An oil platform in Angola

Angola's oil industry is relatively new, only joining OPEC in 2007, it became Africa's leading producer in 2008

New measures have been put in place to ensure Angola's local economy benefits from moves allowing international oil companies to develop the country's newly licensed deep-water reserves. A new foreign exchange law aimed at oil majors should boost the country's banking sector, while work on the new oil platforms will have to be carried out by companies with local links.

The move earlier this year to award international oil companies with licences to explore Angola’s ultra-deep water blocks – known as pre-salt blocks – is expected to be the first stage in the radical transformation of an industry that is already the foundation of the country’s wealth.

Angola, with production of 1.9 million barrels a day (bpd) and reserves that are estimated at somewhere between 10 and 20 billion barrels, already vies with Nigeria to be Africa’s major oil producer, and it is the seventh largest Organisation of the Petroleum Exporting Countries (OPEC) producer.

It has a capacity of 2.1 million bpd and even before the pre-salt blocks are taken into account, new production will give the country a capacity of between 2.5 million to 3 million bpd, which is likely to put pressure on OPEC to allow Angola to increase production.

The country is also, through the Angola liquified natural gas (LNG) scheme, starting to make full use of both LNG and liquified petroleum gas (LPG), much of which used to be flared. Production is expected to start later this year. Only three years ago, initial estimates put gas reserves at 56.6 billion cubic metres, but that figure has now risen to at least 271.8 billion cubic metres and some experts believe it could be as high as 311.4 billion cubic metres – which would make Angola a top 10 world producer.

The decision to concentrate on developing deep-water fields reduces any dependence on the Cabinda onshore field and makes Angola not only the largest, but the most stable of Africa’s oil producers, distinguishing it from Nigeria, which has been weakened by strikes and militant attacks in the Niger Delta.

Huge potential

The award of these contracts is the latest stage in a process begun last year, when the government announced its intention to develop its pre-salt blocks. It believes that these projects could see huge profits, a judgement based on the similarities between its underwater rock formations and those of Brazil, which in 2007 made a pre-salt discovery of some 8 billion barrels of oil in its Tupi field.

This assessment seems to be shared by the oil companies, as the bidding was said to be extremely aggressive. The winning bidders – BP, Total, Eni, ConocoPhillips, Statoil, Repsol and Cobalt International Energy – were awarded concessions across 11 deep-water blocks. State oil company Sonangol said it intended to participate in each of the blocks.

The defining characteristic of pre-salt fields is the considerable amount of capital involved and the level of expertise required, which means that development of this area is inevitably restricted to the oil majors – in most other areas there is invariably a mix of majors and independents.

Local challenge

One of the key challenges perceived by ministers is to ensure that, even though pre-salt fields are dominated by the oil majors, some of the benefits reach the local economy. One oil industry expert says: “There is no doubt that the state wants indiginisation. It accepts that the technology for developing pre-salt field is the preserve of the big oil companies and cannot be built up immediately, but it wants some of the knowledge and economic benefits transferred to Angola.”

Two measures are being planned to ensure that this happens. First there is a new foreign exchange law, which has been drafted and, although it has yet to be implemented, the oil companies are prepared for the legislation to go ahead.

This requires a higher proportion of the money oil companies pay to foreign companies hired to provide services in Angola to pass through Angolan banks – the effect, according to one Angolan lawyer, could be an injection of $10bn into the local banking system.

A second measure will require that all contracts for local work signed by the oil majors will have to be done with locally constituted organisations, a measure which will also bring capital into the economy.

In the past, an oil company would pay a supplier directly, thereby bypassing the need for the transaction to benefit the local economy. After the changes, if, for example, an oil service company signs a contract with an oil major, it must do so through the subsidiary, which it has to establish in Angola. The subsidiary will have a local partner which will share in the profit and the technology, as well as ensuring that jobs are created locally.

Relative newcomer

These measures are an example of the growing confidence of a country whose oil industry is still relatively new, only joining OPEC in 2007 (it held the presidency in 2009) and becoming Africa’s leading producer in April 2008.

Bankers and the oil industry give much of the credit for professional development of the sector to Sonangol. It is the sole concessionaire for oil and gas exploration and production in Angola, working with international companies through joint ventures and production-sharing agreements, while funding its share of production through oil-backed borrowing.

It is a well-known borrower in international markets and bankers say that, once Angola’s sovereign bond has come to the market, they expect Sonangol to follow rapidly and there to be strong appetite for its paper. “Given the appetite for sovereign African risk and for natural resources, it would be a surprise if it was not successful,” says one local banker.

Angola’s oil production was initially focused on the onshore fields near Cabinda, which still account for half of its production – though that proportion is rapidly declining. There is some pressure from separatist movements demanding access to oil revenue but little sign that this is turning into serious political unrest.

However, these onshore fields will be less significant in the future as development is concentrated in more easily protected offshore fields which are divided into three; shallow water blocks, including offshore Cabinda province; deep water blocks; and ultra-deep water blocks.

The deep water blocks include Block 15 in the Congo Basin, which has estimated recoverable hydrocarbon reserves of 4.5 billion barrels and an expected peak production of 800,000 bpd. The operator is ExxonMobil with its partners BP, Eni and Statoil.

Pushing downstream

A pressing challenge for Sonangol will be to be increase the country’s downstream activity. At present, the country only has one refinery in Luanda with a crude oil processing capacity of 39,000 bpd, which does not even meet the country's demand of 65,000 bpd. There are plans for a 200,000 bpd refinery near Lobito, but there is no confidence that it will be operational by the slated target date of 2015.

However, there is more positive news about Angola’s LNG. Sonangol announced recently that production would begin on schedule in November this year, with exports starting in the first quarter of 2012.

The plant in Soyo is the result of an $8bn project headed by the US company Chevron and part-owned by Sonangol, which also has a stake in the terminal where the LNG will be transformed into gas in the US, which will take on most of the production.

Gas is expected to make a major contribution to Angola’s finances, generating at least $1bn a year in export revenue, using gas from Cabinda onshore, Blocks 14,15,17, and offshore whose gas has until now been burnt off.


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