The recent exploration success in East Africa has caught the attention of the global oil industry, propelling Africa into the limelight once again. Still, despite several emerging centres of output and the deteriorating geopolitical backdrop in the north, African production is now largely dominated by Nigeria and Angola, which produce 47% of the continent's output.
Central to improving Nigeria's oil prospects is reducing the incidence of oil theft (estimated between 0.15 and 0.4 mb/d) and domestic security, which means that exploration activities are often halted in areas with high prospects of hydrocarbon deposit. Further, the NNPC's precarious financial position means production will continue to be handicapped by an inability to honour joint venture project obligations. But there are new challenges at play now too.
Nigeria exports around 1.6 mb/d of crude oil. As recently as 2010, almost 45% of those exports were earmarked for the US, but the rise in tight oil production means the US no longer needs Nigerian light sweet crude. Moreover, a significant volume of tight oil produced is NGLs and condensates, a large portion of which can bypass the refining system and be blended into the gasoline pool directly, increasing supplies. Further, the ability of Asian refineries to meet local gasoline demand by processing heavy sour crudes is even more of a concern for WAF grades.
Thus, despite recent increases in Nigerian production-with output at almost 2.2 mb/d-the upturn is unlikely to be the start of a long term improvement. Nigerian production will continue to remain volatile due to domestic insecurity, oil theft, a lack of investments and high decline rates (9% annually). Nigeria's production is unlikely to exceed 2 mb/d by the end of the decade. Instead, it will likely fall and average around 1.8 mb/d.
Angola's production, meanwhile, has struggled to break out of the 1.6–1.75 mb/d range-largely due to persistent technical problems, rapid reservoir depletion, and steep decline rates (17% y/y in H1 14). Each year at least 0.2 mb/d needs to be installed to keep production levels stable. Thus, Angola needs to bring around 1.5 projects the size of the 0.16 mb/d CLOV field (peak output expected by year end) online each year, just to keep production constant.
Angola's future production is dependent on the developments of pre-salt prospects in ultra-deepwaters. However, costs are likely to be dear, with project breakeven costs comfortably above $80 per barrel, and the availability of rigs an additional challenge. Given the high-cost nature of deepwater exploration, it is imperative Angola ensures its fiscal regime makes investment attractive. The recent pullback in oil prices is also a worrying trend for their future prospects, given costs have been rising at double digit rates.
According to our forecasts, Angola's production will rise by 0.38 mb/d from 2014 levels to 2.05 mb/d by 2017, but technical problems may keep output below 2 mb/d at various points, even after 2017. By the end of the decade, capacity could rise to 2.17 mb/d, but will be dependent on Angola being able to offset declines through continued new field additions, and keep cost inflation in check-both of which will be extremely challenging. So despite the tremendous potential Africa promises, various challenges need to be overcome, suggesting it may take decades before this potential is unlocked.