Is it time for Africa to reassess deepwater drilling?

Deep_water_drillingWHAT DOES THE Gulf of Mexico oil spill mean for Africa — and especially deepwater exploration in the west of the continent?

As Roy Jordan of Energy Market Consultants tells Vaughan O’Grady, the spill may involve a different continent but it cannot be ignored.

Like the oil well drill that resulted in the disastrous spill in the Gulf of Mexico, much of the existing or potential oil recovery in the west of Africa involves offshore deepwater exploration. The US response is likely to involve a tightening of regulations affecting deep sea drilling. But will reponses to the BP oil spill also affect regulatory policy in Africa?

For African governments, says Roy Jordan, oil economist with Energy Market Consultants (EMC) UK Ltd, a company that specialises in the analysis and forecasting of developments in international oil and gas markets, the answer is clear. "None of them would want to deal in the future with the scale of disaster being experienced now in the US Gulf," he says, "and I would imagine that future concessions and contracts relating to West Africa will be very clear on specifying accountability and recovering costs of environmental disasters."

He adds that it would also make sense for West African governments to adopt most, if not all, of any new procedures and safeguards the US administration and authorities decide to include in future US concessions or contracts. "Following this line should not harm West African competitiveness," he says, although he adds, "The main issue will be allocating the resources to monitor and enforce the operating conditions and penalise any infringements."

That said, oil majors will probably be supportive. "I expect that the companies will make every effort to review and, as appropriate, overhaul operating procedures, be ultra-cautious in their upstream planning and design and be prepared to incur additional cost to try to avoid the type of disaster which has occurred previously in Alaska and the North Sea and now in the US Gulf," says Jordan.

Costs will inevitably be affected — notably insurance costs, which will undoubtedly increase. Companies will therefore have to decide the balance they want to achieve between self-insurance and obtaining cover through specialist insurance companies.

However, even adding these outlays and expenditure on meeting their own operational overhauls, which could conceivably go further than those proposed by governments, Jordan says, "On a cost/benefit basis, the additional costs involved should not make too big a hole in their large upstream profits."

Don’t forget too that some costs will also be borne by service companies such as drilling businesses, rig providers, blowout preventer providers and suppliers, who, as Jordan puts it "are going to be in the front line of this".

Could the environmental lobby also influence events in Africa? Indirectly perhaps. Such tactics as forcing the environmental pace by buying shares and pressurising directors from within a company, or organising politically to pressure governments may have an influence in Africa even though they originate elsewhere.

However, in their own backyards Jordan feels that West African governments can probably focus on maximising oil revenue in the knowledge that, for the most part, they are not under pressure from local environmentalists. The long-standing dispute in the Nigerian Delta region is a notable exception, although that extends to other areas such as distribution of oil wealth, standards of living and development of local infrastructure.

As Jordan puts it, "My view is that West African governments will continue to encourage offshore oil exploration and drilling while trying to ensure there is sufficient focus on safety, but they will not be able to match the anticipated rigorous enforcement of the US authorities." Most importantly, he feels it unlikely that they will follow the US example and impose a moratorium on offshore drilling, a moratorium that, in any case, is now being challenged in the courts.

We cannot forget, however, that the depths involved in drilling in the Gulfs of Mexico and Guinea can be truly extraordinary. If a spill occurs, it happens at pressure levels able to crush many conventional deep sea vessels. Could wariness about this slow down the deep-sea drilling trend?

Jordan says that this is going to be up to the authorities but urges us not to forget that oil companies have already been drilling at these levels for some while, even in the Gulf of Mexico, where Perdido, a Shell-operated well at a water depth of some 2,450 metres, had its first production on March 31, 2010; it has so far not met any difficulties.

One move that may take place quite soon is away from US-based production, at least where environmental concerns may be an issue. Proposals to drill in Alaska, for example, are likely to be affected. And that leads to another possibility, albeit not one that is being much debated at the moment. Could a US moratorium on certain types of oil production benefit African oil-supplying territories?

Given the low sulphur content of West African oil, the relative openness of African governments to IOCs and the positioning of the oil-producing areas on transport routes favourable to US supply, the continent already has an advantage. So might Africa benefit from a cutback in US oil production? Not by much, if at all, says Jordan. He cites vast spare capacity throughout OPEC and says, "There’s going to be more than enough oil elsewhere to make up for any lost future production as a result of this." Nor are crude prices likely to rise as a result. "The operating costs and the investment costs are likely to be higher, but that won’t necessarily translate into higher crude prices."

As for preventing similar disasters to the one now affecting the Gulf of Mexico, short of banning deepwater exploration globally, it’s hard to see how much more can be done to limit the search for what remains an essential resource. Certainly the US will tighten regulation and other countries that have yet to do so will probably follow. However, many countries already operate stricter policies than the US: new proposals would only bring the US — and by extension Africa — up to the safety levels that areas like the North Sea have already been operating for years.

Of course this could all be an attempt to right a wrong that is a one-off or, as Jordan says, "Companies have historically for the most part achieved a very good record in successful offshore drilling, with few major disasters."

Which is true, although the sheer scale of this disaster and the feeling that something needs to be done will probably drive change in any case.

 

 

 

"I think the companies are right to say they have procedures in place and they have a certain amount of expertise that enables them to do this even in very harsh environments" Jordan notes. However, referring to US attempts to understand some of the issues thrown up by the spill, he adds, "What they seemed to be saying in that congressional enquiry was that none of them [oil majors] actually had the capability of responding to the kind of leakage that BP is experiencing — and that none of them would be able to do this on their own." He adds, "Nobody at the moment — either the authorities or the companies — seems to know where to move next on this."

 

 

 

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
T: +44 20 7834 7676, F: +44 20 7973 0076, W: www.alaincharles.com

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