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From Doldrums to Delirium What caused the dramatic changes from the 1980s offshore West Africa? University of Houston October 24, 2008 Tom Mitro

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The world offshore West Africa in the 80s was very different from today. What caused the dramatic turnaround? Lagos - 1984

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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.

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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?

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Govt participation commences Civil War starts Rapid Price Rise Price declines

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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

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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.

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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

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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.

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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.

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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.

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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.

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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

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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.

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How has this impacted production and reserves of the region?

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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.

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End of War New Fiscal Terms Deepwater Prod Start U.S. sanctions Failed elections

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Cumulative West Africa Oil Reserves Discovered (P&P) Source: PFC Energy Cumulative Discoveries (mmbo)

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Angolas Upcoming Oil Projects Sources: Afroil, BP, International Oil Daily, Petroleum Intelligence Weekly, Reuters, Total, Upstream, Petroleum EconomistAngola Energy Data, Statistics and Analysis - Oil, Gas, Electricity, Coal ProjectLocationOperatorPeak Production (estimate B/D) Expected Start-up Tombua LandanaBlock 14Chevron130,0002009 NegageBlock 14Chevron75,0002009 PazflorBlock 17Total200,0002010 Block 31 projectBlock 31 NEBP130,0002011+ Block 31 projectBlock 31 SEBP130,0002011+ Block 18Block 18WBP100,0002011+ Kizomba DBlock 15Exxon120,0002011+ ClovBlock 17Total150,0002011-planned Block 32 projectBlock 32Total130,0002011-planned

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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