Sub-Saharan Africa energy future brightening

John L. Kennedy
Editor

For several reasons, there is renewed optimism about sub-Saharan Africa's energy future.

The outlook for regional cooperation in energy matters is much better. Economic growth has returned to many countries.

In addition, the pragmatism of new leaders in the region may bring greater political stability.

Efficient use of energy will be a key to sustained economic progress. And, along with expanded exploration opportunities, companies and governments have a new excitement about natural gas utilization and prospects for electric power generation.

Underlying obstacles

Political unrest will not disappear soon, and even with healthy economic growth rates, many sub-Saharan Africa (SSA) economies need years of sustained growth to reach acceptable per capita income levels.

Regional cooperation?

It's still hard enough to get factions in one country to work together, let alone assembling a cooperative group of countries.

Nor are fiscal incentives-at least on a broad, regional basis-that appealing. In a recent rating of petroleum fiscal terms, South and Central Africa was ranked fifth out of eight regions (OGJ, May 26, 1997, p. 35).

Still, representatives of foreign and state oil companies, energy ministers, and bankers painted an encouraging picture at the Fourth Sub-Saharan Oil & Minerals Conference last month in Mauritius.

Government officials, at least publicly, show a new commitment to democracy and trade.

Rear Adm. Jubrila Ayinla, Nigeria's commerce and tourism minister, told OGJ that Nigeria has mapped out "a clearcut transition to democracy." Nigeria will put in place a "virile, long-lasting, civilian, democratic government in October 1998." Foreign direct investment will be necessary for economic growth and development.

Other leaders also voiced support for trade and foreign investment. But, said Florent Kambale Kabila Mututulo, minister of mines in the new Republique Democratique du Congo (formerly Zaire), "We will insist on social involvement" by companies.

Improving environment

Despite unfavorable political and economic environments, relatively high returns have long attracted multinational companies to Africa.

Michael Sarris, World Bank's Indian Ocean country director, said return on direct foreign investment in Africa is 25% compared with 18% in other regions.

"I believe Africa is on the move," said Sarris. "There is a new spirit of social and economic progress caused by shifts to democracy and a new generation of leaders that is pragmatic."

Of 48 SSA countries, 31 had positive gross domestic product (GDP) growth rates in 1996, according to Sarris. GDP for all of Africa grew 5% in 1996 compared with less than 1% in 1994.

For SSA, the growth rate last year was 4.4%, the highest in 20 years, while economic growth in South Africa was 3.1%.

"But progress is fragile," said Sarris.

The 500 million people in SSA represent 10% of the world's population but only 1% of its GDP. Economies must grow even faster-8% or more-if progress is to be significant, he indicated.

Unique energy supply

In 1992, Africa consumed about 215 million tons of oil equivalent, about 3% of the world's total, said John Ferriter, deputy executive director of the International Energy Agency.

South Africa consumed 40% of the total, he said, and the North African countries 40%. The rest was consumed by the 500 million people in SSA (excluding South Africa).

Excluding South Africa, SSA's consumption of "traditional fuels," such as wood, is more than four times SSA's commercial energy consumption. Demand for traditional fuels will not grow as fast as demand for commercial fuels, Ferriter said.

But biomass demand will still grow faster than the 1.2% growth in total energy demand expected for Organization for Economic Cooperation and Development member countries.

IEA estimates biomass in SSA (excluding South Africa) accounted for more than 80% of all fuels used in 1992 and will account for only slightly less than 80% in 2010.

SSA also has important hydro power resources. The stretch of the Congo River at Inga alone has enough to supply over half the electricity demand of the continent, said Ferriter. But only about 6% of Africa's potential hydroelectric capacity has been harnessed.

And, according to other speakers at the conference, hydropower is often not competitive with natural gas-fueled power generation.

New respect for gas

"Maximum utilization of associated gas is the Nigerian petroleum industry's biggest challenge," said Basil Omiyi, Shell Nigeria's director and general manager, relations and environment.

There has been talk for years about the need to make use of massive volumes of flared natural gas in southern Africa. But little has been done because of a lack of markets and minimal economic penalties for flaring.

