From Doldrums to Delirium–
What caused the dramatic changes from
the 1980’s offshore West Africa?
University of Houston
October 24, 2008
Tom Mitro
The world offshore West Africa in the 80’s was very
different from today.
Lagos
- 1984
What caused the dramatic turnaround?
The 1960’s & early 70’s laid a positive groundwork
• Offshore activities commenced in West Africa in the 1960’s
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-1970’s world events raised energy prices from decadeslong low levels and enhanced OPEC power.
But events took a turn for the worse…
• The 1970’s 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 1980’s
were the finishing touch to drive investment
activities and production into the doldrums
throughout the region.
What were the factors that contributed to this?
Main Factors
1.
2.
3.
4.
5.
National Oil Companies
Civil Strife
Fiscal Terms
Gas Strategies
Government Transparency and Local
Development
6. Technology and regional Technical Support
7. Opportunities in the Rest of the World
8. World Demand and Supply Balance
Establishment of National Oil
Companies (NOC’s)
• 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.
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.
Fiscal Terms providing only a fixed
margin per barrel
• Nigeria used old OPEC posted price marginbased 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.
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.
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.
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.
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.
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.
Tax Rate
Increases
OPEC
price
discipline
collapse
Rapid
Price
Rise
Govt
Participation
Commences
Tax reg’s
changed to
accelerate capital
allowances
Note: Includes onshore production.
Price
declines
Civil War
starts
Rapid
Price
Rise
Price
declines
Govt
participation
commences
What caused doldrums to change to delirium?
• The governments in Angola and Nigeria applied those
lessons learned from the early 1980’s.
• Political risk and demand began changing the 1990’s.
• Technology changed and become more portable.
Lagos:
1993
Role of National Oil Companies (NOC’s)
• 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 PSA’s in deepwater blocks NOC’s no longer an investor or with more formal and
robust carry mechanisms.
• NOC’s 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
PSA’s in deepwater areas.
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
(PSA’s) for deepwater developments was the most
significant change. PSA’s established fiscal terms
that were sensitive to production or ROR-levels in
determining government take.
• Result: Capital investments incentivized
International gas markets and strategies
for utilizing natural gas changed
• Development of spot gas markets in the U.S. meant less longterm 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.
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.
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.
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.
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
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.
How has this impacted production and
reserves of the region?
Disruptions in the Delta
MOU-1986
Impacted in 2000’s by
onshore shut-in’s in
the Delta. (April 2007,
~ 587 mb/d shut-in.)
Note: Includes onshore production.
End of
War
New
Fiscal
Terms
U.S. sanctions
Deepwater
Prod Start
Failed
elections
Cumulative West Africa Oil Reserves Discovered (P&P)
Onshore
30,000
25,000
20,000
15,000
Offshore Shallow
10,000
Offshore Deep
5,000
Source: PFC Energy
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
0
1955
Cumulative Discoveries (mmbo)
35,000
Angola’s Upcoming Oil Projects
Sources: Afroil, BP, International Oil Daily, Petroleum Intelligence Weekly, Reuters, Total,
Upstream , Petroleum EconomistAngola Energy Data, Statistics and Analysis - Oil, Gas, Electricity, Coal
Project
Location
Operator
Peak
Expected
Production
Start-up
(estimate – B/D)
Tombua Landana
Block 14
Chevron
130,000
2009
Negage
Block 14
Chevron
75,000
2009
Pazflor
Block 17
Total
200,000
2010
Block 31 project
Block 31 NE
BP
130,000
2011+
Block 31 project
Block 31 SE
BP
130,000
2011+
Block 18
Block 18W
BP
100,000
2011+
Kizomba D
Block 15
Exxon
120,000
2011+
Clov
Block 17
Total
150,000
2011-planned
Block 32 project
Block 32
Total
130,000
2011-planned
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