While the continent’s oil-producing nations have been plagued by political and social conflicts, two African countries are adopting policies to avoid the ‘oil curse.’
One of the most promising areas in the oil industry right now is located on the western coast of the African continent. West Africa is slowly becoming one of the world’s top oil regions, right behind the Middle East and Central Asia. Oil companies have been present in West Africa since the 1950s, but it’s only recently that the oil industry has risen to prominence in this part of the world.
Oil in the region was first discovered in the 1950s in the Niger Delta, and new discoveries have been made ever since. Nigeria is already African’s top oil producer, and while many of its reserves and production facilities are onshore, there is a concerted effort to move production to offshore fields. Today, the African continent accounts for almost 15 percent of global production and the offshore component of that is growing every year. Some of the countries with existing and growing offshore facilities include Nigeria, Angola, Liberia and Sierra Leone.
Ghana, one of the latest entrants into the group of oil-producing nations, is a very interesting case study in Western African offshore oil activities. The nation has developed a mechanism to share the oil wealth in an egalitarian manner with its citizenry, and therefore avoid the “oil curse” that has plagued so many of the continent’s countries.
Transparency a key issue
While the African continent is blessed with abundant natural resources, it’s been cursed by permanent violent political and social conflict. While Nigeria holds the continent’s largest oil reserves, it is also constantly plagued by violence, which has repercussions not only for the internal stability of the country, but also for global oil markets.
It’s estimated that Nigeria loses up to $1 billion a year in lost oil revenues because of civil unrest that disrupts the country’s oil infrastructure. The obvious reason is corruption and the unfair distribution of oil revenues. Many of the country’s citizenry do not benefit from the country’s vast oil wealth, which creates strong resentment that translates itself into attacks against oil facilities and more.
Ghana, which recently began producing oil, seems to have found a way around this oil curse. Exploration in offshore Ghana began in 2007, and the country began pumping oil in 2010. Preliminary results indicated that the country sat on sizable offshore reserves. This was proved correct with the discovery of the Jubilee field, which lies east of the country’s capital, Accra.
While Ghana is currently producing only about 100,000 barrels per day, it’s expected to increase that production tenfold by 2015 and its offshore reserves may grow to 5 billion barrels. More importantly, Ghana has found a way to sidestep the negative oil ramifications. One of the biggest deterrents international investors face when entering West Africa is the violent political instability. The region is plagued by civil war and violence as a result of the erratic distribution of natural resource wealth, including oil wealth.
Ghana has been able to solve this problem by following the Norwegian model, clearing an obstacle for international investors. Norway has instituted a policy of 100 percent transparency when it comes to distribution of the country’s oil wealth. Norway has even set up a “rainy day” fund to sustain the government when the oil eventually runs out.
Ghana has followed a similar model by creating the “Future Generations Fund” and the “Stabilization Fund” administered by the country’s central bank and funded by the government’s oil revenues. And this isn’t a theoretical model; the country generated revenues of $450 million in 2011 and has already allocated $70 million to both funds out of the 2011 proceeds. If other countries are able to follow the Ghanaian model, the region may become one of the most important oil regions in the world, rivaling the Middle East and Latin America.
For investors seeking exposure to Western African oil without the high risk of social unrest and political violence, I recommend getting exposure to the following countries: Ghana and Namibia.
Ghana is a politically stable and financially transparent country with large and growing oil resources. To get exposure to Ghana, I recommend Tullow Oil PLC (PINK: TUWLF). Based in the United Kingdom, this company discovered the Jubilee field, Ghana’s most prominent oil field. It has strong ties to the country and will continue playing a prominent role in the development of Ghana’s oil industry for years to come.
Namibia is an often overlooked country in Western Africa. Many casual observers are familiar with Nigeria and Angola, but only a few sophisticated investors are aware of Namibia’s vast potential. Namibia shares the same geological characteristics as its South American counterpart, Brazil. It’s no secret that Brazil made one of the largest offshore discoveries recently in the Santos basin off the coast of Rio. Offshore, Namibia shares the exact same DNA as the Santos basin (which has over 10 billion barrels of reserves) and many experts believe that a field similar to the one in Santos may lie beneath the country’s waters.
If this is accurate, Namibia may become West Africa’s most prolific oil producer. In fact, a Brazilian company is currently active in Namibia’s offshore area and has purchased large tracts of exploration blocks. This company, HRT PARTICIPACOES (PINK: HRTPY), holds almost 90 percent of the country’s offshore exploration rights. It brings Brazil’s expertise in deep water exploration to this Western African country, which could create a powerful combination if large fields are discovered.
What’s more, Namibia is a politically stable and transparent country with very little of the violence that plagues other countries on the continent.
Disclosure: The author doesn’t have any positions in the stocks mentioned.