Asian oils in Africa: A challenge to the international community by Florence C. Fee
24-04-06 Ms Fee, a former executive with Chevron and Mobil, heads international energy consultancy F.C. Fee International, specializing in risk management in international upstream energy projects.
1. Overview The past two decades have seen Asian national oil companies (NOCs) aggressively exploring for and producing oil in Africa. These investments are now having a major positive impact on global oil markets by bringing on-stream new production to an energy-hungry world. At the same time, much of this new export oil production is coming from projects pioneered by international oil companies (IOCs) which were forced to withdraw from development projects for a variety of political reasons. Further, the replacement Asian firms have been criticized for operating African energy ventures, in some cases in complicity with African regimes, without regard for human rights, corporate social responsibility, transparency, and/or accountability.
This article argues that in order to meet soaring world energy demand, from both the developed and developing world, two things must happen in relation to Asian energy investment in Africa. First, the international community must upgrade the priority it attaches to African economic development as a whole, and African energy development as a subset thereof, if we are to peacefully and maximally develop its natural resources. As part of its more active involvement, the international community must apply consistent, sustained, and unrelenting pressure on African governments, requiring progress on reforms to political systems, including respect for fundamental human rights, transparency in governance and accountability in the management of oil revenues to ensure that benefits from oil production reach the producing country’s citizens.
Secondly, the international community must find ways for Asian NOCs, particularly those from China, India and Malaysia, to join with IOCs experienced in African upstream ventures. Such a joint approach will allow for maximum oil production levels and output growth rates, while also facilitating investment in frontier exploration in the more physically and technically challenging areas of the continent. The net result will be optimization of the African oil and gas exports coming onto world markets to the direct benefit of global consumers.
For both oil groups and the international community, Africa now matters. Its incremental oil and gas resources are vital to global energy supplies and hence the vitality and continued expansion of the global economy. Africa is also increasingly directly relevant to Asia, in particular to the peaceful, stable growth of regional great powers as China and India. Africa’s known oil reserves, while only 9 % of world totals, are a crucial component of global supply. (1) More importantly and often overlooked, the African continent remains largely unexplored, holding the promise of significant future oil and gas discoveries and reserves add-ons.
The strategic challenge for the international community is to work collaboratively to create the conditions that will allow for maximum oil and gas production while ensuring that Africans directly benefit. Africa has a new strategic relevance for global energy supply and the stability of the global economy and the Asian oils’ growing presence has been one of the most visible indicators of this new reality. Africa is no longer a peripheral concern to sustained global energy and economic development.
2. Why Africa? The growing Asian presence in African upstream oil and gas projects simply reflects the broader international economic and energy demand/supply realities: Asia’s growing economies and domestic political stability require a greater volume of diversified, non-Middle East, oil supplies as quickly as they can be accessed. And maintaining those diversified supplies over time is crucial. Asia is experiencing a huge rise in energy demand, a significant portion of which must be met by oil imports. According to the International Energy Agency, in 2005 China relied on overseas oil production for 30 % of its oil imports (7 % of world oil demand at 6,75 mm bpd). India imports a larger proportion, 70 %, of its requirements. However, India’s share of world oil demand is much smaller (3 %, at 2.0 mm bpd). The need to meet this voracious energy requirement from diversified overseas sources has driven Asian states into Africa, once nearly the sole preserve of the Western oil majors. (2)
China, leading the Asian advance into Africa, is now the world’s second largest consumer of oil (after the US), absorbing 6.6 mm bpd. Overseas oil imports to China are likely to grow substantially over the coming decades. (3) Diversification of supply is critical for the Chinese so as not to be held hostage to supply disruptions from any one or several regions. The oil consuming world, including Europe, absorbed this lesson again in January 2006 when once-thought highly-reliable Russia unexpectedly disrupted gas supplies to Ukraine, ostensibly for political reasons related to Ukraine, causing a brief disruption to some European states and a broader EU re-think of energy security issues.
