Untapped: The Scramble for Africa's Oil

Does Africa Measure Up to the Hype?
Opinions about events beyond our borders.
April 3 2007 1:35 PM

Untapped: The Scramble for Africa's Oil

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Although Africa has long been known to be rich in oil, extracting it hadn't seemed worth the effort and risk until recently. But with the price of Middle Eastern crude skyrocketing, and advancing technology making reserves easier to tap, the region has become the scene of a competition between major powers that recalls the 19th-century scramble for colonization. Already, the United States imports more of its oil from Africa than from Saudi Arabia, and China, too, looks to the continent for its energy security.

Does Africa measure up to the hype? After all, the entire continent is believed to contain, at best, 10 percent of the world's proven oil reserves, making it a minnow swimming in an ocean of seasoned sharks. Africa is unlikely ever to "replace" the Middle East or any other major oil-producing region. So why the song and dance? Why all the goose bumps? Why do so many influential people in Washington let themselves get so carried away when they talk about African oil?

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The answer has very little to do with geology. Africa's significance as an oil "play," to borrow the industry lingo, lies beyond the number of barrels that may or may not be buried under its cretaceous rock. Instead, what makes the African oil boom interesting to energy-security strategists in both Washington and Europe (and, increasingly, Beijing) is a series of serendipitous and unrelated factors that, together, tell a story of unfolding opportunity.

To begin with, one of the more attractive attributes of Africa's oil boom is the quality of the oil itself. The variety of crude found in the Gulf of Guinea is known in industry parlance as "light" and "sweet," meaning it is viscous and low in sulfur, and therefore easier and cheaper to refine than, say, Middle Eastern crude, which tends to be lacking in lower hydrocarbons and is therefore very "sticky." This is particularly appealing to American and European refineries, which have to contend with strict environmental regulations that make it difficult to refine heavier and sourer varieties of crude without running up costs that make the entire proposition worthless.

Then there is the geographic accident of Africa's being almost entirely surrounded by water, which significantly cuts transport-related costs and risks. The Gulf of Guinea, in particular, is well positioned to allow speedy transport to the major trading ports of Europe and North America. Existing sea-lanes can be used for quick, cheap delivery, so there is no need to worry about the Suez Canal, for instance, or to build expensive pipelines through unpredictable countries. This may seem a minor point, until you look at Central Asia, where the Baku-Tbilisi-Ceyhan pipeline, stretching from Azerbaijan through Georgia and into Turkey, and intended to deliver Caspian crude into the Mediterranean, had to navigate a minefield of Middle East politics, antiglobalization protests, and red tape before it could be opened. African oil faces none of those issues. It is simply loaded onto a tanker at the point of production and begins its smooth, unmolested journey on the high seas, arriving just days later in Shreveport, Southampton, or Le Havre.

A third advantage, from the perspective of the oil companies, is that Africa offers a tremendously favorable contractual environment. Unlike in, say, Saudi Arabia, where the state-owned oil company Saudi Aramco has a monopoly on the exploration, production, and distribution of the country's crude oil, most sub-Saharan African countries operate on the basis of so-called production-sharing agreements, or PSAs. In these arrangements, a foreign oil company is awarded a license to look for petroleum on the condition that it assume the up-front costs of exploration and production. If oil is discovered in that block, the oil company will share the revenues with the host government, but only after its initial costs have been recouped. PSAs are generally offered to impoverished countries that would never be able to amass either the technical expertise or the billions in capital investment required to drill for oil themselves. For the oil company, a relatively small up-front investment can quickly turn into untold billions in profits.

Yet another strategic benefit, particularly from the perspective of American politicians, is that, until recently, with the exception of Nigeria, none of the oil-producing countries of sub-Saharan Africa had belonged to the Organization of Petroleum Exporting Countries (OPEC). Thus they have not been subject to the strict limits on output OPEC imposes on its members in an attempt to keep the price of oil artificially high. The more non-OPEC oil that comes onto the global market, the more difficult it becomes for OPEC countries to sell their crude at high prices, and the lower the overall price of oil. Put more simply, if new reserves are discovered in Venezuela, they have very little effect on the price of oil because Venezuela's OPEC commitments will not allow it to increase its output very much. But if new reserves are discovered in Gabon, it means more cheap oil for everybody.

But probably the most attractive of all the attributes of Africa's oil boom, for Western governments and oil companies alike, is that virtually all the big discoveries of recent years have been made offshore, in deepwater reserves that are often many miles from populated land. This means that even if a civil war or violent insurrection breaks out onshore (always a concern in Africa), the oil companies can continue to pump out oil with little likelihood of sabotage, banditry, or nationalist fervor getting in the way. Given the hundreds of thousands of barrels of Nigerian crude that are lost every year as a result of fighting, community protests, and organized crime, this is something the industry gets rather excited about.

Finally, there is the sheer speed of growth in African oil production, and the fact that Africa is one of the world's last underexplored regions. In a world used to hearing that there are no more big oil discoveries out there, and few truly untapped reserves to look forward to, the ferocious pace and scale of Africa's oil boom has proved a bracing tonic. One-third of the world's new oil discoveries since the year 2000 have taken place in Africa. Of the 8 billion barrels of new oil reserves discovered in 2001, 7 billion were found there. In the years between 2005 and 2010, 20 percent of the world's new production capacity is expected to come from Africa. And there is now an almost contagious feeling in the oil industry that no one really knows just how much oil might be there, since no one's ever really bothered to check.

All these factors add up to a convincing value proposition: African oil is cheaper, safer, and more accessible than its competitors, and there seems to be more of it every day. And, though Africa may not be able to compete with the Persian Gulf at the level of proven reserves, it has just enough up its sleeve to make it a potential "swing" region—an oil province that can kick in just enough production to keep markets calm when supplies elsewhere in the world are unpredictable. Diversification of the oil supply has been a goal—even an obsession—in the United States since the Arab oil embargo of the 1970s. Successive U.S. administrations have understood that if the world is overly reliant on two or three hot spots for its energy security, there is a greater risk of supply disruptions and price volatility. And for obvious reasons, the effort to distribute America's energy-security portfolio across multiple nodes has taken on a new urgency since September 11, 2001. In his State of the Union address in January 2006, President Bush said he wanted to reduce America's dependence on Middle East crude by 75 percent by 2025.

John Ghazvinian has a doctorate in history from Oxford. Born in Iran and raised in London and Los Angeles, he currently lives in Philadelphia, where he is a visiting fellow at the University of Pennsylvania.