Originally published in Oil & Gas Monitor, May 2012
Modern history has suggested that Africa, and in particular
sub-Saharan Africa, has frequently been fed, subsidised and
supported by the stronger economies of the US, Europe and Asia.
There is evidence to suggest that those tables are turning and that
Africa can be a provider of the resources required to nourish and
sustain (at least in energy terms) those other economies.
Starting with the demand side, it is clear to see where that appetite for energy lies. According to figures produced by BP, from the start of 2010 to the start of 2011 global energy consumption grew by close to 6%, being the highest rate of growth seen since 1973. Although much of that consumption sits in the US and Europe, China has now surpassed the US as the world's largest consumer of energy. China represents 20.3% of the world's total energy consumption, with the annual growth rate in Chinese energy consumption standing at a huge 11%. Looking at oil specifically though, North America stays at the top of the consumption table, representing more than a quarter of the world's total oil consumption.
So the question remains as to where that oil and gas will come from over the coming years. According to those same BP figures, from the start of 2001 to the start of 2011, proved oil reserves in the UK and Norway declined from 16.1 to 9.5 billion barrels. In that same period US proved reserves stayed flat at around 30 billion barrels. By contrast, over the same period proved reserves of oil in Africa grew by over 41%, so that by the start of 2011 Africa had proved oil reserves of 132.1 billion barrels. To put it differently, that means Africa now has over four times as much oil as the US. Nigeria alone has oil reserves of more than 150% of the oil reserves found in the US.
All of this implies that the oil should already be flowing out of Africa to the US and Asia, and indeed the figures show that to be true. Nigeria is one of the five countries that together provide nearly 70% of all crude oil imported into the US. For China, Angola is the second largest source of Chinese crude oil imports (the largest being Saudi Arabia). Aside from those traditional African producing nations such Nigeria, Angola and Algeria, Africa has a whole group of new oil economies that are following the same path and looking both to take advantage of those trends in supply and demand and to fuel their domestic economies. Ghana in West Africa, and Uganda, Mozambique and Tanzania in East Africa are all, along with numerous other African nations, now starting to emerge as holders of significant oil and gas reserves and as future exporters of energy in the form of crude oil and LNG.
So it is clear that Africa has the necessary oil and gas reserves. But for Africa to continue its progress and to play its part in satisfying the world's appetite for energy, then the oil companies need to have confidence both that they can access those reserves in an economic manner, and also that they can readily buy, sell and finance their African assets to see the benefit of their African investments. In turn that requires a stable legal framework, a transparent regulatory regime and clear fiscal terms. The rules that apply, and the ways in which those rules are interpreted and enforced, need to be crafted with care if governments are to attract the investment they need and to take advantage of the energy reserves with which they are endowed.
In that regard, governments need to bear in mind that industry focus is not just on the economic terms of African PSCs and licences themselves, although clearly royalty rates, cost oil caps, profit oil shares and tax rates are critical. Equally though, judicious and transparent use of other governmental rights is key. Those rights range from NOC pre-emption, rights to withhold consent to asset transfers, the application of capital gains taxes and assignment fees on upstream sales, the ability to block disclosure of geological data to bidders and buyers, and the right to consent to creation of security over energy assets to support debt financing for a party's development expenditures. The path on these topics has not always been smooth for energy investors across Africa, whether in sub-Saharan jurisdictions such as Ghana, Uganda, Nigeria and Equatorial Guinea, or in projects in Libya, Egypt and across North Africa.
One conclusion seems clear – that through stimulating investment in its huge energy reserves, Africa can give its oil a key role both in its own economic growth and in that of the rest of the world. But for that to continue, African governments and regulators should proceed with caution. They should foster the stability and legal clarity that are needed for African oil to take its rightful place alongside not just other conventional energy sources, but also shale, oil sands, nuclear and renewables, in the world's energy mix.
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