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Slide 1
From Doldrums to Delirium What caused the dramatic changes from
the 1980s offshore West Africa? University of Houston October 24,
2008 Tom Mitro
Slide 2
The world offshore West Africa in the 80s was very different
from today. What caused the dramatic turnaround? Lagos - 1984
Slide 3
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.
Slide 4
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?
Slide 5
Main Factors 1.National Oil Companies 2.Civil Strife 3.Fiscal
Terms 4.Gas Strategies 5.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
Slide 6
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.
Slide 7
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.
Slide 8
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.
Slide 9
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.
Slide 10
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.
Slide 11
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.
Slide 12
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.
Slide 13
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.
Slide 14
Price declines OPEC price discipline collapse Govt
Participation Commences Tax Rate Increases Rapid Price Rise Tax
regs changed to accelerate capital allowances Note: Includes
onshore production.
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
Slide 17
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.
Slide 18
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
Slide 19
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.
Slide 20
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.
Slide 21
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.
Slide 22
Demand vis a vis supply for petroleum changed in the 21 st
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.
Slide 23
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
Slide 24
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.
Slide 25
How has this impacted production and reserves of the
region?
Slide 26
Impacted in 2000s by onshore shut-ins in the Delta. (April
2007, ~ 587 mb/d shut-in.) MOU-1986 Disruptions in the Delta Note:
Includes onshore production.
Slide 27
End of War New Fiscal Terms Deepwater Prod Start U.S. sanctions
Failed elections
Slide 28
Cumulative West Africa Oil Reserves Discovered (P&P)
Source: PFC Energy Cumulative Discoveries (mmbo)
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