Asian Money Complements Hydrocarbon Riches

Sub-Saharan Africa's oil and gas industry has been one of the biggest ben eficiaries of Asian investment interest in the region. The appeal of Africa has also grown in tandem with its rising significance as one of the last frontier plays in oil and gas, in Asia's scramble for direct access to the world's resources to meet its growing needs.

Unsurprisingly, some of the biggest investments have come from China , which is also one of the largest importers of African crude oil. In 2012, China imported an average of 1.09m n barrels per day ( b/d ) of crude from the region - or about 18.6% of the region's total crude production. Sub-Saharan Africa is China's second largest regional source of crude oil imports, accounting for about 20% of its total imports in the same year. With an oil-for-loans deal struck with Nigeria in July 2013, China's footprint in the region's oil and gas scene will not be shrinking any time soon.

Feeding The Dragon
Crude Oil Imports To China By Region, 2009 To Year-To-Date ('000b/d)

Japan and Korea have imported more modest quantities of crude oil from Africa, though the two largest importers of liquefied natural gas (LNG) have been closely eyeing East Africa's gas potential in particular. In May 2013, the Japanese government under Shinzo Abe announced its intentions to take a greater stake in the region, pledging a JPY200bn (US$2.03bn) financial package for firms looking to invest in extractive industries, including oil and gas. In addition, it is looking to support these investments with more direct inter-governmental agreements, similar to the deals made by China. This would help Japan diversify its sources of crude oil - it is currently dependent on the volatile Middle East and North Africa (MENA) region for more than 85% of its crude import needs - and LNG imports.

African Oil A Prospect To Help Diversification
Sources Of Japanese Crude Oil Imports, By Region (%)

We look at Asian investment in both the upstream and downstream segments and the main players fuelling Asia's growing involvement in the African oil and gas industry. Our general observations are:

  • More investment has been seen in Africa's upstream than in the downstream segment, as crude oil and gas in the region complement Asia's large downstream, power and manufacturing industries. As East Africa continues to produce new discoveries of gas in massive quantities, Asia's growing gas demand is set to see its companies, particularly state-owned ones, continue to lend financial firepower to develop its raw gas potential with a view to exporting it. Not only would it ensure supply security, it could also allow these firms - who are often also importers of oil and gas - access to cheaper resources.

  • Downstream investment is more commonly restricted to Asian national oil companies (NOCs), which are more interested in diversifying their market exposure and operations beyond their home market, than private companies, which find little appeal in Africa's still-limited domestic market for refined oil products.

Upstream Flows

Upstream investment in East Africa by Asian countries has been channelled primarily through state-owned oil companies. The perception that Africa was a difficult place to do business led to underinvestment from Western international oil companies (IOCs) and created opportunities for state-owned Asian players. We highlight Chinese players China National Petroleum Corporation (CNPC) and China Petrochemical Corporation (Sinopec), alongside Malaysia's Petronas, as among the most active Asian players in Africa.

In some markets, such as Sudan and South Sudan, Asian NOCs are the clear upstream leaders. In recent years, these firms have expanded both their presence and scope of operations on the continent. For African countries eager to develop their oil and gas potential, Asian NOC investment holds the following attraction:

  • NOCs are more interested in gain access to resources than reserves. Hence, they are more willing to accept contracts that are seen as less attractive to IOCs, including a greater willingness not to book or require ownership of assets.

  • Asian NOCs also appear less concerned about operations in politically contentious places such as Sudan, where western IOCs have largely stayed away or face legal obstacles to investment. Such investment can also reinforce broader economic and political relationships as Beijing secures its influence over vast swaths of resource-rich Africa.

The nature of Asian investment is steadily evolving in the oil and gas sector. This is particularly true for Chinese firms which are eager to use West Africa's deepwater as training ground to build up their own operational capacity, as they move from farm-ins to more mature assets to exploration of unproven but prospective basins. We are also seeing a greater willingness to invest large sums to gain a foothold in East Africa's lucrative gas assets. Players such as KOGAS and CNPC believe their stakes will offer them secure supplies and influence in the global LNG market.

