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West African Oil: Hope or Hype?

President Bush's trip to the African continent has turned public attention to the Dark Continent. Some analysts have trumpeted West Africa's large crude oil and gas as a possible substitute for America's growing dependence on crude exports from the unstable Middle East. Vice President Richard Cheney highlighted this view in his May 2001 National Energy Policy Report: "West Africa is expected to be one of the fastest-growing sources of oil and gas for the American market." He added, "African oil tends to be of high quality and low in sulfur, making it suitable for stringent refined product requirements, and giving it a growing market share for refining centers on the East Coast of the U.S."

Despite the optimism, the possible impact of the West African oil and gas reserves should however not be overestimated. The West African oil province (the so-called Ecowas region or Gulf of Guinea) holds 33.8 bln barrels of proven oil reserves, 3.1% of the global total. Taking into account unproven reserves increases West Africa's share to around 7% of the world's total. In comparison to known oil reserves in the Middle East - 690 bln barrels - West Africa is at present nothing more than a minor player. Much of West Africa's oil reserves are offshore and thus more expensive to extract.

While analysts look to the potential of West African oil to stabilize the international oil markets by adding a new layer of supply under the current volatile oil sector, giving traders and consumers more leeway to cope with crisis such as strikes in Venezuela or an Iraq war, current optimism is based on prerequisites of stability in the region, increased foreign investment, transparency and liberalization in the domestic petroleum sectors of West Africa and geo-strategic considerations.

Revolutions, violence, ethnic unrest and corruption undermine the growth potential of the petroleum sector in this vast region. Domestic political strife brought several African countries to a standstill this past year. In March, international oil majors ChevronTexaco and Shell were forced to suspend production in the Niger Delta region following violent clashes and even outright kidnapping of international personnel. The 266,000 barrels per day (bpd) of lost oil represented approximately 13% of Nigeria's total average production of 2.1 million bpd. International oil markets felt the pressure.

The ever-growing illicit small-arms trade has added fuel to the fire. Warlords have wreaked havoc in huge countries such as the Democratic Republic of Congo, Sierra Leone, Angola, parts of Nigeria and Liberia. Over the last months, international security services from the U.S, the EU and Asia, have turned their attention to al-Qaeda operatives in West African countries, such as Mauritania, Liberia, Sierra Leone and Burkina Faso. Illegal finance schemes involving diamonds, arms and terrorist networks have also surfaced.

Bi- or even multilateral border disputes over control of potentially oil rich territories pose a threat to on- and offshore developments. Congo and Angola are in conflict over access to offshore oil; according to Congo the dispute is depriving it of as much as 200,000 bpd. Nigeria has multiple disputes with other states, of which the disputed Bakassi peninsula is the most pressing one.

Since West African oil producing states are almost solely dependent on oil income, volatile international oil prices have profound impact on local economies, leading, as in the case of Nigeria, to potentially paralyzing national strikes.

Oil related corruption is rampant in the region. According to Transparency International, Nigeria is the world's second most corrupt country, and corruption is growing in Gabon, Equatorial Guinea, Angola, Ghana, and various other West African countries, including oil newcomers such as Sao Tome, whose government was just toppled by a military coup. In an effort to combat this problem, a push for transparency and liberalization has increased pressure on international oil operators, such as Shell or BP, to open their books. The "Publish What You Pay" campaign, sponsored by George Soros' Open Society Institute and Global Witness, and supported by over 130 NGOs, has called on international extraction companies to "publish net taxes, fees, royalties, and other payments made so civil society can more accurately assess the amount of money misappropriated and lobby for full transparency in local government spending." Underlining the effort, British Prime Minister Blair announced the Extractive Industries Transparency Initiative, endorsed by a coalition of institutional investors, during the World Summit on Sustainable Development in Johannesburg this past September.

Nigeria, by far the largest West African producer, provides a concrete example of the risks of relying on the region. Nigeria was the fifth largest crude exporter to the US in 2002, behind Saudi Arabia, Mexico, Canada and Venezuela. According to the DOE's Energy Information Administration (EIA,) Nigeria's exports to the U.S. declined from 842,000 bpd in 2001 (9.03% of total U.S. imports) to around 567,000 bpd in 2002 (6.27% of U.S. imported crude oil.) Increased reliance on Nigeria means increased exposure to unrest, disputes and instability in this volatile country. Since Nigeria is a member of OPEC its crude oil exports are also limited by the oil cartel's policy restrictions, which already constrain further expansion of production.

Production sharing agreements in Africa have left international oil companies with a smaller percentage of revenue than popularly believed and thus little tolerance for the additional heavy risk premiums brought on by instability. West Africa's volatility limits its appeal to investors and impacts the likelihood of oil industry expansion. It remains to be seen whether the rush to Africa will improve America's energy security or replay in another arena the problems the U.S. currently faces in the Middle East.

Dr. Cyril Widdershoven is the editor of Global Energy Security Analysis (GESA) and IAGS associate fellow.

Further reading:
Africa Drowns in a Pool of Oil
Terrorist Threats in Africa
State Department: Patterns of Global Terrorism 2002--Africa Overview
Bottom of the Barrel: Africa's Oil Boom and the Poor
Fueling poverty - Oil, war and corruption
The Role of the Oil and Banking Industries in Angola’s conflict
Global Witness: How al Qaeda moved into the diamond trade

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