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Sunday´s
Opinion

Asian Oils In Africa: A Challenge
To The International Community - (Part 2 of 2)

By Florence C Fee

Part 1 was publish last week

IV. Indian Oil Activities

After China, India could become a major Asian oil player in Africa. In 2010, India is projected to become the world’s fourth largest oil importer after the US, China, and Japan.1 So far, India has lagged behind China in overseas oil investment in Africa, but has recently begun aggressively expanding its Africa upstream portfolio. Its goal is to maintain a 6-7% economic growth rate and also to prevent China from monopolizing the bulk of new oil production from Africa.

India’s overseas state oil company, Oil and National Gas Corporation Videsh Ltd (ONGC), was a late starter but has picked up the pace of investment in the past few years. Recently suffering some investment setbacks, it lost out to Chinese bidders in the Angolan Block 18 and the important Nigerian offshore Akpo field.

India has extensive interests in Sudan and continues to target Nigeria and Angola for upstream opportunities. In 2003, ONGC joined Sudan’s flagship GNPOC project, acquiring Talisman’s equity interest and instantly gaining access to ongoing major oil production. Its interests in Sudan include:

Blocks 1, 2 & 4 (GNPOC), 25% equity, producing 400,000 b/d.

Block 5A, 24% equity, one discovery, in production in 2006.

Block 5B, 24% equity, in exploration.

In 2004, ONGC also agreed to invest in a 460-mile oil products pipeline from the Khartoum refinery (built by CNPC) to Port Sudan on the Red Sea.2

ONGC also holds interests in Blocks 5A and 5B in southern Sudan, offering the potential for significant future large reserves, albeit with high political risk as the blocks are located in the war-torn Sudd, the terrain is exceedingly challenging, and physical and transportation infrastructure are virtually nonexistent. ONGC is also known to have expressed interest in gaining entry into Total’s Block B. New Delhi’s appetite for risk in southern Sudan appears considerable and can only be explained by the very high geological prospectivity and frontier exploration character of the area, together with the competitive advantage it feels it has with Western oils largely absent.

V. Malaysian Oil Activities

The Malaysian state oil company, Petroliam Nasional Berhad, or Petronas, has for 20 years quietly and efficiently acted as the vanguard of Asia’s upstream charge into Africa, acquiring key upstream positions well ahead of China and India. Currently Petronas operates in 15 African countries, with its main E&P projects in Sudan, Chad and Ethiopia. Petronas gained early entry into the two most important oil producing projects in Sudan and Chad, the GNPOC and Doba projects respectively. Its solid partnership relationship with CNPC could easily be extended, depending upon opportunities, from Sudan into Chad or Ethiopia, or both.

Today Petronas is involved in all active Sudanese basins and projects. It is important to note that Petronas is a significant (40%) stakeholder in Blocks 3 and 7 in the Melut Basin in eastern Sudan, close to the Ethiopian border, where three major oil discoveries were made last year by the Chinese-led Petrodar consortium. Its Sudanese holdings include:

Blocks 1, 2 & 4 (GNPOC), 30% equity, producing 400,000 b/d (partnered with Chinese and Indian firms).

Block 5A, Muglad Basin – Sudd, 69% equity and operatorship, Thar Jath discovery to go into production 2006 (partnered with ONGC).

Block 5B, Muglad Basin – Sudd, 41% equity and operatorship, exploration phase (partnered with ONGC).

Blocks 3 & 7, Melut Basin, 40% equity through Petrodar, three major discoveries to go into production 2006 (partnered with two Chinese firms).

Block 8, Melut Basin, 77% equity, in exploration.

In neighboring Chad, Petronas has been a 20% equity partner in the Doba oil project with partners Exxon and Chevron which project came into production in 2003. Originally Elf and Shell were partners in the project but both withdrew in the late 1990s, creating the opportunity for Petronas’ entry. The Doba project, also known as the Chad-Cameroon Petroleum Development Project, is Chad’s first export oil production enterprise, shipping 200,000 b/d to Europe and the US via a 1,500km export pipeline transiting Chad and Cameroon and terminating on Cameroon’s Atlantic coastline at Kribi.

In Ethiopia, in the Horn of Africa, Petronas appears to be expanding its oil interests as a direct result of its prospecting success in Sudan’s Melut Basin in eastern Sudan. In 2003, it signed an agreement with the Ethiopian government to explore and develop a 15,000 sq km area in the southwest Gambella region, known as Block G that borders Sudan.3 Petronas began exploration drilling in Block G in February 2006. Clearly the Malaysians hope the petroliferous Melut Basin extends across the Sudanese border into western Ethiopia. Improved political relations between Sudan and Ethiopia are also facilitating progress on the Gambella exploration venture.