There are, however, instances which highlight the risks associated with the rise of Asia:

  • The willingness of Asian NOCs to spend vast sums of money for a share of upstream assets has led to cost inflation that has priced out IOCs. Royal Dutch Shell lost out in two attempts to gain a foothold in Mozambique's gas-rich Rovuma Basin. Having backed out of acquiring Cove Energy in 2012 - which was sitting on the gas fortunes of Area 1 - after Thai NOC PTTEP drove up the bidding, it was reported that fierce competition for Eni's Area 4 assets led the Anglo-Dutch major to walk away from them as it determined the costs of entry to be too high. Eni later sold a 20% stake - alongside a share to its other East African assets - to CNPC for US$4.2bn.

  • A presence in areas IOCs that have been more reluctant to enter has exposed Asia's oil and gas companies to greater risks. We note that Petronas was hit particularly hard by the shutdown of production by South Sudan, while Western IOCs had been less impacted as they held few significant producing assets in the country. In frontier play Ethiopia, employees of Sinopec and Petronas have also been the victim of attacks by rebel forces operating across the country. An attack in 2010 resulted in the death of a subcontractor to the Malaysian NOC.

  • The rising presence of China in Africa has provoked a backlash in some markets. We have seen Sinopec subsidiary Addax Petroleum come under criticism from the government for alleged violations that have resulted in the seizure of fields. China has also become the target of criticism in ongoing protests in the construction of a pipeline in Tanzania that would connect southern gas fields to commercial centres in the north.

Key Asian Investment In African Upstream
Country Company Type Timeframe Note
na = not available. Source: BMI
Angola Sinopec Farm-In 2013 - Present Purchase of Marathon's stake in Block 31 for US$1.52bn.
Sinopec Farm-In 2011 - Present US$983mn for 5% stake in Block 21.
Sinopec Acquisition 2010 - Present Sinopec purchased parent company China Petroleum Corp's 55% stake in joint venture Sonangol Sinopec Intl for US$2.46bn.
Sinopec, CNC Farm-In 2009 - Present Block 32 from Marathon Oil for US$1.3bn.
Cameroon Sinopec Farm-In 2011- Present US$538mn for an 80% stake in Pecten Cameroon which has exploration and production assets.
Petronas Exploration License 2009 - Present Signed an exploration deal with Noble Energy for US$119mn.
Equatorial Guinea CNC Exploration License 2006 - Present Signed an exploration deal Block S.
Gabon CNC Exploration License As part of a larger deal with Shell CNC took a 25% interest in offshore blocks.
Sinopec Producing Oil Field and Exploration Licenses 2004 - Present Increased interest in Gabon with 2009 acquisition of Addax.
Ghana Sinopec Gas Project 2011 - Present US$700mn on a project to monetise gas from the Jubilee field.
Mozambique CNPC Exploration Blocks 2013 - Present US$4.21bn on a 20% state in Area 4 of the gas-rich Rouvma Basin.
ONGC, Oil India Exploration Blocks 2013 - Present US$2.5bn for purchase of a 10% stake in Area 1 from Indian company Videocon.
PTTEP Acquisition 2012 Successfully outbid Shell for Cove Energy at cost of US$1.9bn. Most attractive asset in portfolio was acreage offshore Mozambique.
Nigeria Sinopec Producing Oil Fields 2012- Present Purchased 20% stake in Usan oilfield for US$2.5bn from total.
CNPC Exploration Blocks 2006 - Present CNPC was awarded a number of onshore and offshore blocks for exploration.
CNC Exploration Block 2006 - Present US$60mn for a 35% share of Block OPL229.
Sudan & South Sudan CNC Producing Oil Fields 2006 - Present Acquired 45% interest in block OML 130 for US$2.3bn.
CNPC Producing Oil Fields 1995 - Present Largest upstream player in the country. More than US$5bn in total investment, not including a US$1.5 loan in 2013.
ONGC Producing Oil Fields 1990s - Present More than US$2.7bn total investment.
Petronas Producing Oil Fields 1990s - Present na
Sinopec Producing Oil Fields 1990s - Present na

Midstream & Downstream

As with the upstream segment, Asian investment in Sub-Saharan Africa's midstream and downstream has been mostly led by NOCs or by private companies as part of a larger inter-government agreement . The prevalence of NOCs such as Sinopec and Petronas in Asian downstream investment in Africa is an indication of the limited opportunities available to private investors with more limited interests than state-owned firms.