But attitudes are changing. Gas is now being viewed as "an asset, not a nuisance."

Nigeria's goal is to eliminate flaring by 2010. Oil production in Nigeria alone generates more than 2 bcfd of associated gas, most of which is flared.

Planned gas projects will take a big bite out of flared volumes, but eliminating all flaring by the deadline will be made more difficult by the expected increase in oil production.

Omiyi said oil output could increase from today's 2.2 million b/d to 4 million b/d by 2010.

Foreign operators have more aggressive schedules for ending flaring. Mobil hopes to end gas flaring by 2002; Shell, too, plans to beat the government deadline.

Solutions to the gas utilization problem will be diverse, ranging from high-capital projects like the $4.5 billion Bonny LNG project to low-cost projects for small reserves.

The Bonny project is scheduled to begin shipping to markets in Europe in 1999 and will take a big volume of unused gas. But for smaller, more dispersed African markets, other solutions will be needed.

The West African Gas Pipeline is one such solution. It will serve markets in Ghana, C"te d'Ivoire, Togo, and Benin when it begins operation in 2000. The 1,000-km, 12-in. and 18-in. line from Nigeria's offshore Escravos field is expected to cost $400-450 million to build. Flow will begin at about 80 MMcfd and could build to 300-400 MMcfd.

There are also more modestly priced ways to use Africa's gas. Ghana, for example, plans to use barge-mounted power plants to make use of small local reserves. Converting gas to liquids can also provide a variety of options for using gas, and the range of gas-to-liquids processes is growing (see Watching the World, p. 35, and OGJ, June 23, 1997, p. 16).

In addition to pressing ahead on gas-use projects, gas is also the target of an exploration agreement that Phillips Petroleum Co. and partners have covering 14.5 million acres in the Durban basin off South Africa's eastern coast (OGJ May 19, 1997, p. 36).

Hungry power markets

Much of the market for natural gas in sub-Saharan Africa will be in electric power generation.

IEA's Ferriter said World Bank estimates at least $17 billion will be needed for new electricity projects in SSA (excluding South Africa) by 2005.

Governments can provide only $5 billion of this, he said. Lenders such as World Bank and African Development Bank can put up another $2 billion. But the remaining $10 billion will have to come from the private sector.

The growth of the electricity market will depend heavily on developing regional cooperation and on the willingness of each country to allow economics to determine the choice of fuel.

"A regional grid approach is needed," said Tsatsu Tsikata, chief executive of Ghana National Petroleum Corp., to make "much more efficient use of resources in each country."

Such an electricity grid makes it possible to combine local and regional reserves, said Tsikata.

An electricity transmission interconnection is the best way to make the energy of gas available to more markets. It is more efficient than piping gas to power plants in each region.

According to Tsikata, Ghana has taken "a pragmatic, economic, regional approach" to developing an electricity infrastructure by developing a national electrification plan and building a transmission network. He said hydroelectric power "became inadequate" so Ghana developed an interest in natural gas. And independent power production will allow all energy sources to be put into the grid.

But there is still a considerable nationalistic attitude in SSA that makes countries want to be "self-sufficient." This attitude surfaces often in choosing between natural gas from outside the country and domestic hydroelectric power.

"When gas is available from somewhere else at a lower price, it doesn't make economic sense to build a hydro power project," said Tsikata.

"Gas-powered electricity generation is cheaper than even the next generation of hydro technology," he noted. He estimated the cost of hydropower at 7-11?/kw-hr, compared with 5?/kw-hr for a combined-cycle, gas-powered plant.

Opportunities for independents

Another cause for industry optimism is the growing range of opportunities for independent oil and gas companies in SSA.

As is the case in any region today, technology and new alliances are helping provide these opportunities.

"The level of activity in southern Africa is very good," said J.W.S. Bentley, managing director, Energy Africa. "In the past year, we've looked at 50 possible deals and we took five," said Bentley.

Energy Africa operates in six countries in western and southern Africa and has 10 wells planned for 1997. That drilling level will extend through 1998, said Bentley.

The company plans to spend $25 million on exploration and $50 million on development each year for the next 2 years.

