Oil producers led by ExxonMobil (XOM), Chevron (CVX), and London-based Tullow Oil have spent billions in their quest for new crude in sub-Saharan Africa. Now their expected flow of profits is at risk as African governments tighten control of the industry.
From 1989 to 2009, sub-Saharan Africa's estimated oil reserves more than doubled, to 127.7 billion barrels, equivalent to about 9.6 percent of the world's total, according to BP (BP). Along the West African coast, Liberia, Gabon, and Sao Tomé and Principé have invited bids for exploration licenses. In the interior, the geological formations that stretch from Mauritania to northern Namibia may hold 71.7 billion barrels of undiscovered oil, according to U.S. Geological Survey estimates. "There is plenty of interest," says Martin Kelly, head of sub-Sahara Africa research at energy consultants Wood Mackenzie.
Explorers are also struggling to hold onto licenses and avoid ending up with less favorable contracts as governments once eager to accommodate Western oil companies seek to reassert authority over their natural resources and satisfy voters. In Nigeria, for example, oil companies expect that by yearend a new oil law will be in place that will increase taxes and royalties from oil production. Foreign companies say the levies may make investment in offshore fields unprofitable. "Governments are under much more pressure to make demands in terms of oil revenue coming into the national coffers," says Rolake Akinola, a London-based Africa analyst at Eurasia Group.
In August, Ghana blocked ExxonMobil's $4 billion bid to buy a stake in its deepwater Jubilee field from Dallas-based Kosmos Energy. A tax dispute has held up Tullow's plans to start pumping from fields in Uganda. "Government interference in Uganda and Ghana is a major concern," says Dougie Youngson, an analyst at Arbuthnot Securities in London. "This is all part of the pattern of operating in Africa."
Kosmos, which is backed by Blackstone Group (BX) and Warburg Pincus, has been accused of breaking the terms of its contract by attempting to sell assets to ExxonMobil without the consent of Ghana's national energy company, a charge Kosmos denies. "Ghana supports investors like ExxonMobil coming to Ghana," Deputy Energy Minister Emmanuel Armah-Kofi Buah says. "But our laws also have clear requirements that must be met."
In Uganda, Tullow paid Heritage Oil $1.5 billion in July for control of two licenses. Final approval has been held up until the government and Heritage agree on how much capital-gains tax Heritage owes. Both Tullow and Uganda hope the tax row will be resolved soon.
In June, Congo nullified a 2006 agreement with Tullow and handed two exploration permits to companies owned by South African President Jacob Zuma's nephew. Congo will struggle to attract "legitimate" investment if it doesn't honor contracts in a transparent way, Tullow said at the time. The company has won a temporary injunction against the development or resale of the disputed licenses.
One strategy for smaller operators in sub-Saharan Africa may be to find the oil, then sell the discoveries to the majors or the Chinese. "You don't necessarily have to go into full development," says Thomas P. Cross, the outgoing chief executive officer of Dana Petroleum, a midsize British explorer, which has just been acquired by Korea National Oil. "The best way to maximize return to shareholders is to explore in these countries, but to produce cash in more politically stable areas."
The bottom line: Governments in sub-Saharan Africa are asserting their control over the region's oil wealth in a series of disputes with Western oil companies.