: AFRICOM or the New Silk Roads”. Asia Times, 4th September 2018
7) “China’s 2018 financial commitments to Africa: Adjustment and recalibration”. Brookings, September 5th 2018

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