Black Gold: Will The Exploration and Development of African Oilfields Yield Profits, Sustainable Investment, or Death?

As the sun leaks slowly over the African horizon, an ominous cloud of uncertainty continues to swirl. Facing global resource shortages and increasing shareholder expectations, major corporations from China, Russia, France, Germany, and many other European, Asian, North, and South American nations, continue to push aggressively onto African soil through acquisitions and joint venture investments. Unfortunately, while the current World Cup has showcased a continent poised for greatness, the environmental devastation witnessed over the last 50 years from mining, drilling, and harvesting operations in countries such as Nigeria is squalid. Oil spills, gas flares, and poisonous runoff have decimated the African ecosystem and brought billions of dollars of irreparable damage to the African continent and its people. One region that has suffered immensely is the Niger River Delta. Over the last 50 years, corporations have pillaged and exploited the Delta's resources, operating with impunity. As resource industries prepare to expand aggressively within Africa, important questions must be asked. What price are we willing to pay for economic growth? What costs should investors factor in when calculating risk in highly deregulated and undeveloped markets? When accidents happen, why is remuneration between emerging markets and developed nations so disparate? And finally, what will the proposed resource boom bring to Africa? Wealth, Happiness, Darkness, or Death?

From an investment perspective, it is not difficult to realize the important role African nations have in the global oil, gas, and commodities sectors. With 606 oilfields, the Niger Delta in Nigeria supplies 40% of the United States crude oil imports. Nigeria, which vies with Angola for Africa's top oil producer, is the fifth-biggest source of U.S. oil imports, and a critical U.S trading partner. Since oil extraction began in 1958, Nigeria has generated over $600 billion in oil revenues, with companies including Royal Dutch Shell Plc, Chevron Corp., Chevron Corp., Total SA and Eni SpA profiting through joint venture operations with the state oil company NNPC. Shell continues to be one of the largest players in the African oil industry, as well as the most criticized. In 2009, Shell, which boasted profits of $22.94bn (13.12bn), extracted 900,000 barrels of crude oil a day from its activities in the Niger Delta, and significantly more from off shore operations. Similarly, Exxon Mobil, a competitor, currently produces 720,000 barrels a day of crude, condensate and natural gas liquids from 90 offshore platforms in Africa.

While the production rates in Africa are compelling, what is tragic is the African continent's environmental history as it relates to oil, gas, and resource disasters. The Nigerian government estimated recently that over 7,000 spills occurred in Nigeria between 1970 and 2000. They further estimate that over 300 oil spills occur per year within Nigeria. In total, experts estimate that over 13 million barrels of oil have spilled into the Niger Delta, roughly equivalent to the amount of oil spilled from the Exxon Valdez 40 times over. Economically, leaking crude, much of it from outdated equipment and pipes, is estimated to cost Nigeria as well as the drilling companies more than $10m USD (5.3m) a day. Recently, in an unexpected move, Shell downgraded the quality of many of its African reserves, citing infrastructure deficiencies as well as community conflicts as driving factors. Sadly, this movement had little impacts, sending only marginal, temporary waves through the markets, and proving to be nothing more than a short lived distraction at recent Shell shareholder meetings.

For an area as ecologically important as the Niger Delta is, what is also surprising is the lack of media interest. The Delta is home to 7,000 sq km of the continent's remaining 9,000 sq km of mangrove. 60 per cent of West Africa's fish stocks breed in the rivers and swamps along the coast. The region is intensely populated, home to over 31 million people, and has thousands of miles of above-ground pipelines snaking through its delicate wetlands. Last month Shell admitted to spilling 14,000 tonnes of oil in 2009 within the Delta, and significantly more within Africa as a whole. Sadly, Shell is only one corporation. Many of the environmental disasters occurring within Nigeria and elsewhere go unreported, further understating the impact resource industries continue to have. Today, most of the forests and farmlands within the Niger Delta are covered in a sheen of greasy oil. Drinking wells are polluted and people have become militant. As the life expectancy within rural communities in Nigeria has fallen to just over 40 years, little has been done to compensate locals, prevent leaks, or quickly address disasters as they occur. Government corruption continues to impede foreign as well as corporate aid from reaching impacted populations.

Unfortunately, the sad reality is that the devastation within the Niger Delta can be found repeatedly throughout many other African nations. Many corporations operating within Africa consistently seem to place profits and shareholder returns about sustainable investment, knowing that citizens within African nations are desperate and operational rules lax. Workers continue to accept sub-standard living and often poisonous working conditions, and there are few legislative rules to prevent this. NGO's and outside groups have frequently proposed the imposition of resource taxes or sanctions to hold corporations accountable. Unfortunately, while many African governments have threatened Exxon Mobil as well as others with sanctions, few have followed through. Even when imposed, I am doubtful that such sanctions would remain or elicit significant influence, particularly because many governmental authorities work so closely with the corporations that fund them. Furthermore, when faced with recurring disasters and rising liabilities, corporations continue to blame regional conflict rather than take individual responsibility. While conflict is an issue, corporate operations within sensitive areas, as well as the inequitable distribution of wealth, continues to be the catalyst for the terrorism, vandalism, theft and sabotage that corporations continually complain about.

Going forward, investors, citizens, corporations, and governments must acknowledge the real impact that exploration and development is having on the African continent. Moreover, these deficiencies must be resolved before the African continent is opened up for exploration. From an investment perspective, it is clear that the age, state, and deterioration of oil, gas, and resource pipelines, as well as poorly developed infrastructure, may become a significant corporate liability within the next decade, particularly as cleaning costs appreciate. Moreover, corporations must be cautious applying double standards to disasters occurring in African states, particularly as the new age of social connectedness and consumer generated content continues to significantly influence brands and customer perceptions. In the future, I believe that incidence of major spills within Africa are likely to increase, particularly as corporations seek to extract oil, gas, and other resources from increasingly remote and difficult terrains. Global resource supplies will remain under pressure, and shareholder expectations will rise. Unless a global change regarding energy use and generation occurs, African nations will be forced to unfairly, yet precipitously, balance poverty and desperation, with foreign direct investment and economic growth. Sadly, while I hope that shareholders and investors quickly embrace a truly holistic approach to evaluating risk and sustainable investment, I am not holding my breath. Investors demand returns, corporations demand results, and governments demand payment. In the end, I believe it is the African environment and its great people that will be forced to bear the full costs of development; all while foreign entities and governments continue to profit.