The Commodity Investor: Amine Bouchentouf

Columnist Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the bestselling Commodities For Dummies, published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities. 

In a quest to identify and exploit ever-growing oil fields, oil companies are expanding their exploration activities to more remote locations. One of the final frontiers in oil exploration is Africa. Over the last several years, oil companies have pumped billions of dollars into exploration activities off the coast of Africa. While countries such as Nigeria, Libya and Algeria have large onshore fields, operators are increasingly going offshore to develop and exploit oil resources.

Going offshore in Africa

Going offshore provides a key advantage to oil operators: operational security. The African continent is not known for its political stability, and bouts of violence are a very common occurrence. Let’s take Nigeria, for example. Nigeria is the largest producer of oil on the African continent, with daily production in excess of 2.5 million barrels per day. However, almost 10 percent of that oil (over 200,000 barrels per day) is stolen from operators by organized crime elements. The Niger Delta, where the majority of Nigerian crude originates and is processed, is riddled with armed gangs engaged in siphoning oil directly from pipelines. This activity has cost the Nigerian government over $6 billion in lost revenue and is also causing significant losses to the actual operators.

In a quest to resolve this issue, many oil companies, such as Royal Dutch Shell (LSE:RDSA), are investing heavily in exploration off the coast of Nigeria. By developing fields that are offshore, operators are hoping that they will be able to keep more of the oil that they’re getting out. This security situation is also present in places like Sudan and Libya, two of the continent’s other prolific producers. For the last four to five years, Sudan has been engaged in a bloody civil war that many have claimed was at times genocidal. This war, which is a humanitarian catastrophe, also has also had a negative economic impact since a lot of the country’s oil processing has been shut down. And Libya is another clear example of what happens when a country experiences a revolution: when the Libyan people turned against their longtime strongman leader, Muammar Gaddafi, the country’s oil production plummeted by 70 percent.

In an attempt to circumvent this violence, a large number of operators see the value of large-scale offshore exploration. And indeed, offshore exploration in Africa — both in the eastern and western parts of the continent — is booming. The Brazilian company HRT Participacoes em Petroleo (OTC Pink:HRTPY) is actively involved in offshore Namibia; Angola has developed prolific fields off its coast; and even Ghana has recently discovered sizable offshore fields. Within this trend, a newcomer to the African club of oil nations is emerging: Mauritania.

Mauritania: a growing player in African oil

Mauritania is another country that’s seen political instability. As recently as a couple of years ago, the country suffered a coup d’état whereby the previous ruler’s chief of staff ousted his boss and assumed power. While Mauritania is not a beacon of stability in the region, it is nevertheless becoming a major player in the offshore space. About a decade ago, the Australian oil company Woodside Petroleum (ASX:WPL) discovered the Chinguetti oil field off the coast of Mauritania.

While it’s not a giant field, Chinguetti boasts over 120 million barrels of reserves in fairly shallow waters of about 800 meters. Extraction costs are lower since it isn’t an ultra-deep-water operation. More important is that the discovery of Chinguetti means that commercially-viable wells are a reality in offshore Mauritania and in offshore Northwest Africa. In fact, satellite wells are being drilled around Chinguetti and preliminary results indicate that many new fields will likely be coming online in the years to come.

Mauritania offers some advantages to investors seeking to get exposure to the growing African oil industry. First is geography. Mauritania is located in Northwest Africa, which means that any oil that’s discovered will find a natural market a few hundred kilometers north in Europe. This proximity to the European market is a big reason why many companies are interested in acquiring drilling licenses in the region. Second is stability. It may seem ironic, but the fact that Mauritania went through a coup d’état is not such a bad thing; the previous ruler was known for corruption, and the current leadership actually held democratic elections to choose the country’s new leaders. Third is cost. Mauritania is still a growth story, so companies are able to buy drilling and exploration licenses from the government at a considerable discount relative to some of their neighbors.

If you’re looking to get inexpensive but promising exposure to Africa’s growing offshore oil industry, then take a look at Tullow Oil (LSE:TLW). This British company has extensive operations in Mauritania, including nine licenses and exploration acreage in excess of 42,000 square kilometers. It also includes the Chinguetti oil field so you’ll be getting in on the current production as well. Offshore Africa represents one of the last unexplored frontiers in oil, and Mauritania could very well be the next oil producer to take off.

 

Securities Disclosure: Amine Bouchentouf doesn’t have any positions in the stocks mentioned.