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Oil minnows: all creatures great and small

Patrick Smith
By Patrick Smith
Editor-in-Chief of The Africa Report.

Posted on Monday, 8 November 2010 13:08

Part of our investigation into African mineral deals, The Struggle Underground.

At the barricades of the resource revolution is a generation of small companies run by consummate risk takers who have blazed a trail in countries such as Ghana, Uganda and, more recently, Ethiopia and Somaliland. These small companies – the minnows or wildcatters as they are known in the oil business – have acted as an advance guard for the multi-billion dollar companies such as ExxonMobil, AngloGold Ashanti and Rio Tinto.

Their original business model was ‘find and sell’. That is changing with the rise of companies such as Ireland’s Tullow Oil, run by Aidan Heavey. His Africa team has been spectacularly successful: over the past five years Tullow’s market capitalisation has rocketed to $10bn from just $1bn, thanks to astute investments in Ghana and Uganda, the two hottest new oil territories in Africa.

Heavey is not only proud of Tullow’s record of astute assessment of political risk – the company is working on a more problematic operation in Ethiopia – but insists it has developed a reputation for straight dealing, avoiding under-the-counter payments to get favourable treatment from corrupt officials. Now Tullow is putting that to the test as it battles officials from the Democratic Republic of Congo after its oil licence there was peremptorily cancelled.

Read more about Guinea’s master plan, Kinshasa’s contract competition and the first act in Ghana’s long oil drama.

Other minnows face troubled times. Kosmos, pioneers of the ‘find and sell’ strategy in West Africa are locked in a political dispute in Ghana. Anadarko, with oil ventures along the Atlantic seaboard in West Africa, is struggling after its share price was cut in half because of the company’s involvement in the Gulf of Mexico oil spill. Yet the global titans who dominate production in Africa– ExxonMobil, Shell, BP and Total – keep a close watch on the smaller companies.

The stakes in mining are even higher, given long payback times and often massive investments in infrastructure. And the politics are often trickier to navigate because the assets are onshore. Comparative newcomer but formidably well-financed ArcelorMittal has been wrongfooted in Liberia, where it was forced to renegotiate a bad contract in 2006, and this year in South Africa, where it was pushed into a black empowerment deal with one of President Jacob Zuma’s closest political allies.

Older established players such as South Africa’s De Beers are facing heavier market pressures in Africa and the West. Less than 10% of the $80bn-a-year global diamond market comes from African production, which is dominated by De Beers and its associates. Most of the money is made from processing and marketing, now De Beers’ main target.

This article was first published in the October-November 2010 edition of The Africa Report.

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