According to the World Bank, Africa, home to 1.1 billion people, is the poorest inhabited continent. However, between 1995 and 2013 the continent's economy grew an average of 4.5% annually, and growth in 2013 was even stronger at 5.6%. According to The Economist, real income per capita has grown by 30% over the past decade, while it shrank 20% in the preceding 10 years. Over the next decade, the continent's economy is expected to grow by an even better 6% thanks to strong growth in foreign direct investment. 

The above chart, with data from the U.N.'s Conference on Trade and Development, indicates companies are willing to invest more into the continent, a trend that is likely to grow strongly, according to a new report from PricewaterhouseCoopers. The reason for the coming investment boom? Oil, of which Africa has 132.7 billion barrels of proven reserves, and gas, of which the continent has 513.2 trillion cubic feet. That's approximately 8% and 7% of global oil and gas supplies, respectively. 

Industry excitement heating up
Previously, most of Africa's oil development was focused on the northern and western sides of the continent, with 90% of production coming from Nigeria, Algeria, Libya, and Egypt. However, unlike in the past, much of the newest investment and focus is on East Africa, in nations such as Mozambique and Tanzania. These nations are already fast growing, but their nonexistent current oil industries mean new oil and gas production could supercharge their economies. 

Country Daily Oil Production (2013) GDP ( 2013) GDP Growth Rate (2013)
South Africa 191,000 barrels $353.9 billion 2%
Gabon 241,700 barrels $19.97 billion 6.60%
Democratic Republic of the Congo 274,400 barrels $18.56 billion 6.20%
Equitorial Guinea 346,000 barrels $17.08 billion -1.50%
Sudan 487,000 barrels $52.5 billion 3.90%
Egypt 680,000 barrels $262 billion 1.80%
Libya 1.7 million barrels $70.92 billion -5.10%
Angola 1.9 million barrels $124 billion 5.60%
Algeria 2.1 million barrels $215.7 billion 3.30%
Nigeria 2.2 million barrels $502 billion 6.20%
Top 10 African Oil Producers 10.12 million barrels $1.637 trillion  
Mozambique 20 barrels/day $14.67 billion 7%
Tanzania 10 barrels/day $31.94 billion 7%
U.S. 8.531 million barrels $16.72 trillion 1.60%
World 90.1 million barrels $74.31 trillion 2.90%

Sources:, CIA World Factbook, U.S. Energy Information Administration.

Six of the largest 10 oil and gas global discoveries in 2013 were located in Africa and  the industry is taking notice, with over 500 global companies now exploring for fossil fuel deposits.

Why should you care? 
As fellow Fool Anna Wroblewska recently wrote, Africa offers a kind of portfolio diversification that is hard to find nowadays.

Of course, actually investing in Africa can be daunting, with only four African ETFs to choose from: iShares MSCI South Africa Index Fund (NYSEMKT:EZA), Market Vectors Africa Index Fund, (NYSEMKT:AFK) Market Vectors Egypt Index Fund, (NYSEMKT:EGPT), and Global Shares X MSCI Nigeria ETF (NYSEMKT:NGE). As seen below, in the past year, only the Egypt ETF beat the S&P 500.

NGE Total Return Price Chart
NGE Total Return Price data by YCharts.

What about African oil companies trading on U.S. exchanges?
Only Sasol (NYSE:SSL), South Africa's largest integrated oil company, fits that mold. Despite Sasol's involvement in Mozambique, which is expected to become the world's fourth-largest exporter of liquefied natural gas, or LNG, thanks to its 127 trillion cubic feet of reserves, analysts only expect the company's earnings growth to be an anemic 1.9% annually over the next decade. 

