Africa's Oil Is Cheap, But Often a Hassle

Market trends tempt big oil producers

Judging by the numbers, West Africa sounds like a more attractive place to do oil business in than the North Sea. West Africa has reserves of 25 billion barrels, which cost $3.50 per barrel to produce. In contrast, the North Sea has reserves of 15 billion barrels. Production costs $10 a barrel.

So why do oil companies invest $13 billion yearly on offshore North Sea developments to produce 5 million barrels a day versus the $2.5 billion spent to produce half that amount in West Africa? Some industry leaders seem to be pondering that question these days.

With the air of people in on a good secret, a group of international oil executives gathered at a conference here recently to discuss doing business in Africa. Their conclusion was simple: The continent provides rich potential for the intrepid who can withstand its myriad frustrations of poor infrastructure, heavy state control, and corruption.

"There are exciting prospects in Africa," says Eric Daffern, group leader of the World Bank's Oil and Gas Division. But he adds that "Africa needs to make itself more attractive. It's the hardest part of the world to work in."

On the gloomy side, experts see a continent where reliable information is scarce, regulation extreme or outdated, and banking services are sometimes nonexistent. Matters are not helped by political instability in many nations and poorly maintained refineries suffering financial losses.

But while acknowledging the hardships, executives find encouraging trends in a region long associated with war and famine: growing political stability in many African countries and a shift toward market-oriented economies and high levels of economic growth in others.

"I believe Africa is starting to show its teeth. Already a lot of money from the East is starting to seek out Africa," says John Greensmith, British Petroleum's managing director for Africa. "The lift doesn't stay in the bargain basement forever, and nothing worthwhile is ever achieved without risk."

"West Africa has huge reserves and is a long-term and low-cost producer," adds Kjell Almskog, the president of ABB Oil & Gas, part of the Swiss company Asea Brown Boveri.

Africa's population - now more than 700 million - and energy needs will grow rapidly over the coming decades, forecasts Stone Bond Corp. The Houston consulting group says Africa will become one of the fastest-growing oil markets.

In the past few years, African oil consumption has been stagnant at 3 percent of world demand. This should change with sharp increases in demand in eastern and southern Africa, experts predict. In South Africa, for example, Mr. Greensmith notes, oil consumption grew by 8.7 percent last year, well ahead of 3.3 percent economic growth overall.

On the producing side, executives describe "exciting prospects" with great potential in Chad and Sudan, as well as gas discoveries in Angola, Congo, Equatorial Guinea, Gabon, Ghana, and Cameroon.

Stone Bond also forecasts that Africa's petroleum supply will rise from 5.8 billion barrels per day last year to 6.46 to 7.66 billion b.p.d. in the year 2010.

Among the enthusiasts is the Malaysian state oil company Petronas, which recently acquired a 30 percent stake in Engen Ltd., the largest South African oil firm.

Dato Hamzah Bakar, senior vice president of refining and marketing at Petronas, says he expects Africa to post average economic growth of 4.9 percent a year over the next decade, which would boost demand for oil products and energy consumption.

"We are taking a long-term view and want to be here at the very start," he says. "This is a vote of confidence in Africa."

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