ENERGY FORUM A QUARTERLY JOURNAL FOR DEBATING ENERGY ISSUES AND POLICIES CONTENTS Issue 73 May 2008 Oil in Africa Jean-Pierre Favennec Bassam Fattouh Walid Khadduri Africa is often referred to as the forgotten continent. It only catches Philippe Copinschi the headlines when revolutions, massacres or massive electoral Gerald Doucet and Latsoucabé Fall – page 3 fraud take place. Africa is not a poor continent however. There is both hydrocarbon and mineral wealth. Oil and gas resources are US Presidential valuable assets for the countries that possess them, and globally for Candidates and Energy an energy hungry world. In this issue of Forum five authors assess Michael Lynch – page 16 successes achieved and problems faced by some African countries Comments on Gas in the hydrocarbon and electricity fields. Demand, Contracts and Prices Jean-Pierre Favennec sets the scene to participate in the development of James T. Jensen – page 17 describing first the main features oil and gas upstream. Bassam Fat- of the energy sector in the conti- touh shows how Libya managed to Asinus Muses – page 20 nent, most remarkably the very attract a very large number of for- low level of primary commercial eign oil companies from the super energy consumption particularly in majors to newcomers from the East sub-Saharan countries (other than after the lifting of sanctions in 2004. South Africa). This reflects the state This was not done by offering cheap of under-development of the region and easy terms in production shar- and in turn may well be a contribut- ing agreements. On the contrary, ing cause. Yet oil reserves in Niger- Libya imposed tough fiscal agree- ia, Angola and Libya are substantial, ments taking advantage of a strong as are gas reserves in Algeria, Ni- bargaining position. geria and Libya. Recent discoveries Algeria began a long process of in the Gulf of Guinea, Mauritania, opening-up in 1990 having suffered Chad and Sudan have widened the economically from the lean years of set of countries with hydrocarbon the 1980s. The final stage was the potential. Disappointingly, oil adoption of the 2005 Hydrocarbon revenues have been misused almost Law which took four years of po- everywhere. Some governments fac- litical debates involving the parlia- ing rebellions, civil wars or unrest ment, trade unions, political parties purchased weapons. Others were and various interests in the civil unable to prevent the diversion of society. It succeeded in attracting funds into private purses. foreign investors both in gas and oil In North Africa, Algeria and Libya, despite an insurgency which caused albeit in different contexts, govern- security concerns. Walid Khadduri ments have invited foreign investors mentions in addition some of the OXFORD ENERGY FORUM MAY 2008 problems encountered by Algeria in realising its in favour of biofuels, but will they change their ambitions of becoming a player in the Spanish minds when the unintended consequences of this domestic gas market. preference become clear? The Democrats will want to reduce tax breaks on the industry but On certain criteria, Nigeria is the most important McCain has not expressed views on this issue. oil country in Africa. Philippe Copinschi notes Clinton and Obama may try to increase excise the dynamism of investments by oil companies taxes on petrol despite past failures of such at- since 1998, the year when the military dictator- tempts; McCain will not. And there are other dif- ship ended, and the results in offshore discoveries. ferences which Lynch defines carefully. Production capacity will increase as these new reserves are developed, but whether production Forum is a debating journal. We welcome letters will grow as a result is a different question. True, and longer comments. James Jensen is contribut- the insurgents are less able to disrupt offshore ing very significant comments to the articles activities, but complacency on the security issue published in the last issue of Forum (No. 72). is not warranted. The obstacles to progress in the His comments are on the crucial topics of gas development of the Nigerian hydrocarbon sector demand growth, contracts and prices. Two of his and indeed the whole economy are well known main messages are: first, although ‘international but deserve to be repeated and repeated. gas markets are more flexible than they used to be…the long-term contract is far from dead’; and Electricity is in many respects a superior form of secondly that nobody seems to have an answer energy. It reaches the point of application at the to the crucial question of how to place a value on end of a wire; no messing about with pipes carry- long-term gas supply. Without such an answer in- ing a toxic fuel, dirty coal to be shovelled under a vestment decisions on major gas projects become boiler, or oil products either viscous or vaporous, very difficult. unsuitable for lighting and awkward in domestic uses. Gerald Doucet and Latsoucabé Fall rightly stress the important role that electricity can Contributors to this issue play in deprived Africa: ‘it is a cornerstone for economic progress.’ Their contribution is about PHILIppE COPINSCHI teaches at l’Institut d’Etudes the Inga projects that aim at realising some of the Politiques de Paris (Sciences Po) huge hydropower potential of Africa, a ‘potential of which only 7 percent is presently exploited’. GERALD DOUCET is Secretary General, World Energy Council This issue includes two other articles. Michael Lynch addresses the topical question of changes LATSOUCABÉ FALL, is Manager Africa, World in the US energy policy that may result from the Energy Council Presidential election. What would Clinton, or Mc- BASSAM FATTOUH is Reader in Economics, Cain or Obama do in this complex area if elected? London University School of Oriental and The current administration was expected to adopt African Studies and Senior Research Fellow at pro US oil industry and pro Arab domestic and the OIES foreign policies. What actually happened was dif- ferent. There were few benefits to the oil industry JEAN-PIERRE FAVENNEC teaches at the Institut and President Bush turned out to be more sympa- Français du Pétrole thetic to Israel than to Arab positions. JAMES JENSEN is President of Jensen Associates The three presidential hopefuls have similar inten- WALID KHADDURI is a consultant to Middle East tions as regards curbing greenhouse gas emissions. Economic Survey They are all in favour of renewable energy which needs subsidies. They rightly believe that this is MICHAEL LYNCH is President and Director of good for the environment and less convincingly Global Petroleum Service at Strategic Energy that it is also good for energy security. They are and Economic Research Inc. 2 OXFORD ENERGY FORUM MAY 2008 Energy in Africa Jean-Pierre Favennec this group of significant producers, North African producing countries are and other West African countries more closely related to Middle Eastern on the importance of already produce oil (Ivory Coast, producing countries than those of Mauritania) or will do so soon (Ghana West Africa: Algeria and Libya are oil in Africa and possibly Niger or Mali). Uganda OPEC members, their oil industries is also a future producer. were nationalised in the 1970s, their Africa is unique because it has a very national companies (Sonatrach and low primary energy consumption, of Africa’s proven oil reserves amount NOC Libya respectively) still play the order of 0.4 tonnes of oil equiva- to 15 billion tonnes (Gt), i.e. ap- a very important role, and there is lent (toe) per inhabitant, compared proximately 10 percent of the world’s greater sensitivity to political tensions with 1.7 worldwide and no less than total reserves, and are fairly evenly in the Arab Muslim world. distributed between North Africa 8 in the United States. South Africa Libya produced almost 3.5 million alone consumes 40 percent of the en- and West Africa. In 2006, African production reached 10 million barrels b/d in the early 1970s. But its produc- ergy used in Africa, and North Africa, tion then dropped sharply with the mainly Algeria and Egypt, 25 percent. per day (Mb/d) – equivalent to 475 million tonnes – i.e. over 10 percent decline of investments as a result By contrast, sub-Saharan countries of the restrictive terms imposed by (West Africa, Central Africa and East of the world’s total production. Given its reserves and production, Africa is Colonel Qaddafi’s government on Africa), from Mauritania to Namibia oil companies present in the country, and Sudan to Mozambique, use very therefore no ‘new Middle East’, but its role as a supplier to the United States and the government’s wish to reduce low quantities of commercial energy. production. Having fallen to a little This low energy consumption is both and Europe makes it a key player and the setting of a battle for influence over 1 million b/d during the 1980s, the cause and the effect of the low production rose again to 1.8 million level of development in the region. between the main consumer zones. Indeed Africa uses only 30 percent of b/d in 2006. Algerian production, on Biomass (wood, plant residue, and the oil it produces, leaving consider- the other hand, has increased progres- so on) represents two-thirds of total able quantities free for export and sively and is now 2 million b/d. household energy consumption. South making the continent the third largest In Algeria and Libya production Africa uses very large quantities of oil-exporting zone, just behind the prospects are good. In Algeria the coal, and North Africa uses substan- CIS but far behind the Middle East. liberalisation of the hydrocarbons tial quantities of natural gas, but oil is sector that took place around 1990 widely used everywhere, particularly allowed foreign companies, in as- in sub-Saharan countries.