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Colleagues Vij Ramachandran and Julia Barmeier recently blogged that BP's oil spill debacle in the Gulf should be a wake-up call for the U.S. to finally get serious about renewable sources of energy. But what about the likely effects of the Gulf disaster on Africa's oil producers? Nigeria, Angola, Equatorial Guinea, soon Ghana (and maybe one day Liberia and its neighbors) are all oil exporters dependent on deepwater offshore technologies largely based on innovations from the Gulf of Mexico. What might the spill mean for them? Here are four possible effects:
Higher costs, and thus lower revenues, for offshore production. One company exploring in Ghana has already complained that the spill will add 7-8% to development costs because of additional safeguards. While the extra measures may be warranted, this adds an additional cost to already-risky deep offshore exploration and production-- and perhaps one more reason for companies to either avoid uncertain African markets or delay their investment plans. At a minimum, the additional costs are likely to be passed through to reduce the governments' shares rather than trimming company margins.
Geographic shift. If the U.S. takes the radical step of banning deepwater exploration, however, the oil companies will have little choice but to turn to other potential sources -- and Africa, particularly the Gulf of Guinea, is a prime target for future production. This should theoretically raise the prices for future licenses and strengthen the negotiating position of governments. Currently, deepwater (below 1,000 feet) and ultra-deep (below 5,000 feet) drilling is already significant in West Africa (see map).
Regulatory arbitrage? Blowback from BP's experience and U.S. Department of Justice investigations could in theory push the oil majors to shift even more of their production from wealthy highly-regulated markets to poorer nations with more lax oversight and enforcement. I have no doubt that the reaction would have been different if the BP spill had occurred in Liberia instead of Louisiana, but I'm not yet convinced that “regulation shopping” will be a likely driver of where the oil majors decide to go.
More heat and light? If Africa does get more interest in its oil, the additional revenue for African nations is of course a double- edged sword. While governments always welcome the income, their track record of using oil money is extremely worrying. (See CGD's new initiative exploring direct cash transfers to fight the oil curse). Like so many other challenges, the impact on Africa will depend on how governments respond to changing market conditions—and whether leaders choose to exploit the new opportunities for the betterment of their people, or simply for themselves.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.