To meet growing energy demand, China, India and Malaysia have in the past decade implemented an aggressive energy investment strategy in Africa. Its effects are beginning to be felt across a wide range. These countries are investing heavily and rapidly in African exploration and production projects starting in the Horn of Africa, but more recently expanding into West Africa in the politically unstable Gulf of Guinea region. At the same time, the geopolitical or national security consequences of this Asian energy strategy in Africa should not be overdrawn or exaggerated. A recent US government report concluded, for example, that Chinese energy demands do not per se threaten US national security interests but rather act to enlarge world oil supplies. (4)
Besides meeting immediate energy import needs, there is a longer-term, strategic component to Asian governments’ strategy in Africa: to ensure that adequate oil and gas development projects outside the Middle East are “in the pipeline” and steadily coming onto world oil markets. Oil is a commodity bought, sold and traded in a world oil market that constitutes one large pool. As Asian states will in future be among the biggest purchasers from that pool, it makes sense for those governments to ensure that it attains its maximum size. Asian importers will tap federal treasuries as needed to acquire supplies at whatever price the market sets; but first the supplies must be available. That means exploration, development and production investment expenditure, in places like Africa, 5, 10 or even 20 years in advance of export production and transportation.
3. Chinese oils in Africa overview Given its priority for diversified oil imports, China has launched all of its state oil companies into the African upstream arena: China National Petroleum Company (CNPC), China National Offshore Oil Company (CNOOC), and China Petroleum and Chemical Corporation (Sinopec). Chinese oils are most active in Sudan, Angola, Nigeria, Algeria and Gabon, with pre-investment talks ongoing in Chad, Libya, and the Central African Republic. Among Asian oil firms in Africa the Chinese are the most dominant in terms of the number of companies investing and actual production brought on-stream. China is the second major importer of African oil after the US, relying on Africa for 25 % of its oil. (5) The fact that one-quarter of its oil comes from Africa says a great deal about the importance Beijing attaches to the continent and its energy development.
While China’s historical relations with Africa were once rooted in support for anti-colonial struggles in the 1960s, today, they have shifted from ideology towards market forces and natural resource development. Beijing is now employing a less political and more pragmatic approach. But in return for its investment dollars, China does ask African states to accept the “One China” principle -- with the exception of oil producing states such as Chad, which maintains diplomatic relations with Taiwan while also welcoming PRC potential investors.
A. CNPC CNPC’s oil investments in Sudan are its largest global oil operations, currently producing 500,000 bpd, and expected to reach 750,000 bpd by 2007. (6) Sudan alone supplies China with 7 % of its oil needs and is its fourth-largest overseas oil supplier (after Saudi Arabia, Iran and Oman). Sudan is a long-term play for China, especially since the highly prospective (in oil) southern region remains virtually unexplored, and Chinese oil firms are gaining in petroleum exploration and development operating experience in the country.
Sudan’s proven oil reserves consist of 700 mm barrels in the Muglad and Melut Basins in mostly northern Sudan, both discovered by Chevron in its pioneering exploration work in the 1970/80s. In the southern region, high potential for finding future oil reserves exists in the “Sudd” (Arabic meaning barrier for its dense aquatic vegetation) swamp. The Sudd is a massive clay-soiled bowl-type basin where the White Nile yearly overflows its tributaries as it flows north through Sudan and Egypt. Energy professionals believe the Sudd likely holds an additional 5 bn barrels or so in recoverable reserves. Together, these aggregate reserves (Muglad, Melut and Sudd) will be sufficient to maintain production for nearly 60 years, meaning Sudan will be a major oil supplier for China for decades. (7)
In 1996, when CNPC entered Sudan, the country represented a perfect beachhead opportunity for China. CNPC’s first investment, in the Greater Nile Producing Consortium (GNPOC), is made up of the Muglad Basin portion of the old Chevron license area. The current GNPOC partners are CNPC, Petronas, ONGC and Sudapet. The investment features that attracted the Chinese to Sudan were: (a) the presence of large discovered oilfields waiting to be developed; (b) the absence of Western oil majors competing for oil rights; and (c) huge upside exploration potential to ensure a steady flow of production into the future, when, presumably, the country would enjoy greater political stability (Sudan was engaged in a civil war at the time).
Sudan since then has been an unqualified oil production and exploration success for China. Within three years of joining GNPOC, CNPC was producing and exporting high-value, easily-refinable, light, sweet Sudanese crude from the Muglad Basin. By 2005, its crude production levels there reached 500,000 bpd and may attain 750,000 bpd by 2007. Meanwhile, further east, in the Melut Basin, another portion of Chevron’s old license area, the current Petrodar consortium, made up of a nearly similar group of partners (CNPC, Petronas, Sudapet, Gulf Petroleum and Al-Thani) to GNPOC (both including CNPC) has discovered three new oilfields in the past three years. (8) The Chinese work in both basins is built upon earlier work by Chevron.
