Is This Lucrative Oil Play Worth the Risk?
The Gulf of Guinea has developed into a hot playground for oil drillers. Twice in the past few months, companies have announced discoveries of oil off the west coast of Africa. These are great for investors, but will the increased attention on the Gulf of Guinea lead to other problems down the road?
Harvest Natural Resources (NYSE: HNR) publicized the discovery of oil off the coast of Gabon at the end of July. A month later, Anadarko Petroleum (NYSE: APC) announced a find off the coast of Ghana, an area that has been more than kind to the company in the past.
How much oil?
Countries bordering the Gulf of Guinea produce 4% of the world's oil supply today. The U.S. estimates that by 2015, 25% of the oil consumed domestically will come from this region. Here's how oil production breaks down in the "other gulf":
Oil Production (barrels per day)
Source: Reuters. *Expected by year's end.
Ghana is a real up-and-comer here. Oil production began at the end of last year and is expected to reach 250,000 barrels per day in three years. On the flip side, Royal Dutch Shell (NYSE: RDS-A) just shut down a well producing 25,000 bpd in Nigeria because of issues with theft and sabotage.
The Gulf of Guinea countries have oil offshore and onshore, including unconventional sources like oil sands in the Republic of Congo. Here's some of the ongoing activity:
- French oil giant Total S.A. (NYSE: TOT) purchased three onshore exploration licenses in Gabon.
- Eni (NYSE: E) has an oil sands exploration deal in Congo set to expire at year's end.
- Anadarko has discovered oil off Ghana three times since the beginning of the year.
- Hess (NYSE: HES) struck oil off Ghana in June.
The Gulf of Guinea is rich with oil, but it is also rich with potential for trouble. Obviously, political stability in the African nations in the Gulf is crucial for success. Historically, Nigeria is the most infamous for clashes between government, poor villages, and oil companies.
On top of that, pirates in the Gulf pose a serious threat to consistency of operations and uninterrupted oil production. Pirates are specifically targeting the oil and gas industry, attacking drilling platforms, boats, tankers and refineries.
The International Maritime Bureau reports a sharp rise in brutal attacks off the waters of West Africa since January. It's a serious enough problem that the U.S. recently sent military trainers to the Gulf to tune up local navies. The coastal states of Nigeria are discussing a joint patrol force to improve security there as well.
We have seen what political strife in places like Libya and Syria can do to oil production. Investors certainly shouldn't ignore a company like Anadarko and its repeated oil discovery success, but when these discoveries are made in the Gulf of Guinea, they must factor in the dangerous reality of the oil business in this region.