Investing in major oil companies investing in Africa: a better alternative

Company Countries Operating In Yield 10-Year Projected Earnings Growth 10-Year Projected Dividend Growth
Statoil  Mozambique 4% 2.80% 2.76%
Eni Mozambique 4.70% 5.50% 1.78%
Total (NYSE:TOT)  Nigeria, Mozambique 5.10% 7% 4.86%
Talisman Energy  Sierra Leone 2.60% 9.80% 6.35%
British Petroleum Namibia 4.70% -1.50% 1.33%
ExxonMobil (NYSE:XOM) South Africa 2.80% 6% 6.87%
Anadarko Petroleum  South Africa 1% 7% 6.40%
Chevron (NYSE:CVX) South Africa 3.30% 6% 6.19%
China Petroleum (NYSE:SNP) Mozambique 4.40% 3.90% 6.66%
Marathon Petroleum  Kenya 2% 12% 9.28%
Sinopec Shanghai Petrochemical  Nigeria 2.20% na na
PetroChina (NYSE:PTR) Liberia 3.40% 10.70% 7.76%
Royal Dutch Shell (NYSE:RDS-A) Tanzania 4.70% 8% 6.38%
S&P 500   1.89%    

Sources: PricewaterhouseCoopers Africa Oil and Gas Review, Yahoo! Finance, Fastgraphs,

As the above table shows, Chevron, ExxonMobil, China Petroleum, PetroChina, Royal Dutch Shell, and Total all have above-market yields and long-term earnings growth rates that will sustain strong dividend growth that maximizes the chance of market-beating returns. I would recommend long-term investors choose among these companies as a means of betting on Africa's potential coming oil and gas boom. 

What are the risks?
If you invest in Africa, a land notorious for its lack of development, there are of course risks involved. According to the International Business Times, theft and corruption are the biggest problems for Africa's nascent oil industry. For example, oil theft and corruption drain $11 billion a year (2.2% of GDP) from the Nigerian economy.

With 80% of government revenue derived from oil, this is a major concern, and in 2004, to comply with international transparency standards, the government initiated the Nigeria Extractive Industries Transparency Initiative, or NEITI. The last audit report showed that between 2009 and 2011, $23.6 billion of oil money went unaccounted for, indicating the NEITI initiative isn't doing much to stem the tide of corruption.

Oil theft is a major concern as well. In February, Shell had to shut down a major Nigerian pipeline because thieves were drilling holes in it to steal oil. According to Mutiu Sunmonu, head of Shell's Nigerian unit, "More than 60,000 barrels of oil are being stolen a day, resulting in frequent production shutdowns and massive oil spills blighting the ecosystem." To put the severity of the theft in perspective, the oil being stolen from just this one pipeline was worth close to $2.2 billion per year at today's oil prices. The frequent damage to and theft from the $1.1 billion pipeline was frustrating enough to convince Shell to include the pipeline in a planned $2.5 billion Nigerian asset sale. Eni and Total are also selling some of their Nigerian assets due to frustration over rampant theft, corruption, and damage to infrastructure.

According to the PWC report, other obstacles to Africa's oil boom include protectionist government regulations, a lack of skilled workers, and a lack of necessary infrastructure, especially in Mozambique and Tanzania: "A huge obstacle to growth ... is the cost of the infrastructure required, which neither country can afford without help from foreign investors, who have their eyes on other global projects."

While oil companies are increasingly willing to fund this infrastructure that is only in an age of cheap capital and high oil prices. Should oil prices drop or credit dry up, such as during another financial panic and or global recession, the necessary infrastructure to allow Africa's oil and gas boom could vanish.

Foolish takeaway
Africa's poverty and lack of development are slowly being addressed, and its potential oil and gas boom could supercharge growth and living conditions. However, there are large risks inherent with investing in this sector, with theft and corruption rampant, so long-term investors are arguably best served by investing in large multinational oil companies such as ExxonMobil, Chevron, China Petroleum, PetroChina, Royal Dutch Shell, and Total. These companies have the resources, technical expertise, and patience to drill for oil and gas on this challenging continent, and to produce growing dividends and market-beating returns for years to come. 

Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Chevron, Sasol, and Statoil (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.