If Petronas is successful in proving oil reserves in Ethiopia, we are likely to see Chinese firms join that project. Given their producing interests in neighboring Sudan and interests in Sudanese export pipelines to the Red Sea, the Chinese firms may consider utilizing those pipelines for shipping Ethiopian export volumes in future. In 2004 Petronas hired a Sinopec subsidiary, Zhongyuan Petroleum Exploration Bureau, to undertake drilling of Block G’s first exploration well. CNPC is reportedly negotiating with Addis Ababa on an additional joint venture in the eastern region of Ethiopia – a country now on China’s exploration radar screen. Further cooperation with Petronas, as with the Petrodar consortium in eastern Sudan, may be in the offing.

Ethiopia reflects a further consolidation of the Asian Troika’s (CNPC/Sinopec, ONGC, Petronas) dominant presence in the Horn of Africa in Sudan, Chad, and Ethiopia, plus a growing willingness among Asian oil companies to partner and cooperate with each other in African projects. This is another often overlooked aspect of Asian upstream oil investment in Africa, their affinity for intra-Asian collaboration: Chinese and Indians in central Sudan, Chinese and Malaysians in eastern Sudan and Ethiopia, possibly Chinese and Malaysians in future in Chad.

V. Analysis

From the foregoing, it is clear that Asian oil projects in Africa exhibit the following characteristics:

New export production is coming onto world markets.

New export transportation infrastructure (pipelines/terminals) is being constructed.

Asian involvement often supplants an IOC forced out for political reasons.

Asians’ willingness to operate in failed, rogue, or sanctioned states.

IOC-NOC competition is intensifying for access to new reserves.

Asian presence progressing from East Africa to West Africa.

Cooperation and partnerships among Asian oils in Africa is expanding.

Context is critical in assessing the meaning of Asian oils in Africa. Pure, unadulterated industry competition for oil reserves is a paramount factor. Growing global energy demand and slowing production growth rates are leading to increased competition among NOCs and IOCs as oil reserves are sought by both groups. Both have large capital and exploratory budgets, due to higher oil prices, but Asian NOCs are advantaged by having their budgets largely subsidized by their own governments. Subsidized Asian firms, pushed by their home governments into high-risk frontier areas, and to gain greater operating experience and technology, now loom a very serious threat to the Western oil majors whose lifeblood is accessing new, produceable reserves. This is a threat to which the IOCs must now apply new creative thinking, particularly in terms of partnership rather than rivalry.

Fueling this intense competition, high world oil prices have made Middle Eastern producing governments even less willing to open up to new foreign investment, thus further narrowing the number of upstream opportunities open to foreign oil groups. In addition, producing governments, such as Venezuela, Bolivia, Nigeria, Russia, Chad, are imposing even tougher terms on foreign oil companies already invested in their countries.4 Some terms the companies will not accept forcing their withdrawal.

Assessing the overall situation, one can say that in this competitive, challenging industry environment, Asian oils’ new oil production from Africa is having a beneficial, salutary effect in not only enlarging world oil supplies, but also in creating new export transportation infrastructure, expediting the shipment of new crude volumes to world markets. In the past 10 years, three new export oil pipelines have been built in Africa with Asian oils’ participation: Sudan's 1,500km GNPOC-Red Sea pipeline; Sudan’s 870 km Melut-Red Sea pipeline; and Chad’s 1,300km Doba-Kribi pipeline (albeit with Exxon as operator and Petronas as partner). It was hoped that these new export links would “open up” the continent to further exploration and development. But will political and other factors conspire to limit the opening only to Asian oils?

Currently, the two largest oil importing nations in the world, the US and China, are both looking to Africa to diversify their oil supplies. Hence both have an interest in maximizing African oil production. Issues do arise when one state (US) seeks to contain an African oil producing rogue regime (Sudan), thereby running into conflict with the other importer’s (China’s) energy policies. But this is a different matter than conflict over the presence per se of Asian oil investors in Africa, bringing new supplies onto the market and creating new export infrastructure to transport those supplies.

Competiton aside, the IOCs and Asian NOCs in Africa share significant investment criteria in common: the need to access new oil reserves, to be able to invest in secure, stable operating environments with host country political stability assured, particularly where high-cost, multi-year energy projects are concerned. As operators, both groups manifest a willingness to invest in new export infrastructure to allow export sales, and both aim to operate as long-term, strategic investors. This commonality of interests should logically allow for consideration by both groups of future cooperation in African upstream projects, where such partnership is a portfolio “fit” for each investor.

While the NOCs may have a funding advantage over their Western competition, it is also evident that the Asian firms are disadvantaged in lagging well behind the IOCs in a variety of important operational and management competencies: in the ability to operate in technically or physically challenging environments such as deep water, Arctic seas or continental shelf; in a lack of project management experience for the big, complex mega-projects that bring together vast capital budgets and complex financings, multiple multinational partners, state-of-the-art technology, complex operating procedures and environmental rules and regulations, etc. When it comes to future upstream ventures, massive in size, scope and complexity, and requiring experienced international operators, the Asian NOCs still have a long way to go. But their aim is to reach international operating level proficiency, equal to the IOCs, as soon as possible. And Africa is providing them an important platform in reaching that goal.

