From Doldrums to Delirium What caused the dramatic changes from the 1980s offshore West Africa

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From Doldrums to Delirium What caused the
dramatic changes from the 1980s offshore West
Africa?

• University of Houston
• October 24, 2008
• Tom Mitro

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The world offshore West Africa in the 80s was
very different from today.
Lagos - 1984
What caused the dramatic turnaround?
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The 1960s early 70s laid a positive groundwork

• Offshore activities commenced in West Africa in
  the 1960s with start of production offshore
  Nigeria, Angola, Gabon and later Zaire and Congo.
  
• Activities carried out in shallow water depth
  utilizing technology proven in geological
  provinces similar to what international majors
  had encountered elsewhere.
• The main international player offshore was Gulf
  Oil, and to a lesser extent Elf, Shell, Mobil and
  AGIP.
• Growth in production continued as political
  optimism in these nascent countries still
  thrived.
• Mid-1970s world events raised energy prices from
  decades-long low levels and enhanced OPEC power.

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But events took a turn for the worse

• The 1970s price-driven incentives to invest in
  offshore West Africa were tempered by political,
  civil, fiscal and governmental uncertainties.
• Then the oil price crashes of the early 1980s
  were the finishing touch to drive investment
  activities and production into the doldrums
  throughout the region.
• What were the factors that contributed to this?

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Main Factors

• National Oil Companies
• Civil Strife
• Fiscal Terms
• Gas Strategies
• Government Transparency and Local Development
• Technology and regional Technical Support
• Opportunities in the Rest of the World
• World Demand and Supply Balance

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Establishment of National Oil Companies (NOCs)

• Angola and Nigeria followed OPEC lead in
  nationalizing operations, but with a difference
  they permitted international companies to retain
  a large equity share and remain as operators.
• New national companies had limited financial
  resources and inconsistent processes to finance
  their equity share of new investments.
• Lingering fear that additional nationalization
  would take place.
• Result Long delays in cash call funding,
  deferrals of projects, and limited new
  exploration.

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Civil strife and cold war politics.

• Biafra civil war in Nigeria.
• Full scale civil war in Angola.
• Cabinda separatist movement in Angola.
• U.S., Soviet, Cuban and South African military
  involvement in Angola.
• Result Political risk high. U.S. government
  restrictions and taxes imposed.

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Fiscal Terms providing only a fixed margin per
barrel

• Nigeria used old OPEC posted price margin-based
  high tax/royalty regime that was no longer linked
  to the market.
• Angola established fixed margins with no
  investment incentives.
• Result Drilling ceased in Nigeria and production
  was shut-in. Limited new investments in Angola.

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Lack of an international gas market or strategies
for utilizing natural gas

• Far from industrialized markets
• No spot markets long term commitments for both
  buyer and seller required.
• Limited government strategies in form of
  penalties or fiscal incentives. (e.g. 2 Kobo/mcf
  penalty in Nigeria, Cabinda gas incentives in
  Angola)
• International companies at the time not
  interested in environmental or less-than-economic
  developments .
• Result Gas flared, gas discoveries ignored or
  relinquished.

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Lack of government plans to deal with local oil
producing regions and no transparency

• Oil revenues went to central governments not to
  regions.
• Newly independent governments had limited
  experience with financial controls.
• No programs to redistribute funds or undertake
  social programs.
• Result Limited development of skills of local
  people or support industry, higher costs,
  regional demands lead to security risks, investor
  concerns on social responsibility of
  international companies.

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Limited regional technical applications/support

• Technology still centered around mainframe
  computing in central technical centers.
• Limited application of new technology in remote
  locations due to security, transportation and
  communications infrastructure, low education
  levels.
• Result Few experienced local employees or local
  bases. Only simpler proven older technology was
  used.

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The rise of competing opportunities in other
regions in the world

• Large discoveries in North Sea, Gulf of Mexico,
  Australian gas.
• Former Soviet Union resources became available to
  outside investment.
• Corporate capital restrictions and risk
  preferences meant most majors were more willing
  to invest in these other locations than West
  Africa.
• Result New investments in West Africa withered
  further.

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Flattening of demand vis a vis supply for
petroleum over an extended period

• Continued surplus productive capacity in Saudi
  Arabia, and discoveries in the North Sea
• General global economic downturns including
  higher interest rates/costs of capital
• Result Oil prices remained below levels of
  general inflation. Reduced earnings resulted in
  mergers, downsizing, loss of critical skills and
  lower worldwide investment levels.

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OPEC price discipline collapse
Tax Rate Increases
Rapid Price Rise
Govt Participation Commences
Price declines
Tax regs changed to accelerate capital allowances
Note Includes onshore production.
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Civil War starts
Rapid Price Rise
Price declines
Govt participation commences
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What caused doldrums to change to delirium?

• The governments in Angola and Nigeria applied
  those lessons learned from the early 1980s.
• Political risk and demand began changing the
  1990s.
• Technology changed and become more portable.

