West Africa beckons

West Africa is a burgeoning area for private and public companies as an important natural gas and oil producer in the world market. In the past however, legislation and government issues made midstream operations difficult. Operators struggled with the balancing act of appeasing government and local inhabitants while dealing with pipeline sabotage by militant groups. Despite these difficulties, and tensions from adjacent states that may or may not be like-minded, private-sector companies are beginning to successfully negotiate the nuances of investing.

Inarguably, the biggest hurdle for West African companies is generating enough capital to sustain and justify pipeline construction. Though energy demand is certainly present, a lack of infrastructure and funding make the process of getting oil and gas to market tough. Geopolitical complications and social unrest are hindering those operators that have enough capital and resources to feasibly invest in midstream construction.

According to Sabastian Spio-Garbrah, managing director for New York and Accra-based DaMina Advisors LLC, “Facing cost overruns is a big issue for big public or private companies. Using the West Africa Gas Pipeline as an example, where the government is supportive and the private company is supportive, the cost overruns have been 50% more than the initial estimates projected for the end of the project.”

Typically, the private sector has shied away from large construction projects, which require massive amounts of capital and a trustworthy end user. Also, these bigger projects bring with them increased risk of pipeline piracy and unstable government taxes, making profits unpredictable.

Instead, companies able to access capital are focused on acquiring upstream assets with proven reserves, which can be held until the political and social climate stabilize. This is understandable, because even if the capital to invest is present, the project has to be profitable on a long-term basis.

“Even today, pipelines still don’t produce enough gas because of problems that occur. In the Niger Delta, militants and insurgents obstruct the gas from being transported properly,” says Spio-Garbrah.

Oil theft
Sabotage and acts of thievery are commonplace for pipelines, as local inhabitants try to glean profit by tapping and selling barrels of oil. In fact, according to Bloomberg data, the oil-rich Niger Delta region, one of Africa’s most lucrative areas and the fifth-largest source of U.S. oil imports, has seen enough attacks by saboteurs to have cut Nigeria’s crude output by an estimated 28%.

Shell Petroleum Development Co. has experienced numerous acts of sabotage. In August and September of 2010, the company was forced to declare force majeure on Bonny Light exports, chiefly due to production deferment from recent crude-theft activities in the eastern Niger Delta region.

With the support of Clean Nigeria Associates, efforts were made to repair the pipelines and recover the spilled oil. But, after that spill, Shell was forced to shut down its Cawthorne Channel-Bonny pipeline due to another spill, also likely due to sabotage. Frequent disruptions continue in the region, despite a militant amnesty in 2009.

Oil politics
The loss of profits from these events is enormous. Shell reports that Nigeria’s oil-industry reforms have cost the country close to $100 billion in lost investment in the past five years. This follows the federal government’s decision to restructure the petroleum industry via the Petroleum Industry Bill, which also restructured the fiscal regime.

“If you are a private company and you put money into a pipeline project, you have probably been losing money for the past few years,” says Spio-Garbrah. “This is what prevents big public or private companies from funding construction projects. It keeps them from happening because the private companies don’t want to put millions of dollars into a project only to see that project not work out, or that project be delayed, or that project frustrated by political events.”

Despite these hurdles, West Africa has a definite need for pipelines and midstream infrastructure. Production that is not exported overseas is used locally to run turbines for electrical generation. The country needs more electricity to serve its growing population, and increasing energy consumption is fast outstripping supply.

“Demand is definitely a factor to consider, because demographically, these are countries which are growing, but the industry is also growing,” says Spio-Garbrah. “And the problem is that supply is unable to catch up with demand, because of these social and political issues.

“In Africa, there are several smaller companies who have wanted to do deals, but who don’t have agreements with the government. If a company wants to build a project, they want to know that when they build it, there will be an end user who will demand it, and that would commit to buying electricity for 20 to 30 years. These are some of the most obvious problems that need to be resolved.”

Meanwhile, the lack of midstream infrastructure promotes gas flaring despite laws that prohibit the practice.

Oil pipelines are very limited in Ghana, says Opoku Danquah, upstream director for Hart Energy Consulting. “But this is set to change once development ramps up from Jubilee Field and other recently discovered oil and gas fields off the country’s coast.”

