Introduction

Many ongoing changes are taking place in the African upstream oil and gas sector. Rather than attempt to provide a detailed overview of all relevant countries in Africa, we have focused on a few countries of particular interest: on the one hand countries whose abundant petroleum reserves have kept exploration and production (E&P) companies busy for a significant amount of time – Nigeria and Gabon – which we have called "old frontiers", and on the other, countries whose natural resources were until very recently perceived to be found exclusively in the mineral sector – such as Sierra Leone, Liberia, Kenya and Tanzania, which we have called "new frontiers".

Old frontiers: Nigeria and Gabon

Nigeria and Gabon, where the oil and gas sector remains by far the most significant contributor to both countries’ GDP, offer two distinct yet representative pictures of old frontiers in West Africa.

Although Nigeria accounts for 2.7% of the world reserves of oil and 2.8% of the world reserves of natural gas (according to BP's Statistical Review of World Energy), its output and reserves have stagnated over the past few years. Gabon, despite remaining a significant oil producer, has already experienced such a decline: oil output has decreased by about 40% in nearly 15 years, from a peak of 370,000 barrels of oil per day (bopd) in 1997 to 230,000 bopd today (in comparison with Nigeria’s current output of 2.2 million bopd) (again, according to BP's Statistical Review of World Energy).

The factors behind the decline of Gabon’s output and the stagnation of Nigeria’s output and reserves differ in many respects, but it is probable that a reversal of both countries’ medium to long-term outlook will require increased investment in deepwater offshore exploration programmes.

In the case of Nigeria, if the Petroleum Industry Bill (the "Nigeria Bill") - which is intended to replace the Petroleum Act 1969 - is enacted in its current form, international oil companies (IOCs) may have concerns about undertaking the investments necessary for deepwater offshore exploration projects without further guarantees on their return. Furthermore, IOCs may be concerned about the absence of a definite regulatory and fiscal framework. Although the uncertainty relating to Nigeria’s failure to enact the Nigeria Bill has lasted for several years, observers hope that an amended and improved version of the Nigeria Bill will be enacted by the end of 2012. This uncertainty is replicated, on a much smaller scale in Gabon. High-level discussions relating to the “revival” of a Gabonese state-owned oil company and the enactment of a new Petroleum Code were initiated following Gabon's leadership changes in 2009. The government’s intention appears to be to separate the state’s equity in petroleum assets in Gabon - which is likely to stay at 15% - to be held by the national oil company (NOC), from its regulatory functions, which would remain the prerogative of the Gabonese petroleum regulator (the Direction générale des hydrocarbures). The creation of such a state-owned Gabonese oil company mirrors the Nigeria Bill's ambition to transform NNPC from its dual role as operator and regulator into a fully-fledged NOC without any regulatory functions.

In spite of the current uncertainty, there has been a continued flow of activity in the Nigerian upstream sector. Several major IOCs have recently divested onshore assets to Nigerian-owned companies partnered in some cases with smaller international E&P companies. In Gabon, the tenth licensing round over 42 deepwater offshore blocks, which was initially due to take place in May 2010, was then postponed to October 2010 and finally put on hold. The government further specified that it will instead be entering into direct negotiations with any interested parties once the new legislation mentioned above is in effect. The licensing round had attracted a robust amount of interest and, once the situation has been clarified, it is expected that it will once more be closely followed by international E&P companies.

Although these are relatively challenging times for Nigeria and Gabon, it is also clear that many opportunities remain in both countries’ upstream oil and gas sector, in particular in relation to deepwater offshore.

New frontiers By far the most exciting new entrants to the African upstream oil and gas sector in recent years have been Ghana (in particular with the Jubilee field) and Uganda (with the Lake Albert Rift Basin). Although neither country was hitherto known for holding any sizeable petroleum reserves, production should be starting on the fields in the near future. These discoveries have in turn sparked significant interest from E&P companies (majors and juniors) and NOCs, not only in Ghana and Uganda but also within their respective regions in West and East Africa.

