Africa a Hotspot for Oil Investment
DEVELOPMENTS
With the price of oil having more than quadrupled since 2004, governments are negotiating more and more deals in oil-producing African states, now hotspots for foreign investments. African industries have historically been overlooked as potential investments because of political and economic instability on the continent, yet with African markets growing steadily, investors are seeing the continent as an attractive opportunity to capitalize on emerging industries and markets. Despite rampant poverty on the continent, especially in Sub-Saharan Africa, African investments in fact provide “the highest returns on foreign direct investment of any region in the world,” according to the World Bank.
Russian energy companies are at the forefront of this trend. Already, Russian energy firms have spent billions of dollars investing in oil on the continent. For instance, Gazprom, a state-owned Russian energy monopoly supplying almost one-third of the European Union’s gas, signed an oil and gas exploration deal with Nigeria in September. .
China, too, has made significant investments in African oil markets. With an economy growing at an average of 9% each year, China “is intent on getting the resources needed to sustain its rapid growth,” reports the Council on Foreign Relations. Africa now supplies one-third of China’s oil imports. China has invested heavily in major oil producers such as Equatorial Guinea, Nigeria, Sudan, Angola and the Republic of Congo, as well as in lower-profile oil markets still untapped by the West, like Gabon.
Governments are also negotiating investment treaties with African states to secure politically important energy partnerships. During the first week of September, President Hugo Chavez of Venezuela traveled to South Africa for a two-day visit to negotiate a deal with PetroSA, the country’s state-owned oil company. The deal, if finalized, will be a bilateral investment treaty forming a partnership between Venezuela and PetroSA that will allow the South African company to acquire a Venezuelan oil-producing asset.
The surge of investment in and partnerships with African energy has tremendous economic implications for oil-producing African states, with the potential of creating more jobs and improving countries’ economic standing. In a speech earlier this month, Libyan leader Colonel Muammar Gaddafi said incoming oil profits would directly benefit citizens –– “Put it in your pockets,” Gaddafi said.
CONTEXT
While known oil reserves in Africa amount to only 9% of the world’s total -- as compared with 62% in the Middle East -- experts speculate that Africa may house large oil deposits that are yet undiscovered.
Investment in African oil is now rapidly increasing, but the international interest in African energy resources dates back decades. For instance, Nigeria and Angola, the two largest oil-producing states in Africa, have had business partnerships with Western oil companies since the 1980s.
While Africa is the most recent hotspot for foreign oil investment, the pattern of investment follows earlier oil-fueled economic booms in South America and the Middle East. Both regions continue to rely on petro-dollars to further develop their industries and provide economic stability.
Saudi Arabia is currently the world’s largest oil exporter, exporting 8.525 million barrels per day, according to the U.S. Government’s Energy Information Administration (EIA). Saudi Arabia, Kuwait, Iran, and United Arab Emirates – all amongst the top ten leading exporters of oil in the world -- represent the Middle East’s dominance of the oil exporting markets. Yet African nations aren’t far behind, with Algeria and Nigeria listed as the eighth and ninth largest oil exporters, according to the EIA.
While oil-rich countries like Nigeria, Algeria, and Libya expect long-term profitability from their oil industries, other African nations are threatened by diminishing reserves. Angola has less than 20 years of remaining oil reserves, and has joined others like Namibia, Egypt, Ghana, Zambia, and Kenya in diversifying their energy industries by developing biofuels, energy derived from dead biological matter such as sugar cane or corn. Experts cite low land and labor costs as perfectly suited for the development of the biofuels industry in Africa.
ANALYSIS
Foreign investments in African oil have the potential to enrich the economies of oil-producing states, yet the global appetite for African oil is creating potentially worrying foreign policy implications.
For instance, European governments are complaining “with rising amounts of panic … about what the Russians are doing” in Africa, said Jon Marks, editorial director of the Africa Energy newsletter. European countries are worried about a growing Russian monopoly on oil supplies, as the EU already relies on Russia for nearly one third of its oil imports.
At the same time, China’s relationship with Sudan has drawn particular scrutiny, particularly accusations that in return for oil China supplies Sudan with weapons which are then used in Darfur.
Some also raise concerns about a US-China race for African oil and energy supplies Others, however, dispute that China’s energy investments are closely tied to China’s overall Africa policy.
Energy policy has been one of the main issues in the U.S. presidential campaign, as both Senators McCain and Obama have put forward plans to wean America off of dependence on foreign oil. Senator Obama announced at the Democratic National Convention his plan to eliminate America’s dependence on foreign oil in the span of only 10 years. Senator McCain likewise has spoken about “the great and urgent challenge,” proposing offshore drilling as a first step to energy independence. Senator McCain, like Senator Obama, plans to “support new production of America’s own oil and gas reserves, because “we can’t outsource the solution to America’s energy problem.” While as early as 2002 the Bush administration expressed plans to further invest in African oil reserves, Senators McCain and Obama haven’t directly made explicit their policies on investing in African oil.
With the price of crude oil having risen to almost $150 per barrel this summer, Senators McCain and Obama are heavily targeting biofuels as part of their energy and economic plans. Biofuels might become a less viable energy alternative for the candidates, as the diversion of crops for fuel instead of food has contributed to soaring food prices in African countries for crops like rice, wheat, and corn. Earlier this year, UN Secretary General Ban Ki-Moon said that rising food prices, which are attributed in large part to the diversion of crops for biofuels, are "a worrisome situation and pose a threat to countries in Africa." Both U.S. Presidential candidates – in particular Senator Obama, who supports government subsidies for corn producers to stimulate biofuel production – face pressure to modify their biofuels-centric energy policies.