Hart Energy Consulting’s upstream director, Opoku Danquah, says “Flaring is the quick, but environmentally incoherent, way to get rid of the associated gas in the oil business. It does make sense to throw away the skimmed cream when you’re the milkman but don’t have the money to buy an ice cream truck. Building liquefied natural gas (LNG) trains can cost billions of dollars, and the aboveground risks of laying cross-border pipelines can be astounding, not to mention the electric generation plants required for the end users of natural gas in the region.”

The practice of gas flaring is not remarkable for this region, because producers normally don’t have the means to transport the gas.

“Gas flaring still occurs, but there are all types of laws (against it) that have been passed, in Nigeria especially,” says Spio-Garbrah. “The problem with gas flaring is that, to prevent it, you would have to either compress (the gas) or use it as LNG, or, it would have to be put in a pipeline and sent to the appropriate end user. In both cases, it requires a significant amount of capital.

“Either an operator builds a costly liquefaction plant, or it builds a pipeline that costs several hundred million dollars. Neither of these projects usually occurs, because of the sheer amount of money involved.”

Existing assets
Since the British discovered oil in the Niger Delta in the late 1950s, the oil industry has been marred by political and economic strife. Yet, despite the challenges, Nigeria is one of West Africa’s largest energy producers, and has the largest amount of midstream infrastructure.

The primary regions in West Africa with significant existing midstream assets include Nigeria, Niger, Cameroon, Chad, Ghana and Cote D’Ivoire. According to recent economic statistics, the gross domestic product of Nigeria has grown 6% in the past year. The energy resources in West Africa are primarily petroleum and natural gas products.

Significant areas of production are concentrated in the Niger Delta region. Its gas reserves are estimated to be well over 187 trillion cubic feet, three times more than its crude oil reserves.

According to Danquah, “The problem that the countries in this region face is a lack of everything—refineries, power plants and pipelines. All are critical issues.”

Though it may seem that there are huge reserves of oil and gas to pull from, the lack of midstream infrastructure prevents countries from utilizing that bounty to help meet their energy needs. Countries are forced to export a majority of their natural resources for money to help balance their budgets, rather than use the resources themselves.
Most oil production occurs offshore, Through the introduction of new deepwater-drilling techniques, 50% more oil is extracted than previous years. The oil is transported via subsea pipelines and the majority is sold to markets in Asia, the U.S. and Europe. Onshore, pipelines are the chief transportation method.

Nigeria-Niger
Nigeria’s midstream infrastructure includes some 1,593 miles of gas pipeline and 2,127 miles of oil pipeline. One of the most notable gas pipelines is the West African Gas pipeline, which moves gas from Nigeria to Benin, Togo and Ghana. The 20-inch, 421-mile pipeline is owned by the West African Gas Pipeline Co. and is operated by Chevron Corp.

Yet, because the local gas markets are still underdeveloped, a large portion of the gas output is processed into LNG. Nigeria exported 23 billion cubic meters of LNG in 2007, accounting for 10% of the world trade.

Nigeria’s oil is largely free of sulfur and easy to refine, yielding more gasoline. As such, the country tops the list of OPEC members that produce sweet oil. Nigerian crudes, all of which are named after an export terminal, are Bonny Light, Qua Ibo, Escravos blend, Brass River, Pennington Anfan and Forcados. Of the six petroleum export terminals, Shell owns two, while ExxonMobil Corp., Chevron Corp., Texaco Inc. and Agip SpA own one each. Shell also owns the Forcados terminal, which can store 13 million barrels of crude oil in conjunction with the nearby Bonny terminal.

The U.S., as the largest importer of Nigeria’s sweet oil, accounts for 40% of the country’s total oil exports.

Recently, Shell announced that it is close to completing its $1.1-billion Nimbe Creek pipeline, which will move some 600,000 barrels of oil per day to the Bonny terminal on Nigeria’s Atlantic coast. The 60-mile pipeline collects crude from 14 oil pumping stations and is part of Shell’s ongoing five-year program to replace old pipelines.
Also, the Niger region contains the Trans-Saharan Pipeline and the West African Pipeline. Both major pipelines help support Niger’s economy, but, unfortunately, the Niger region has the highest risk for pipeline-product piracy.

