African deals may oust Westerners

Feb. 20, 2006
If India, China, and other developing world oil giants (DWOGs)increase investments in African countries, it could have several negative repercussions for Western companies doing business in Africa:

If India, China, and other developing world oil giants (DWOGs)increase investments in African countries, it could have several negative repercussions for Western companies doing business in Africa:

• Prices on African assets likely would soar as Chinese and Indian bidders stepped up efforts to ensure access to prime resources. As African countries auction exploration licenses and engage foreign companies in lucrative partnerships with national oil companies, Chinese and Indian companies would pay top dollar and absorb large risks to gain access to these resources. This could be problematic for Western firms also focused on Africa as a major area of growth.

Particularly pronounced would be the push into Angola, Nigeria, Gabon, and Equatorial Guinea, where corruption and complicated deal structures give a bidding advantage to Chinese and Indian firms not bound by the US government’s Foreign Corrupt Practices Act or similar restrictions.

Countries such as Sudan and Congo (Brazzaville), which have problematic security situations or human rights records, could also see a spike in Chinese and Indian investment.

• Western firms having a history of mismanaging large, complicated projects could be ousted as African governments accommodate new entrants.

Western oil and gas firms that retain their access to African reserves would be those that provide a comparative advantage in extracting oil and generating revenues for host government treasuries. Western firms most likely to be pushed out are those that have had trouble managing megaprojects or that have had conflicts or difficulties working with national oil companies.

• Smaller players could be squeezed out in the battle for access. As prime resources are divided among large Western firms and DWOGs, smaller players with less expertise advantage relative to Western supermajors and little operating and flexibility advantage relative to DWOGs would be the first companies ousted from their properties. These smaller players would need to develop coherent strategies for maintaining their properties and creating incentives for local authorities to retain their concessions.