Private investment into Africa's downstream segment has been relatively weak owing to the region's limited market connectivity. Although there is growth potential, the regional market is segmented. Individual markets are small and are not well-connected to other markets to justify downstream investment - particularly large-scale operations that could provide economies of scale - most of the time. Poor business environments and inefficient price regulations serve to further weaken interest.

However, for integrated NOCs these deterrents are negated by positive externalities they may enjoy from downstream investment. These are:

There are three main motivations for this trend:

  • Growth opportunities in Sub-Saharan Africa's downstream market. Although it will stay small relative to other regions through our forecast period to 2013, we have outlined that the continent's refining capacity remains far below what will be required to service a growing demand for the most parts of the decade ( see our Africa Regional Overview, 'Exploratory Momentum Creates Upside To Regional Forecasts', June 25). Downstream involvement could also assist the NOCs' compatriot firms in winning government contracts for supporting infrastructure developments.

Growth Raises Fuel Needs
Africa Refining Capacity & Oil Consumption ('000b/d), 2000-2022
  • Goodwill gesture for other gains or as part of a wider inter-government agreement . Part of the strategy of NOCs and governments is to build key infrastructure in the country within which they are operating in exchange for goodwill from the local community. This could give them a stronger position while vying for natural resource assets in African countries. China National Offshore Oil Corporation's (CNC) interest in the Hoima refinery project could be part of the upstream-focused firm's initiative to establish good relations with Uganda, by giving the government the downstream investment Kampala has chased ( see 'CNC Downstream Interest Raises Upstream Hopes', July 11). Interestingly, CNC's interest was first expressed during Ugandan Prime Minister Amama Mbabazi's visit to Beijing in July 2013.

  • Diversifying operations away from the home market. While Asian firms are more interested in export prospects in upstream investment, downstream investment tends to eye the local and immediate regional market for demand. Petronas' acquisition of Engen Petroleum had focused on expanding its presence in Africa, and not the export of fuel products back to Malaysia. Likewise, given weak refining margins at home, downstream investment overseas helps Asian NOCs hedge against domestic risks. Sinopec's interest in PetroSA's Coega refinery project appears to be based on the regional export potential that production could hold ( see 'Refinery Brings Sinopec Deeper Into Africa', May 22 2012).

Key Asian Investment In Sub-Saharan Africa's Downstream
Country Company Project Date/Expected Start-Up Date Note
Source: BMI
South Africa Sinopec Mthombo Refinery, Port Elizabeth 2016 US$10bn planned by Sinopec, PetroSA and Industrial Development Corp.
Petronas Engen Petroleum 2013 Petronas is currently in talks to sell its stake in Engen Petroleum to PetroSA
Sudan CNPC Khartoum Refinery 2000 50/50 Joint Venture between CNPC and the Sudanese Ministry of Energy & Mining
South Sudan, Kenya, Rwanda Toyota Oil Pipeline N.A. US$4bn project. Dual pipelines running from South Sudanese oilfields to Kenya port of Lamu and from Rwanda to Mombasa
Uganda CNC Hoima Refinery N.A. In talks to develop a 30,000b/d refinery in conjunction with a crude oil export pipeline as part of an upstream development in Lake Albertine
Tanzania China Export-Import Bank Dar Es Salaam Pipeline 2014 Domestic pipeline connecting gas-rich Mtwara to capital Dar Es Salaam
KOGAS Maputo Gas Pipeline 2014 Joint venture by KOGAS and ENH to pipe gas for power and industry in Maputo

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