Cameroon-Chad

Built in 1966, the Volta dam provides hydropower to Ghana and its neighboring countries, Togo and Burkina Faso.

Cameroon and Chad have fewer assets, though the region boasts about 552 miles of oil pipelines. Chad is landlocked, so its petroleum production depends on its ability to access international markets through the Chad-Cameroon pipeline project, which was completed in October 2004. The pipeline, operated by ExxonMobil, runs 670 miles from the Doba Basin, through Cameroon’s Logone Birni Basin, to the port of Kribi. About 85% of the 225,000-barrel-per-day pipeline is in Cameroon.

The developers spent $3.5 billion to construct the Chad-Cameroon pipeline and export facilities. The World Bank’s approval of the project, a prerequisite for a $93-million loan to fund each country’s government stake in the project, was essential in securing the support of outside countries.

The export facilities in Kribi include an onshore pressure-reducing station and a subsea pipeline connected to a floating production, storage and offloading vessel. Tchad Oil Transport Co. and Cameroon Oil Transport Co. have respective ownership of each country’s portion of the pipeline.

Chad was the first country to accept a conditional loan from the World Bank based on oil-revenue-spending restrictions. During the first 10 years of petroleum exports, Chad will receive $3.5 billion in oil revenues, which will increase annual government revenues by more than 50%. Some 70% of that will be allocated to social improvements. Recent data shows that Cameroon will earn an estimated 46 cents on every barrel of oil transported through the pipeline.

Cameroon’s gas reserves are in the Rio del Rey, Douala and Kribi-Campo basins. In 2006, Perenco signed a 25-year contract with Societe Nationale des Hydrocarbures, the national oil company of Cameroon, to develop the offshore Sanaga Sud gas fields. The Sanaga Sud fields are in the Douala/Kribi-Campo basins. Cameroon will use gas produced from the fields to generate power at the Kribi plant.

Ghana
Formed from the merger of the British colony of the Gold Coast and the Togoland trust territory, Ghana, in 1957, became the first sub-Saharan country in colonial Africa to gain its independence.

Thanks to the West African Pipeline, Ghana is expanding its role in the midstream industry. “Oil pipelines are very limited in this country,” says Danquah. “But this is set to change once development ramps up from Jubilee Field and other recently discovered oil and gas fields off the country’s coast.

“Hydropower has been the staple source of electricity, and Ghana primarily uses the Volta dam that was completed in 1966, which also provides electricity to neighboring countries like Togo and Burkina Faso.

“Right now, the power being generated from hydroelectric plants can’t produce enough electricity to satisfy the growing demand. Also, with more frequent and intense periods of dry weather, power rationing is a necessity for the countries in the region that rely on hydroelectric power,” he explains.

Meanwhile, Ghana cannot take full advantage of its bountiful gas and oil reserves to help meet its energy needs. Instead, it is forced to export a majority of the production for funds to help balance its budget.

Cote D’Ivoire
Cote D’Ivoire’s midstream infrastructure includes 112 miles of gas pipeline and 57 miles of oil pipelines. The country has about 1 trillion cubic feet of proven gas reserves.

Gas was first discovered in Côte d’Ivoire in the 1980s, but it was not until the mid-1990s that companies began to develop the resource. In 2004, Côte d’Ivoire produced around 46 billion cubic feet of gas for domestic consumption. Côte d’Ivoire primarily uses its gas for power generation.
Côte d’Ivoire’s largest producing gas field is Foxtrot. According to IHS Energy, Foxtrot holds an estimated 950 billion cubic feet, and produced some 30 billion cubic feet in 2005.

Also significant, Espoir Field, offshore Block CI-26 and operated by CNR International, has proven gas reserves of some 150 billion cubic feet. Development of West Espoir Field began in mid-2005, with first production beginning in July 2006. CNR holds 58.7% interest in the block and is joined with partners Tullow Oil Plc (21.3%) and Petrosi (20%).