In the 1970/80s, Chevron had secured rights to a massive 500,000 sq km concession in the interior of the country for an unprecedented frontier exploration effort on a massive scale. After 15 years of exploration and investment, and $ 1 bn (in 70/80s dollars) in capital expenditure, it discovered two new sedimentary basins (Muglad and Melut), highly unusual in the oil industry. (9) That achievement was overshadowed when declining security conditions in the oilfield area due to a civil war outbreak in 1983, forced Chevron to withdraw from the southern region. Nearly 10 years later, still unable to work in its southern operational area due to war conditions, Chevron sold all of its Sudan interests. Besides the civil war, a second barrier for US firms working in Sudan was created in 1997 when the US imposed economic sanctions on Sudan, prohibiting all trade and investment by American firms. US sanctions remain in place.
Today the Sudan oil industry is dominated by the Chinese, Indians and Malaysians. The one major Western petroleum investor remaining is France’s Total. It followed Chevron into Sudan in the 1980s and acquired equity in, and operatorship of, Block B, south of Chevron's Muglad Basin area in the Sudd. The license for Block B has been renewed by the Sudanese authorities for the past 21 years despite its force majeure status due to the war. Block B is located in the centre of the highly prospective Sudd area. Total undoubtedly will continue to seek to hold onto such a high-potential asset, given the block’s reserves potential and projected oil prices.
CNPC’s interests in Sudan now include: -- Blocks 1, 2 & 4 (Muglad Basin), 40 % equity and operatorship through the Greater Nile Petroleum Operating Company, producing 400,000 bpd. It also holds an interest in a 1,500 km export oil pipeline it constructed in 1999 from the Unity oilfield to the Red Sea exporting GNPOC crude. -- Blocks 3 & 7 (Melut Basin), 41 % equity and operatorship through Petrodar Operating Company, producing 5,000 bpd from Adar Yei field; three new oilfield discoveries in 2004/05, to begin producing 100,000 bpd 2006. -- Block 6 (Muglad Basin), 95 % equity, producing 10,000 bpd, expected to reach 170,000 bpd.
Much has been written about the Government of Sudan’s use of the Sudanese military, and armed Arab militias to raze villages and forcibly displace local Nilotic African inhabitants in southern Sudan. This so that GNPOC production, and the construction and operation of the export pipeline could progress unimpeded. International NGOs and human rights organizations have been highly critical of both the Sudan government and the GNPOC partners for their role. Canada’s Talisman oil independent, which operated the GNPOC license beginning in 1998, withdrew entirely from Sudan in 2003, due to pressures from those groups.
In West Africa, CNPC’s activities in Angola are centred on a 50 % equity in offshore Block 18 acquired from the Angolan government after Shell’s withdrawal. Shell’s decision to quit Angola, Sub-Saharan Africa’ssecond largest oil producer, created the opportunity for CNPC to join this major project. CNPC’s investment was further facilitated by a Chinese government $ 2 bn soft loan to the Angolans which eliminated the need for Luanda to submit to more onerous IMF conditionality on a pending credit facility. The IMF loans would have prescribed strict terms on transparency and accountability for oil production operations and revenues, conditions China does not require. Angola now promises to be a major oil operations base for the Chinese, possibly eventually eclipsing Sudan in size and scope.
Shifting to the North Africa, in Algeria, CNPC is in the early stages of exploration having acquired a 75 % interest in Blocks 112/102a and 350 onshore in the northern part of the country. Further south in Niger, CNPC signed exploration agreements for the 60,000 sq km Bilma Block, and in central Chad acquired an exploration interest in the vast Block H license area, north and west of Exxon’s Doba oil production project. Chinese oil involvement in Chad may possibly expand, encompassing not only the Block H exploration concession, but also conceivably the Doba producing project should either of the Western partners (Exxon, Chevron) withdraw. In that event, it is likely that CNPC would replace them as stakeholders.
Malaysia’s Petronas is already a partner in Doba, and CNPC is partnered with Petronas in Sudan (GNPOC and Petrodar), so it would make sense for CNPC to follow Petronas into the Doba Chad oil production project if the opportunity arose. Given the Chad government’s cool relations with the World Bank over President Idriss Deby’s recent moves to renege on his government’s obligations under an oil revenue management law, and China's general lack of concern for such issues, it is a strong possibility that N’Djamena would welcome further Chinese investment in Chad -- if nothing else to maintain existing production levels and revenues accruing to State coffers.
