Gulf of Guinea: The new Wild West

Reuters ran a story several months ago on the key political risks of doing business in the Gulf of Guinea.

I posted the article then. The article has been updated and I’m putting it up once again.  As I said when I originally posted this article, most coverage of the extractive industries (and cocoa, in the case of this article) is in the business pages and basically boils down to dollars and cents.  What are the rewards, what are the risks?

The human side of the story is only of interest insofar as it impacts business and the investment climate. Ditto for the environment.  What’s noteworthy here is that there is absolutely no mention of the the environmental risk of rapidly expanding drilling and mining. Kind of crazy when you consider that environmental mayhem will certainly lead to social unrest. Even from an investment perspective, one might think (wish?) that environmental concerns would be part of the risk assessment.

DAKAR May 3 (Reuters) – A stretch of West Africa’s coast spanning more than a dozen countries, the Gulf of Guinea is a growing source of oil, cocoa and metals to world markets.

But rising rates of piracy, drug smuggling, and political uncertainty in an area ravaged by civil wars and coups have made it a challenging destination for investors seeking to benefit from the massive resources.

The Gulf of Guinea runs from Guinea on Africa’s northwestern tip to Angola in the south and includes Nigeria, Ghana, Ivory Coast, Democratic Republic of Congo, and Cameroon.

NEW ENERGY FRONTIER?

Gulf of Guinea nations produce more than 3 million barrels of oil per day — about 4 percent of the global total — mostly for European and American markets, with the bulk coming from OPEC-member Nigeria (2.2 million bpd).

Smaller producers include Equatorial Guinea (300,000 bpd), Congo Republic (340,000 bpd), Gabon (230,000 bpd), Cameroon (66,000 bpd) and Ivory Coast (40,000 bpd).

While many of the region’s producers are struggling to maintain output, oil companies believe the deep seas along the coast west of Nigeria could be a new frontier.

Ghana joined the ranks of West African oil producers in December and is expected to ramp up output to 120,000 bpd by August. Further out, Sierra Leone and Liberia hope offshore drilling will spell oil riches for them as well.

Washington estimates the Gulf of Guinea will supply about a quarter of U.S. oil by 2015 and has sent military trainers to the region to help local navies secure shipping.

What to watch:

– Gabon has decided to invite direct bids for investments in remaining oil blocks rather than auction them and is preparing new legislation for the sector. Rocky labour relations in the country are a risk, with the main oil union striking in early April and slashing operations. French oil major Total revived its exploration efforts in the country, meanwhile, by purchasing stakes in three onshore licenses

– The results of exploration efforts by Tullow and Anadarko off Ghana, Sierra Leone, and Liberia could go a long way to defining the energy potential of the region.Anadarko announced in March it found more high-quality oil off Ghana from its Teak-2 exploration well, the latest in a string of discoveries in the area. Hess Corp meanwhile said in April its exploration drill on its Paradise prospect encountered 370 feet of hydrocarbon, an early positive sign as it seeks commercial quantities.

— The security of operations and shipping is a key risk, with piracy on the rise in the area.

– The security of operating contracts may also cause concern after Ghana’s government said last year Exxon Mobil’s reported deal to buy Kosmos’ stake in the Jubilee field was illegal. Kosmos reported in August 2010 the deal was scrapped.

COCOA HUB

Two-thirds of the world’s cocoa comes from Gulf of Guinea nations, most of that from No.1 global producer Ivory Coast, and the rest from Ghana, Nigeria, Cameroon and others.

Cocoa output from the four producers during the 2009-10 season hit a three-year low below 2.4 million tonnes, but may rebound over 2.5 million tonnes over the next two years if Ghana sticks to its ambitious targets.

A key risk, however, is a political crisis in top grower Ivory Coast that halted shipments from the ports of Abidjan and San Pedro, boosted smuggling, and raised the risk of supply degrading before reaching market.

What to watch:

– Ivorian efforts to restart exports. Ivory Coast’s new president, Alassane Ouattara, has said he wants to restart cocoa exports immediately and revive the country’s economy after winning a months-long violent standoff with former leader Laurent Gbagbo. Exporters have said a resumption of shipping may be possible by early May and farmers have said they are starting to see cocoa trade within the country come back to life. About a half a million tonnes of cocoa had backed up at the ports during the violent power struggle, which only ended in mid-April with Gbagbo’s arrest.

– Ghana’s bumper harvest. No. 2 world cocoa grower Ghana is expecting official output to rebound this season to 850,000 tonnes, after it fell below 650,000 tonnes last season.

The country has said it is committed to its target of 1 million tonnes of annual output within the next two years. If successful, the programme could put Ghana in the running to overtake Ivory Coast as the world’s top cocoa producer.

– Longer-term trend. Ivory Coast’s political crisis has called into question the longer-term security of supply from the world’s top producer. The government has said it is keen to revamp the sector that is suffering from years of neglect since a 2002-03 civil war, but years of turmoil have blocked reform efforts, leading to output declines.

IRON ORE AND OTHER MINERALS

Gulf of Guinea nations — already home to top bauxite exporter Guinea and major gold producer Ghana — have attracted billions of dollars of investments from resource firms eager to dig up its vast unexploited resources of iron ore.

The region could eventually produce nearly 10 percent of the world’s iron ore, up from under 1 percent last year, according to the U.S. Geological Survey. Investments announced this year from BHP Billiton, Rio Tinto , Vale and Chinalco amount to around $10 billion.

What to watch:

– Mining companies are well aware of the risks common to West Africa, contract security being one of the chief worries.

– Iron-rich Guinea’s successful elections in November ended two years of military rule and could be a green light for investors to re-engage. However, the country plans to pass a new mining code within the next few months that would boost state ownership in the sector and toughen the rules for obtaining concessions — changes that industry players said could discourage future investment.

– Other risks in the region include tight power generation capacity — something which has interfered with mining investment in other countries such as South Africa and Chile.

Most notably, Cameroon is hoping to triple power generation by 2020 after shortages forced Rio Tinto’s joint- venture Alucam smelter to cut back operations in 2009.

Cameroon issued a treasury bond in December that it said was oversubscribed. Proceeds from the bond are meant to go towards hydropower projects.

PIRATES AND DRUGS RUNNERS

Piracy in the Gulf of Guinea is not on the scale of that off Somalia, but analysts say an increase in scope and number of attacks in a region ill-equipped to counter the threat could affect shipping and investment.

Recent attacks by gunmen on ships off Cameroon’s major port of Douala have showed pirates are extending their range beyond the restive Cameroon-Nigeria maritime frontier, where Niger Delta rebels operate.

Cameroon blamed piracy for part of a 13 percent drop in oil output in 2009 to 73,000 bpd. Production has since fallen to 66,000 bpd and is expected to dip further to 55,000 bpd in 2011.

Nigeria, meanwhile, suffered years of curtailed output due to rebel attacks.

West African drug trafficking is also having an impact on the region’s economies. The United Nations estimates that $1 billion worth of cocaine, destined for Europe from Latin America, passed through West Africa in 2008.

What to watch:

– Shipping, oil production, and investment trends will tell the tale of the economic impact of piracy. Cameroon is expected to hold an offshore lease sale in 2011 that might be a good gauge of the perceived risks of piracy to the sector.

– Analysts say the drugs trade is leading to a spike in regional money laundering, crime and corruption that could set back some of the region’s fragile gains.

© Thomson Reuters 2011 All rights reserved

 

This entry was posted on Wednesday, May 4th, 2011 at 4:35 pm.