Lagos 1993
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Role of National Oil Companies (NOCs)

• Innovative approaches to NOC financing in Angola
  such as trusts, cash call protocols and some
  carries. Not much change in Nigeria in older
  concession areas.
• New roles established in PSAs in deepwater
  blocks - NOCs no longer an investor or with more
  formal and robust carry mechanisms.
• NOCs gained expertise and experience, and their
  roles changed. More active in developing gas
  policies, technical reviews, local content and
  regulating regional and social development
  activities.
• Result Reduction in investment-drag effect
  mostly due to PSAs in deepwater areas.

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Fiscal terms moved from fixed margins and added
investment incentives

• Amendments to fiscal terms in Nigeria (MOU)
  created market-based pricing and incentives for
  investments such as Reserves Bonus. But margins
  still controlled.
• Angola Block 0 investment incentives were
  introduced based on North Sea style fiscal terms
  with capital uplifts and free production
  allowances.
• Introduction of Production Sharing Agreements
  (PSAs) for deepwater developments was the most
  significant change. PSAs established fiscal
  terms that were sensitive to production or
  ROR-levels in determining government take.
• Result Capital investments incentivized

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International gas markets and strategies for
utilizing natural gas changed

• Development of spot gas markets in the U.S. meant
  less long-term contractual commitments before
  investing in LNG.
• In-country political pressures plus greater
  environmental awareness resulted in more
  proactive government policies in Nigeria and
  Angola.
• Separate fiscal terms for gas developments were
  introduced.
• In some cases (e.g. Angola) the government
  required new deepwater developments to fully
  utilize associated gas before they were permitted
  to go ahead.
• Result LNG, LPG and gas pipeline projects
  developed that utilize gas. But flaring still a
  problem.

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Technology changes resulted in easier application
in remote

• Introduction of enhanced computing power and
  satellite tools enabled more remote management of
  information and equipment, e.g. 3-D seismic and
  directional drilling.
• Development of FPSO technology meant easier
  on-site installation for deepwater developments.
• Downside is that newer technology resulted in
  less employment by local communities or
  indigenous companies that had not acquired new
  technical skills.
• Result Greater and faster applications of new
  technology than before allowed more complex
  projects to go ahead.

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Changes in opportunities in other regions in the
world

• Rapid production and reserves declines in North
  Sea and GOM diminished prominence of other
  regions.
• Increasing political risks in FSU, Venezuela and
  Middle East diminished their attractiveness.
• West African governments used competitive bidding
  for new concessions to widen the number of
  companies and enhance competition.
• Result West Africa viewed as relatively less
  politically risky and more open to Western
  governments and investors.

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Demand vis a vis supply for petroleum changed in
the 21st century

• Increased demand from expanding economies in
  Russia, China and India drove up energy prices in
  the 21st century.
• Result High costs of deepwater development could
  be more easily absorbed and projects became
  economic.

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Civil strife continued in a different mode, but
the cold war ended.

• Over time the civil wars ended and political
  stability increased in relative terms.
• Due in part to the end of cold war meddling in
  the region.
• In some cases local stability only achieved
  through non-democratic governments imposing
  security through force, e.g. the Delta.
• More regional cooperation, e.g. joint development
  zones with neighboring countries.
• Result Mixed results but generally more positive

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Government plans to deal with local oil producing
regions and transparency

• Regional Income Distribution Some progress on
  Cabinda issue in Angola, but Niger Delta in worse
  shape with no workable income redistribution
  plans.
• Community Development Offshore prospects in more
  remote deeper water means less direct access by
  or ties to local communities.
• Government Accountability Increased political
  pressure on transparency showing results in some
  areas, .e.g. televised bid-openings, web-sites.

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• How has this impacted production and reserves of
  the region?

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Disruptions in the Delta
MOU-1986
Impacted in 2000s by onshore shut-ins in the
Delta. (April 2007, 587 mb/d shut-in.)
Note Includes onshore production.
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End of War
New Fiscal Terms
U.S. sanctions
Deepwater Prod Start
Failed elections
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Cumulative West Africa Oil Reserves Discovered
(PP)
Cumulative Discoveries (mmbo)
Source PFC Energy
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Angolas Upcoming Oil ProjectsSources Afroil,
BP, International Oil Daily, Petroleum
Intelligence Weekly, Reuters, Total,Upstream ,
Petroleum EconomistAngola Energy Data, Statistics
and Analysis - Oil, Gas, Electricity, Coal
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What Might be Next?

• Geology and Crude Price still king
• Continued infrastructure, security and personnel
  limitations
• More centrally planned development and
  production, e.g. establishment of trust funds,
  limiting new bid rounds and OPEC quotas.
• Tightening of fiscal terms
• Continued pressure for transparency, democracy
  plus social responsibility
• Continuation or strengthening of regional demands