Review: African oil industry heading upstream

Africa is swiftly becoming a continent heavily focused on oil, both in terms of supply and demand. On the demand side strong economic growth is driving a growing appetite for oil, while on the supply side production levels are widely forecasted to continue rising as higher prices drive further interest in exploration and production (E&P) across the continent.

Indeed, new exploration is likely to drive reserves and production growth over the medium-to long term with West Africa's highly prospective subsalt acreage region drawing the most attention.

The poster child for the African oil industry at present is the upstream sector, which stands likely to be the focus of the lion's share of investment - both from abroad and from at home - over the coming years. Despite the brutal economic climate, high oil prices (with oil prices forecast to remain above US$100 per barrel) serve to incentivise investment in the development of the sector.

One country that could be a key beneficiary of the increased investment is Libya, following the end of its bloody civil war. However, whether this will come to fruition or not will depend greatly on the agenda of a newly elected government with the country's first post-war vote likely to occur in the first half of 2012.

Another country set to increasingly appear on investors' radar screens is Ghana, as the nation's offshore production and reserves increase.

But where there are winners there has to be losers too. And in this context the biggest loser as the African oil industry develops over the coming years is set to be downstream sector. Even against a backdrop of rising oil consumption, the outlook looks grim for the downstream sector.
The sector has been held back by greater structural problems which have led to the low refining capacity and rising dependence upon fuel imports. In particular, two factors stand-out: 1) fuel subsidies; and 2) years of underinvestment.

Continued fuel subsidies among many of Africa's top-tier oil producers have slowly destroyed margins and quite simply disincentivised investment in developing the downstream sector. As such, funding for any new downstream investments will have to come from abroad - with development loans from China likely to be the key source of funding.

Should this scenario play out then this could well push African refining capacity from the downstream sector slightly higher but the level of expansion is still likely to trail well behind the growth in broader oil demand. And this can mean only one thing: refined product import dependence is set to spike.

More broadly speaking for the African continent, 2011 was a difficult year for the African oil industry with production levels in flux for the most part of the year. With production levels returning in Libya in the aftermath of the country's bloody civil war and with higher output expected from nations such as Ghana, Angola and Nigeria, total African production is expected to recover to more familiar levels over the coming months.

To-date, Libyan volumes have returned a lot quicker than many would have anticipated with output swiftly making strides towards the 1 million barrels per day (bpd) output levels the nation had become more than accustom to. According to reports, National Oil Corporation (NOC) estimated that output hit 750,000 bpd in December 2011, with exports totalling 350,000 bpd. Although such a level remains short of pre-war production volumes, a full return is expected before the end of 2012, the nation's interim oil minister recently noted.