VI. Conclusions

The overriding international imperative to increase global oil supplies via new exploration and production from non-Middle East areas is a sufficient global priority to warrant the international community escalating the priority it attaches to the African region, to both its economic and energy development, and to how it can assure optimal development of natural resources in the context of expanding African economic growth and opportunity for its people.

African governments and international investors must re-think how upstream projects are developed, including the roles of both IOCs and NOCs, with a view to joint venturing where appropriate in order to maximize and sustain production. It is too important to global energy supply not to take a joint, collaborative partnership approach, where possible.

Without it, we will soon see in West Africa a situation similar to that in East Africa: Asian oils operating in conditions of conflict, unrest and instability, working alongside corrupt and autocratic governments. A pattern is already discernible of Asian-only upstream collaboration in East Africa stretching through Chad-Sudan-Ethiopia. While on the one hand, the progression of investment and cooperation among the Asian NOCs has appeared to follow the geology: Doba Basin -> Muglad and Melut Basins -> Gambella prospect.

On the other hand, it is evident that the Asian oils have also clearly taken advantage of the turmoil, conflict and political isolation and absence of IOCs in those states. Will that pattern be repeated in West Africa, in the major oil producing states of Nigeria and Angola on which the world substantially depends for incremental, diversified crude exports? Will such a scenario maximize and secure African oil production in the long run? For the long-term benefit of Africans?

The IOCs themselves must find acceptable ways to lobby their home governments, without getting involved in national or international politics, to urge policymakers and officials to address African development, according it a higher, strategic policy priority. They must press their home governments for a willingness to participate in sustained, active international community engagement in African development issues and reconsider the counterproductive use of sanctions a tool of foreign policy making.

The use of US sanctions against Sudan has resulted neither in a weakening of the oppressive Bashir regime, in office since 1989, nor prevented the development of major oil resources by Asian companies, resources originally invested in and basins discovered by a US oil major. IOCs must urge their domestic politicians not to see African energy development as a zero-sum game, but rather as another diversified energy source, too vital not to be optimized, and find ways for their home governments to appropriately encourage and support their investment activities in Africa.

African governments themselves must confront the issue of whether Asian energy investment alone, or predominantly, will, in the long run, be more positive or negative for their country’s economic and social development. Or, whether a balanced role for both the Western majors and the Asian state firms in healthy competitive rivalries and partnerships is most advantageous for them and for their people to realize the benefits from optimized and sustained oil production and state revenues channeled into economic development.

Those African governments might consider the impact of IOC and Asian NOC activities on employment of nationals in the oil sector. A criticism of Chinese oils in Sudan is that they employ thousands of imported Chinese workers to build, guard and maintain pipelines and other oil installations in lieu of Sudanese nationals. Asian oils partnered with the Western majors may be more likely to adopt new social responsibility thinking, including indigenization and training of the African national workforce.

The key to resolving many of these intractable issues is the involvement of the international community. And here Sudan offers us an important lesson. Sudanese history has shown that it is only during periods of active international involvement that that country has been able to make progress on peace, stability and multiple foreign investment. In the early 1970s, the internationally-mediated Addis Ababa Agreement ended the long-running Sudan civil war opening a door to peace and foreign investment that lasted for 10 years. From 1972-82 those peaceful conditions created the environment for Chevron to spend huge sums on a high-risk frontier exploration project. Moreover, Chevron’s seminal investment attracted other foreign investors such as Total, Shell and Sun Oil. In hindsight, was that decade of peace an anomalous interim? Or was it the model of sustained international community involvement and open foreign investment that we must return to? Likewise today, is the 2004 Comprehensive Peace Agreement the beginning of a permanent peace in southern Sudan, or just the start of another anomalous interim?

The international community must be actively involved in African development and also must give a much higher priority to the region and its broader economic and political growth issues. A consensus needs to be reached on how African resources can and should be optimally developed for the mutual benefit of an energy-hungry world, and, equally, for Africa’s own neglected development. Beijing and the Asian state oil companies appear to have played an important catalytic role in causing a spotlight to be placed on these vital issues. The question is: will policymakers see the opportunities and act on them for the greater good?

Asian Oils In Africa: A Challenge To The International Community - (Part 1 of 2)

Notes:

1. IHS Energy.

2. US Department of Energy, Sudan Country Brief, March 2005.

3. IHS Energy.

4. Financial Times, 9 February 2006.

 

Florence C Fee is a former executive with Chevron and Mobil, heads international energy consultancy F C Fee International, Inc, specializing in risk management in international upstream energy projects (Part 1 was publish in previous weeks ) .Petroleumworld not necessarily share these views.

Editor's Note: This article was was written exclusively for Middle East Economic Survey- MEES and originally publish in MEES, VOL. XLIX, No 18, 1-may-2006. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld 05/28/06

Copyright ©2006 Florence C Fee/MEES. All Rights Reserved.

 

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