Bentley said partnerships with other companies "is the easy part," but relationships with governments and national oil companies are critical.

In January, Energy Africa disclosed a partnership with Gabon involving six production licenses and the option in the event of discovery to acquire interests in 22 other licenses. Three of the six blocks are onshore, three offshore.

In March, Energy Africa also took a 24% interest in offshore Block C1-102 in C"te d'Ivoire that is operated by Ranger Oil Ltd. Energy Africa is also a partner in the new exploration license off Durban, South Africa, to be operated by Phillips. Also, it has interests in Congo, Angola, and Namibia, as well as South Africa, the U.K. North Sea, and Oman.

Energy Africa is an exploration and production company that was separated from South Africa's Engen last year. Engen, the South Africa refining/marketing company, owns 60.5% of Energy Africa's shares.

More independents active

Ranger Oil Ltd. is also an example of the growing involvement of independents in SSA oil and gas development.

Ranger has been operating in Angola and Namibia for the past 6 years and now will operate in C"te d'Ivoire, and its experience underscores how the wide availability of technology can yield new opportunities for independents.

Ken Seymour, Ranger's Angola general manager, said, "Our primary purpose here is to make a major oil discovery: To discover an elephant." But during the hunt for the big one, smaller fields are often found that are economically marginal, said Seymour.

With new technology, these fields can be developed without first discovering an elephant, Seymour told conference attendees.

He said the three key elements now available are subsea completions, horizontal and multilateral drilling, and mobile reusable production systems, especially floating production, storage, and offloading (FPSO) vessels.

Seymour cited the Kiabo field on Block 4, Angola, as an example of the opportunities small fields can offer. Kiabo was developed by Sonangol in 1993 and began production in January, 1994, from two subsea wells flowing to the FPSO Ocean Producer.

Two more producers have been drilled that extended field life. Plans for additional well work include three horizontal sections that will further extend the field's life.

Ranger has submitted a development plan for the Kiame field, which will be developed using two multilateral subsea completions tied to an FPSO.

"These show that fields of less than 10 million bbl can be economically produced," said Seymour.

Still, he said, there are many barriers to developing marginal fields. Single marginal fields have short field lives and "do not stand up well to the rigors of discounted cash flow techniques....

"The way to neutralize this risk is by portfolio management and by developing a series of marginal fields sequentially."

"The true value of offshore marginal field development," said Seymour, "is their ability to permit simultaneous appraisal and development permitting the generation of positive cash flows during the hunt for large fields."

Regional cooperation

Africa "needs to get together as a block in order to be part of world trade," Nigeria's Minister Ayinla said.

"We must quickly form our own block if we are not to be left behind."

Tied up in the regional cooperation question is security. "We are seeing some modicum of success" in improving security, the minister added. And he attributed part of Nigeria's problems to a "domino effect" that results from instability anywhere in southern Africa.

"Refugees flock to Nigeria," he said, when problems flare up anywhere in the region. And this nation of more than 100 million people distributed among 250 different tribes points to why regional initiatives are difficult to put together in SSA.

But there seems to be some progress toward regional cooperation. Training and other projects proposed by the Southern Africa Development Council (SADC) that have been discussed for several years now are reported to be advancing.

The Southern African Power Pool (SAPP) was established in 1995 to help SADC countries concentrate on development of power and to insure the efficient use of capacity. IEA's Ferriter said SAPP "can help take advantage of diversities between primarily 'fossil' South Africa and its mainly 'hydro' neighbors to the north."

Harmonization of oil and gas specifications and quality are important issues facing regional cooperation efforts. Cooperation in this area could boost trade and open new markets, officials maintain.

Construction specifications and tax regimes also are important issues for cross-border projects that will make regional energy grids work.

Nationalism remains the biggest single obstacle in regional efforts. Countries want to be seen as having their own resources and capabilities. The best approach, said IEA's Ferriter, is for the countries to set common objectives and guidelines, based on the principles of reliance on market forces, pricing energy at its full cost, and environmental protection.

Then each country can put its own policy in place within this framework.

Copyright 1997 Oil & Gas Journal. All Rights Reserved.