B. CNOOC CNOOC, China’s second major upstream oil and gas company, is primarily an offshore operator. It was established in 1982 with a mandate to partner with foreign oil companies and acquire as much upstream technology as possible. It has since joined with Western majors offshore China, in the South China Sea, and in the Pearl River Mouth Basin among other areas. (10) In 2005, CNOOC lost out to Chevron in a much-publicized bid to acquire California-based Unocal oil company as part of CNOOC’s aggressive investment strategy to add to its oil and gas reserves base.
CNOOC’s presence in Africa reflects an evolutionary development among Chinese oils, a progression from operations onshore East Africa to offshore West Africa in the strategic Gulf of Guinea region. As an offshore operator, CNOOC is clearly targeting the prolific deep waters of West Africa which have proven so profitable for IOCs over the past 20 years. West Africa will also give CNOOC the opportunity to gain technical and project management experience in offshore projects. In the future these more sophisticated technological capabilities could allow Chinese oils to undertake oil exploration in frontier areas such as the Russian Far East continental shelf and the Arctic and Northern seas. Thus, African offshore investment is seen by the Chinese as a crucial strategic investment in developing and honing its international operating experience. This strategic aspect to Chinese oil investment in Africa is often overlooked by observers in the focus on China’s need to access near-term barrels.
While not as advanced in African operations as CNPC, CNOOC last year entered into a major oilfield in Nigeria, Sub-Saharan Africa’s largest oil producing country -- world’s 8th largest oil exporter, producing 2.5 mm bpd. (11) CNOOC paid $ 2.3 bn for a 45 % interest in the recently discovered Akpo field offshore Nigeria, operated by Total. Akpo is one of a “string of pearls” -- recent Nigerian deepwater discoveries in the Gulf of Guinea, including the Agbami (Chevron) and Bongo (Shell) fields.Akpo is also contiguous with the Nigerian-Sao Tome Joint Development Zone, a possible new West African oil play, if first-time exploration drilling now underway is successful. With estimated recoverable oil reserves of 650 mm barrels and 75 bn cm gas, Akpo is scheduled to go into production in the first half of 2008. (12) The Akpo investment not only gives CNOOC a foothold in Africa’s largest oil producing country, but the field is also offshore and distant from the increasingly volatile onshore Niger Delta producing area.
In February 2006 CNOOC signed an exploration agreement for offshore Block S in Equatorial Guinea, now Sub-Saharan Africa’s third-largest producer. CNOOC will be technical operator for the project which will entail seismic testing and exploration drilling in 30-1,500 m depths. Between them, CNPC and CNOOC have a strong foothold in West Africa, in Nigeria and Angola, with the promise of more investment to come.
C. Sinopec The third Chinese oil firm operating in Africais Sinopec, China’s downstream arm. It is predominantly domestically-oriented, and until recently it has had limited overseas exposure. However, it is a telling reflection of China’s determined, strategic focus on upstream projects in Africa that it has now deployed all three of its state firms across the continent in an effort to access new oil reserves.
Sinopec’s upstream interests in Africa include: Sudan: Blocks 3/7, 6 % equity Angola: Block 3/80 production rights Gabon: oil production Algeria: development of Zarzaitine oilfield onshore Congo-Brazzaville: Blocks 12 and C offshore, development and production
The Angolan block (3/80) was obtained after the Angolan government decided against extending Total’s license and after the Chinese government had extended a $ 2 bn soft loan to Luanda. Thus that Chinese loan directly opened up opportunities for Sinopec as well as CNPC.
Notes: 1. BP Statistical Review of World Energy, June 2005. 2. International Energy Agency, Oil Market Report, December 2005. 3. Ibid, BP Statistical Review. 4. US Department of Energy, China Report, February 2006. 5. French Centre for Research on Contemporary China, China’s Presence in Africa, Francois Lafargue, September 2005. 6. Jamestown Foundation, Sudan: China’s Outpost in Africa, Yitzhak Shichor, October 2005. 7. Ibid. 8. US Department of Energy, Sudan Country Brief, March 2005. 9. The author was a member of the Chevron Sudan management team. 10. Eurasia Group, China’s Energy Security Policy and NOCs, Jason Kindopp, October 2005. 11. BP Statistical Review, 2005. 12. Wood Mackenzie.
Source: Middle East Economic Survey via Enatres
RRS Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
