Record fuel prices mean boom time for oil companies. And with little sign of a significant easing in prices anytime soon, the good times – for oil companies, at least – are set to last.

Despite high prices, the International Energy Agency says that oil consumption is growing at “breakneck” speed. Based on current estimates, oil demand increased by roughly 2.2% in 2003, and is expected to grow by 3.2% in 2004 and 2.2% in 2005. In China, double-digit growth in demand is anticipated this year and next.

It is little wonder that share prices of the world’s oil companies have risen on the back of a near 40% hike in oil prices. Premier Oil, a leading UK independent oil and gas company, has similarly enjoyed a sharp rise in its share price. Premier has production interests in the UK, Pakistan and Indonesia, plus exploration and appraisal ongoing in the UK, Indonesia, Philippines, India and south Asia. However, what is catching the eye of investors is Premier’s aggressive and potentially lucrative exploration programme in untapped parts of Africa’s new and promising oilfields.

Charles Jamieson, Premier’s chief executive, says Premier is actively seeking high quality exploration opportunities in its other focus areas of the UK and south and south-east Asia. Most recently, it announced the acquisition of exploration and appraisal acreage in Vietnam and Egypt.

Exploration focus

Restructured and refocused on exploration, Premier has embarked on an aggressive drilling programme in Mauritania, Gabon and Guinea Bissau, an area that exploration general manager Neil Hodgson describes as one of the world’s most attractive areas for exploration.

Despite planned exploration and appraisal activity in the UK, Pakistan, India and Indonesia in 2004, the real thrust, says Mr Hodgson, is Africa. Up to 18 wells will be sunk this year of which 13 will be in Africa. Already, success in Mauritania has seen an investment of about $25m yield production prospects valued at over $100m in less than 18 months.

Africa’s status as an oil hotspot is not new; what has changed is a heightened impetus in the West, and the US in particular, to diversify the supply of oil away from the Middle East.

US demand

For the US, the 9/11 attacks, a difficult campaign in Iraq plus persistently poor relations with the Arab and Muslim worlds have exposed the country’s vulnerability to unsafe Middle East oil supplies. As a consequence, it has now become an even more pressing priority to diversify the country’s supply.

US demand for oil is growing rapidly, from 19.7 million barrels per day (bpd) in 2002 to an estimated 26 million bpd in 2020. With little or no growth expected in domestic supply, the US is being compelled to seek out sustainable new sources. So important is this objective that it is now seen as key to national security.

According to the National Energy Plan developed by US Vice-President Dick Cheney in 2001: “Energy security is a fundamental component of national security and a prerequisite to continued economic growth.” The plan projects that the US will eventually be importing nearly two thirds of its oil needs, risking dependency on foreign powers “that do not always have America’s interests at heart”.

Africa is singled out in the plan as a significant and growing source of new supply. Currently, the US imports about 15% of its oil from sub-Saharan Africa, in contrast to 30% from Canada and Mexico and 26% from the Persian Gulf. Imports from sub-Saharan Africa are projected to rise to 25% by 2015, although that is the conservative scenario – some industry insiders believe sub-Saharan Africa could be supplying a quarter of US oil demand as early as next year.

Supply diversity

At present, sub-Saharan Africa has about 7% of proven world oil reserves, which analysts expect to rise over time. With technological advances, exploitable reserves may expand significantly over the next decade. About 85% of crude oil reserves discovered in the past three years were on west and central Africa’s Atlantic coast. Angola increased proven reserves by 600% between 1995 and 1999, according to the US-based Corporate Council on Africa, more than any other country during that period.

There are nine oil-exporting countries in sub-Saharan Africa – Nigeria, Angola, Congo-Brazzaville, Gabon, Equatorial Guinea, Cameroon, Chad, Democratic Republic of Congo and Sudan – and several others are set to join their ranks. Premier, in partnership with other oil firms, is targeting Africa’s frontier locations – high risk, high reward areas.

