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Offshore Africa: The Next Oil and Gas Hotspot?

Ever since the late 1950s, when commercial quantities of oil were first discovered in Nigeria's Niger Delta basin, West Africa has been an area of interest for oil and gas exploration and production companies.  

But a host of challenges, many of them related to threats of violence and corrupt political regimes, dissuaded many of the world's leading energy companies from prospecting areas of Africa more thoroughly.

However, that reluctance quickly changed to renewed optimism when Tullow Oil discovered the Jubilee oil field in Ghana back in 2007 – a find hailed as one of the largest recent discoveries on the continent. Jubilee, which has an estimated reserve potential of about 5 billion barrels of oil, piqued the interest of a bevy of global exploration and production companies, who subsequently rushed into neighboring Gabon, Liberia, and Sierra Leone, eager to exploit the continent's vast natural resources.  

Energy companies exploring in Africa
Initially, it was mostly smaller, foreign exploration and production outfits, including Ophir Energy, Kosmos Energy, Africa Oil and others, that dominated exploration off the coast of sub-Saharan Africa. Mid-sized international oil and gas companies, such as Anadarko (NYSE: APC  ) , which made an explosive move into exploring offshore Tanzania, where one of its deepwater exploration wells reported promising results last year, also played important roles.

But over the past few years, the world's largest integrated oil companies have also joined the party. For instance, Brazilian oil major Petrobras (NYSE: PBR  ) is preparing to drill exploration wells offshore Tanzania, where it holds 50% stakes in two offshore exploratory blocks, while ExxonMobil (NYSE: XOM  ) has turned its attention to exploratory prospects off the coast of South Africa, where it acquired a 75% stake in blocks owned by Impact Oil & Gas late last year. 

And Chevron (NYSE: CVX  ) announced in March that it will proceed with the development of the Moho Bilondo "Phase 1 bis" and Moho Nord projects offshore the Republic of Congo. The projects, situated roughly 50 miles southwest of Pointe-Noire in water depths ranging from 1,500 to 4,000 feet, are expected to cost about $10 million and produce a combined 140,000 barrels of crude oil per day at their productive peak, which Chevron reckons will be attained in 2017.

Final thoughts
Chevron and the other integrated oil majors' willingness to take on the high level of risk by prospecting acreage often tied to unstable political regimes highlights their urgent need to find new reserves and boost production. Many are struggling to replace the oil they produce with new reserves, as reflected by some of their weak reserve replacement ratios.

For instance, Royal Dutch Shell (NYSE: RDS-A  ) reported a reserve replacement ratio of just 85% last year, while Total's (NYSE: TOT  ) came in at 93%. A ratio that is consistently under 100% generally indicates trouble further down the line. As the majors continue to struggle to boost their oil and gas production, future growth will increasingly come from unconventional sources, such as offshore Africa and Brazil, U.S. shale, and Canada's oil sands.

According to the consultancy Wood Mackenzie, sub-Saharan African nations could be pumping out an additional 400,000 barrels of oil per day by 2018. That would bring the sub-Saharan region's total crude oil output to 6.6 million barrels per day, equivalent to daily field production of crude oil in the U.S. last year.

In my view, it will be most interesting to see whether or not the wealth generated from sub-Saharan Africa's oil and gas production will translate into higher standards of living for its citizens, or whether the region will fall prey to the infamous "resource curse", where wealth is accumulated by just a handful of already wealthy politicians, their circle of privileged friends, and the companies they hand out contracts to. Unfortunately, the latter looks more likely to be the case.

While the oil majors are having difficulty boosting production, companies focused exclusively on exploration and production are having better luck. Chesapeake Energy, for instance, has reported nearly 40% year-over-year liquids percentage growth. As the company transitions away from natural gas production, will it manage to meet its oil production target and boost cash flow? Or will it languish under the weight of its heavy debt load? To answer that question and to learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy, and as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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