OIL ANALYSIS:

African answer to US shaling revolution

open | 06 June, 2013

African producers of light crude are struggling to sell their oil. The US, a large and traditional market for African crudes, is drying up as an export destination now that the US shale boom is producing so much crude that imports are being backed out.

Since the new US oil is pretty similar to that of African producers, they feel the brunt first. Other producers will follow, including the Mideast and Venezuela, producers of heavier crude.

Since 2010, Nigeria, Angola, Algeria and Libya had to divert 1.4 million barrels per day of their crude to other markets away from the US.

US imports from Congo Brazzaville, Congo Kinshasa, Cameroon, Gabon and Ivory Coast have dried up completely in the first quarter of 2013. Current US imports of African crude are around 600,000 b/d, and might be down to a trickle by the end of the year as relentless growth in US output makes imports less necessary.

Breaking into new markets is not always easy, and typically forces producers to discount their oil to make it more attractive than alternative grades. Of the African producers, Nigeria is worst off. It already had to divert 650,000 b/d from the US to other markets, some in Europe and some in Asia.

All that oil sloshing around might put pressure on the oil price, but Brent keeps steady over $100 per barrel. Since Nigerian oil is better than Brent, it typically sells at a premium over Brent. But because so much sweet is looking for a buyer, the premiums have narrowed.

Nigeria is “very worried” about the impact of the US shale boom, says Nigerian Oil Minister Diezani Alison-Madueke.

Opinions differ how long the US shale revolution will last - the exploding output of oil and gas from shale formations that has shot US production back to 1998 levels.  

Which is why the producer group Opec is now going to study the US situation itself – at the instigation of Nigeria. Africa’s worst case scenario? The US will be exporting so much oil that it will be competing with African crude around the globe. The best case scenario for African producers: that the shaling revolution will fizzle out as shale fields initial output tend to be decline after a while. Shaling is also expensive, under $50 per barrel it will be unprofitable.

Diezani Alison-Madueke is looking for an African answer to the issue and has floated a plan to create an internal African market for crude and refined products.

Details are scarce, but the bottom line is that African producers can best compete in their own market since transportation costs are lower than imports. “I must say that it is also an opportunity as Africa as a continent to begin to look inwards as well and create alternative markets,” she says. Why not make Africa self-sufficient, and take the path the US is going, is her philosophy.

One way of doing that is refining African crude oil in African refineries and create products for the continental market. In theory that is an excellent plan, which could well work since the economics can be created to support it. In practice, nothing of the sort is expected to come off the ground any time soon.

Look no further than Nigeria itself. It has four refineries which could easily supply the nation with the products it needs. Instead, the refineries are in disrepair, run at low rates, and the products they make are sold in the domestic market for a pittance because of fuel subsidies – and these subsidies create a lively and profitable smuggling business with neighbouring countries.

Nigeria's fuel subsidies take away any financial incentive to refine the products at home. Instead, crude oil allocated to these refineries by the Nigerian National Petroleum Company is sold in the international market for higher prices. In turn, Nigeria imports refined products to the detriment of its trade balance, imports that are also hard-hit by subsidy fraud.

Creating an African market would demand a stable and sound market at home for participating countries. Nigeria is the continent’s largest producer, but not its poster child for good governance.

The African Opec producers Algeria, Angola and Libya have their own hiccups – but their oil industry functions better than Nigeria’s. All these countries are finding new markets. But little is staying on the continent, so far.

Short term, therefore, the US shaling revolution continue to affect the African continent's oil and gas industry. Fields with lower production prices can manage well, others will not.