Several factors have contributed to an interest in African oil. Oil from Africa is typically high quality and low in sulphur – suitable for stringent refined product requirements. As such, it provides especially large profit margins.

Fields are close to US markets, making oil easily transportable over open sea lanes. West African crude oil can reach refineries in the Gulf of Mexico in just 20 days, half the time required from the Middle East and at a saving of about 35 US cents per barrel.

The bulk of new discoveries are found offshore, reducing (in the eyes of companies) potentially explosive interactions with the local population and possible social turmoil onshore. This lowers political risk.

Also, Africa’s oil markets are generally wide open to foreign participation. In contrast, foreign companies are locked out of many other countries, such as Saudi Arabia, Kuwait and Mexico, where large reserves are controlled by national oil companies, offering limited or no participation opportunities for foreign companies. State-run national oil companies control more than two-thirds of global oil reserves.

What is especially appealing to world markets is that among Africa’s oil exporters only Nigeria is a member of OPEC. Growing production volumes add a new layer of supply under the current volatile oil sector, giving traders and consumers more leeway to cope with crises such as a war in the Middle East or strikes in South America. And because the best West African oil prospects are offshore, supply is less vulnerable to onshore political or social disturbances.

That is not to say the region is not without significant risk but this is to some extent offset by governments’ offers of favourable terms to petroleum developers, particularly in prospecting and exploration. Smaller countries, like Mauritania, typically offer easier access to influential bureaucrats who can make things happen.

Small advantages

In this environment, smaller independent oil companies excel. “Small countries welcome competent independents. Unlike the majors, our revenues are not many times the size of these countries’ entire economies, so we are able to build relationships on a more even footing. We might not have the financial muscle of the majors but we gain in terms of a more willing and constructive relationship with governments,” says Mr Jamieson.

The other dimension to Africa’s oil boom is the dramatic improvement in exploration and production technology, especially offshore and deepwater drilling. This has made viable vast new tracts of acreage off the coast of Africa. Crucially, however, this technology is not the sole preserve of the majors.

Neil Hodgson: the real thrust of Premier’s activity is in Africa

“There is very little proprietary technology left in the industry. The most important thing is people and know-how. In the past 15-20 years, because of lay-offs or people just moving around, we have seen a growing number of consultants. Once it was only the majors who had the technology and the people; now we can go to a number of vendors for everything we need, getting state-of-the-art technology at a modest cost,” says Mr Hodgson.

“At the same time certain costs are falling. Whereas drilling a well 1000m under water used to cost upwards of $20m, it can now cost $5m. Instead of operating a costly drilling platform for 30 days, the same job can now take 10 days to complete.”

This is an important trend to ensure commercial viability. Extracting oil from the ocean bed is considerably more costly than onshore drilling. Saudi Arabian oil, for example, is still profitable if sold for $2-$5 while deepwater oil must fetch more than $14.

Africa is also suited to the independents because of the high number of small deposits that companies like Premier are able to turn profitable. Indeed, some of the findings have been aided by exploration data left behind by the majors.

“The majors are not interested in prospects of less than 50 million barrels, which creates an obvious niche. We are going back over areas that have already been explored but still with plenty of potential,” says Mr Hodgson.

Overall oil production in sub-Saharan Africa is predicted to jump from 3.8 million bpd to 6.8 million bpd by 2008. West Africa’s growth potential is considered to be greater than that of Russia, the Caspian or South America, according to Cambridge Energy Research Associates. The US government’s Energy Information Administration believes the region will be producing 9 million bpd by 2030.

For 2003, Premier reported net profits up 81% despite restructuring charges. The restructuring, completed in September last year, saw major shareholders Amerada Hess and Malaysia’s state-owned oil and gas company Petronas divest their combined 50% stake in the company in exchange for Premier’s interests in Myanmar and part of its Indonesian business. Premier has budgeted around £25m for exploration in 2004.

Mr Jamieson says the restructuring brought Premier’s net debt to zero from £249.5m, and this, combined with expected cash flow of around £60m a year, forms the financial base for the company’s exploration plans.