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Enormous investments planned for Angolan oil industry
The Washington Diplomat / December 2004

By Larry Luxner

Twice a week, a chartered World Airways MD-11 jumbo jet lifts off from Houston's George Bush Intercontinental Airport, ferrying 113 passengers nonstop to Luanda.

The 15-hour flights from Texas to the Angolan capital — costing over $5,900 per round-trip business ticket — are a testament to the importance of the oil industry to this developing African nation, which has attracted an estimated $4 billion in U.S. investment and will likely jump dramatically over the next few years as major oil discoveries come online.

"Angola offers some real viable opportunities, especially in the oil services sector," said Lorenzo Bellamy, a Washington attorney that represents two U.S. oil companies doing business in Angola. "Right now, that's the biggest area of return on investments."

In fact, the United States already buys more oil from Angola than from Kuwait; the African country now accounts for 7% of all U.S. crude oil imports. Angola would like to boost this to 10-15% of all imports over the next decade.

Angola has produced oil since 1955, with initial exploration success taking place onshore in the Kwanza area. In 1973 — at the height of the Arab oil embargo and two years before independence from Portugal — petroleum became Angola's principal export. Production reached 100,000 barrels a day in 1973, 359,000 b/d in 1987 and 450,000 b/d in 1993.

Angolan oil production now stands at 1.3 million b/d, making the country sub-Saharan Africa's second-largest oil producer (after Nigeria), and the ninth-largest supplier of crude oil to the United States.

Largely thanks to record high oil prices, the Angolan government forecasts GDP growth at 11.7% in 2004. At the moment, the extraction of oil contributes about two-thirds of GDP, 90% of export earnings and roughly 50% of government revenue. Two important new offshore developments will also come online in 2004, boosting oil production levels further.

"Unfortunately, higher oil prices are not helping us yet," says Josefina Pitra Diakite, Angola's ambassador in Washington. "The contracts were made in terms of fixed prices, so we'll benefit from companies like BP that will start producing in 2007 — but not as much from current production."

The largest single investor in the sector is ChevronTexaco Corp. The California-based energy conglomerate is spending $11 billion on 12 Angolan oil and gas projects over the next five years, including a proposed liquefied natural gas (LNG) project which has long been in the planning stages, even by African standards.

Block 0, off the coast of Cabinda, is operated by ChevronTexaco and accounts for 60% to 70% of Angola's current production. Cabinda Gulf Oil Co. (CABGOC), a Chevron subsidiary, is the operator of the block, with a 39.2% share. Other parnters include state oil entity Sonangol (41%), TotalFinaElf (10%) and ENI-Agip (9.8%).

Block 3, off Angola's northern coast, is the second-largest area of production. TotalFinaElf is the operator of Block 3, with a 50% stake. Other partners on the block include Ajoco, Agip, Mitsubishi, Sonangol, INA-Naftaplin and Naftgas.

Following closely on the heels of ChevronTexaco is rival oil conglomerate ExxonMobil, based in Irving, Tex.

In August, ExxonMobil announced that its subsidiary, Esso Exploration Angola (Block 15) Ltd., had started production of the $3.4 billion Kizomba A project — the largest deepwater offshore development in West Africa.

Estimated recoverable resources from the project total around one billion barrels of oil, with an expected production rate of 250,000 barrels a day.

"Kizomba A employs the world's largest FPSO [Floating Production, Storage and Offloading] system, and the start-up of this project is an important milestone in Angola," said Harry J. Longwell, ExxonMobil's director and executive vice-president. "As planned, ExxonMobil's projects are employing leading-edge deepwater technology to develop significant new oil production capacity in West Africa. These projects demonstrate our commitment to the long-term development of Angola's hydrocarbon and human resources."

In addition to Esso, which has a 40% stake in the project, other participants in Block 15 are BP Exploration (Angola) Ltd., with 26.67%; ENI Angola Exploration B.V. (20%) and Statoil Angola (13.33%). Sonangol, Angola's state oil entity, is the concessionaire.

Kizomba A is the first of three world-class production developments on Block 15 that are intended to collectively develop over 2.5 billion barrels of oil at a total investment of around $10 billion. Located 230 miles northwest of Luanda, Kizomba A will develop the Hungo and Chocalho discoveries in water depths of 3,300 to 4,200 feet.

In February 2003, Esso and Sonangol announced the beginning of construction of the Kizomba B project, which will develop the Kissanje and Dikanza discoveries. Kizomba A and B incorporate a unique "design one, build two" approach that captures substantial synergies. The first oil from Kizomba B is scheduled for 2006.

ExxonMobil and its partners have so far announced 38 discoveries in Angola, 17 of which are on Block 15, a world-class development with the potential to recover about 4.5 billion oil-equivalent barrels. ExxonMobil holds interests in five offshore deepwater blocks covering more than 4.5 million gross acres with a resource base now estimated at more than 11.5 billion barrels of oil equivalent.

Oil exploration in Angola has also resulted in major discoveries of natural gas reserves. In 2000, those reserves were estimated at 1.6 trillion cubic feet (Tcf). The country's recent deepwater discoveries have likely increased this to a substantially higher level, possibly as high as 25 trillion Tcf. Roughly 85% of gas produced in Angola is flared, although some is reinjected to aid in crude production.

The LNG plant now being developed jointly by ChevronTexaco and Sonangol will process natural gas from offshore Blocks 1, 2, 3, 4 and 16, as well as from the new deepwater discoveries on Blocks 15, 17 and 18. Sonangol and Chevron each have a 50% stake in the $2.5 billion project, but BP, ExxonMobil and TotalFinaElf could join the project's consortium of investors.

Production was originally targeted to begin by 2005, but will not likely occur until late 2006, five years after the project was first approved by Angola's Council of Ministers.

Bellamy noted that the Angolan Ministry of Petroleum has recently issued a protocol encouraging multinationals to subcontract with local companies. That's resulted in the formation of several U.S.-Angolan joint ventures.

For now, downstream activity is confined to one oil refinery in Luanda with a capacity of 39,000 b/d. The refinery is operated by a venture owned by Petrofina (64%) and Sonangol (34%). Private investors own the remaining 2%. Angola refines about 30,000 b/d for its domestic market and exports lubricating oils, bunkering oils and heavy fuel oil.

In January, Sonangol announced plans to build a $3.3 billion refinery in Lobito, a coastal city 400 kilometers south of Luanda. The plant will be constructed by Samsung Engineering Co. Ltd. of South Korea.

Once this new refinery comes online in 2008, it'll have an installed production capacity of 200,000 b/d — more than enough to satisfy local demand in addition to supplying refined products to the U.S., European and African markets.

With all this new oil revenue, one of the biggest debates now underway is how to make sure this money is spent wisely — and avoid the "curse of oil" that has plagued other oil-rich but corrupt Third World nations such as Venezuela, Nigeria and Equatorial Guinea.

"This is a major issue in Angola," says Paul Hare, executive director of the U.S.-Angola Chamber of Commerce. "The government has taken a number of steps over the last couple of years. They have a very competent, professional economic team to improve both accountability and transparency with regard to revenues.

"Previously, during the war perhaps 40-50% of expenditures were off-budget," he explained. "In other words, the official budget didn't reamlly mean much. But now, you have an integrated budget, and all revenues including oil revenues are flowing into the central system. These are all important steps forward."

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