Liberia and Sierra Leone in West Africa and Kenya and Tanzania in East Africa form part of the main new upstream oil and gas frontiers in Africa. To illustrate this new frontier status, it should be noted that there are only around 500 wells in East Africa whereas there are around 15,000 wells in West Africa (mainly concentrated in Nigeria, Gabon, Angola etc.) and about 19,000 wells in Central and North Africa (Algeria, Libya etc.). As a result, it is generally very difficult to estimate petroleum reserves in the new frontiers with sufficient precision.

The recent discovery of the Jubilee field offshore Ghana and, 1,100 km further west, the Venus field offshore Sierra Leone, have strengthened the idea that there may be other significant deepwater prospects off the coast of Ghana and its western neighbours, in particular Sierra Leone and Liberia. Should the prospects contained within the Liberian Basin - which appears to share many of the geological characteristics found in the Jubilee field and which straddles the borders of Liberia and Sierra Leone - materialise, it is possible that Liberia and Sierra Leone will follow Ghana’s lead and start producing petroleum in the medium to long-term. In the meantime, there are still many opportunities for new investments in Liberia and Sierra Leone, despite the fact that a few experienced international E&P companies have already established a foothold in the country. More licensing rounds are due to take place in the next few years and farm-in opportunities are likely to continue to surface.

In Tanzania, a fourth deep-offshore licensing round is due to take place in 2012 (postponed from April 2011) and TPDC recently awarded onshore exploration rights to Total, and in Kenya it is understood that the government will be opening bids for new blocks in the near future. The attractiveness of the East African oil and gas sector has also been highlighted by several high-profile farm-ins and acquisitions in the past few weeks, as reflected in the increasing value of the acquisition prices.

A common challenge for all E&P companies in these new frontier countries has been the regulatory framework in place in the petroleum sector. As none of these countries is currently producing any oil or gas, and exploration has been, until recently, relatively limited, the existing petroleum legislation is at times inadequate. Further, a considerable strain is being applied to the local petroleum regulators and fledgling NOCs, which do not always have the experience and resources which more mature oil and gas-producing countries possess. These issues can have an impact on the predictability and transparency of the various approval/award procedures or the tax treatment of certain assets, although new legislation is being proposed in a number of these countries. Whilst there may be a risk of unpredictability for IOCs, these companies also appear to enjoy a degree of flexibility when negotiating terms with the relevant authorities/NOCs, particularly as regards state back-in rights and fiscal terms. However, as currently seen in Ghana and Uganda, there is a risk that in the future, new frontier governments may seek to implement more stringent fiscal terms (in particular in relation to royalties, state/NOC back-in rights, local ownership requirements, cost recovery or contract area relinquishments).

Complex issues such as cross-border unitization (in order to preserve the unity of particular deposits) could also prove to be a future challenge for these frontier countries. Prior experiences in Nigeria (in particular the joint development zone between Nigeria and Sao Tome and Principe) show that such issues can be overcome. Some form of unitization would appear to be likely between Liberia and Sierra Leone, Mozambique and Tanzania and possibly Tanzania and Kenya. Another pressing issue relevant for certain of these frontier countries is the lack of infrastructure required to commercialise the discoveries. For example, Kenya is seeking to develop its existing infrastructure through the redevelopment of its ports and the construction of pipelines linking these ports to its neighbouring countries. Due to the region’s geographical position, it is believed that any oil and gas originating from East Africa would be ideally placed to supply Asian markets.

Conclusion

The presence in all of these new frontier countries and, amidst many juniors, of IOCs and experienced international E&P companies, shows a certain degree of confidence in the regions' future prospects. It is hoped that the challenges posed to this promising picture discussed above will be met, and that these new frontier countries will soon be joining the ever-expanding ranks of African oil and gas producing countries.