Archive

No. 3, 2012

PAVEL BOGOMOLOV

THE LION PREPARES TO LEAP


LUKOIL opens another branch in West Africa

In July 2011, LUKOIL Overseas Holding (operator of the LUKOIL overseas upstream projects), together with Vanco Overseas Energy, acquired from the privately-owned company Oranto Petroleum, 70% in an agreement to explore and develop the SL-5-11 deep-sea block in the territorial waters of the Republic of Sierra Leone (West Africa). In April 2012, LUKOIL Overseas opened an office in Freetown, the country's capital, and launched the active phase of work on its shelf.

TREASURE CHEST IN THE GULF OF GUINEA

Let us imagine that we are standing on the fourth floor of one of the few business buildings in this colourful African town, where the overseas upstream project operator of the pioneer of the Russian vertically integrated oil business ‒ the major subsidiary LUKOIL Overseas has leased an office. From here, the Freetown panorama is reminiscent of a multi-coloured, though dusty and faded, tapestry or mosaic. More canvas awnings hanging over stalls and wonky stands than proper shops and restaurants.

The country and its capital are far from wealthy: Ghana, for instance, already has an annual per capita income of $3 thousand, whereas, in comparison, in war-torn Sierra Leone the figure has stalled, according to some international rating agencies, at the modest $600 mark. More than 70% of the local population lives below the poverty level and the GDP of just $2 billion per annum puts the country in a far from honourable 215th position in the world. Moreover, two-thirds of the population live by subsistence farming.

Knowing all this, one cannot but ask both oneself and others in bewilderment: what exactly are the treasures that not so long ago attracted mercenaries and fortune-seekers and now, under the conditions of the long-awaited peace, draw investors from all over the world like a magnet?

"Don't imagine it is just Black Gold", Tomah Nhabay, who has long since lived on this coast, explains to me pointedly. Former Chief Executive of the Petroleum Directorate of the Republic of Sierra Leone, he recently became the first African to be appointed by LUKOIL to the high position of head of the company's representative office. "It is not only oil, but a lot more."

Having graduated in 1977 from the Moscow Geological Exploration Institute in Geophysics, Nhabay knows the Table of Elements virtually by heart, not only as a professional oilman but also as a thoroughly Russian-speaking expert on the history of our industry. This Table of Elements, thought up by the great Russian chemist Dmitry Mendeleyev, is very broadly represented here in the subsoil of Sierra Leone. The minerals present here in large quantities include diamonds and chromite, bauxite and iron, gold and platinum, together with the world's biggest reserves of rutile (titanium ore). Alas, today, however, only diamonds are mined in the country, these accounting for half Sierra Leone's exports, as well as rutile (a third of the quantity mined globally).

By the end of 2012, however, thanks to investment by the companies London Mining and African Minerals, iron ore exports are to be launched as well. Iron ore mining will make such a major addition to the structure of the national economy that the GDP growth rate will increase ten-fold! In 2011, this vital indicator rose in the country by 5.1%, whereas a figure of 51.4% is now anticipated. The Chinese corporations Shandang Iron and Steel Group are also rapidly penetrating the local metals sphere, investing $1.5 billion in the Tankolili mining project in anticipation of receiving 25% of the output. Nor is work marking time in the diamond industry. A branch of the Israeli corporation Beng Steinmetz Group has invested $150 million in expanding its mine at Koidu.

A LONG PATH TO INDEPENDENCE AND PEACE

Freetown, with its population of two million, is probably one of few capitals in the world that cannot be reached when flying into the country. The fact is that the international airport is built on a wide sandy spit separated from the city by a broad and often stormy Atlantic bay. In other words, an hour's ride across the wild waves in a small ferry with a diesel engine roaring with exhaustion and the suitcases getting wet at the prow cannot be avoided. And only then is it at last possible to admire the smooth spurs of the so-called Lion Mountains, accounting for the country's name in Spanish. It was a long time since that not the British, who came here later, but sailors from the Iberian Peninsula frequented these shores.

Lions, by the way, are also depicted on the emblem of this state, which borders on Guinea in the north and east and Liberia in the south-east. It should be added that Sierra Leone has an area of about 72 thousand km2 and a population of over 6 million. The "Lion Mountains" gained independence from Britain on April 27, 1961 and, ten years later, the country became a republic. Besides, while mentioning the mountains, we must take into account that there are not particularly high peaks here. The country's highest point is considered to be Bintumani (Loma-Mansa) mountain at 1948 meters. On this picturesque peak, it is, of course, cool but, overall, Sierra Leone has a sub-equatorial climate. The rivers that cut through the red tropical soil are short but very full and are navigable in their lower reaches. A large part of the country consists of tall-grass savanna that replaced the jungles cut down back in colonial times.

...As exhausting as is the traveller's route to Freetown (moving from one means of transport to another), windy and long, figuratively, has been the path of many centuries taken by the archaic and God-forsaken land of Sierra Leone out of the Middle Ages into the modern world. Before I left Moscow, this country's Ambassador in Russia (previously an active participant in the national liberation movement) John Sahr Yambasu, being an excellent story-teller, described, in a few brilliant and telling phrases during a friendly talk, a few of the main chapters in his Homeland's difficult history: "Sierra Leone is populated by twenty different tribes, the biggest being the Fulbe and the Mende, who arrived in the country in mediaeval times and formed the first feudal states. The first Europeans arrived here at about the same time. These were the Portuguese, who set up small manufactories on the coast in the 16th century. Yet all this was just the prologue to the emergence of the "explosive mixture" of problems brought by the further expansion by enterprising Old World businessmen and soldiers, armed to the teeth."

Indeed, the Portuguese traders were followed to Sierra Leone by Spanish and British slave-traders, who caused much evil. By the end of the18th century, however, as reference materials on the history of this exotic land testify, Britain started importing into the region freed slaves who had previously worked on the plantations of faraway Jamaica. It was this unusual contingent who, by the way, founded the country's future capital ‒ Freetown. In time, this town, the trade and industrial centre and the lively port became the main links in the uneasy process of formation of a national awareness, drivers of combined efforts by the patriotic forces of Sierra Leone for liberation from the foreign yoke.

The results of the long battle waged by the people of Sierra Leone for their independence are manifested in what have now become quite strong national foundations and institutions. The head of state is the President, elected for a term of 5 years. He is also the head of the government. The legislative body is a single-chamber parliament. On the administrative territorial plane, the country is divided into four regions - three provinces and the Western Region. In Sierra Leone there is an actual multi-party system and a constitutionally open political struggle is waged. There is a legal (unarmed) opposition, independent media and other basic attributes of democracy. Coming to an end within the big judicial and investigatory complex, built and equipped with UN assistance in the centre of Freetown, are the many years of investigation and examination of cases involving war criminals who ran rampant here during the civil war years; the sentences handed down are being enforced. In all this, the people of Sierra Leone, it should be said, also see one of the guarantees of the country's future immunity to international scams and crimes against humanity.

Unfortunately, however, the political stability within Sierra Leone is not duplicated in the rest of the region as a whole. In 2011, for instance, Cote d'Ivoire saw a power transfer conflict. In oil-bearing Nigeria, the Boko Haram radical group is expelling Christians from the north of the country "by fire and sword", whereas separatists from the Movement for the Emancipation of the Niger Delta disrupt the inflow of investment into the fuel and energy complex. Niger and Burkina Faso are in the throes of a Tuareg nomad uprising that is disrupting the entire Sahel. In fact, examples do not have to be sought far afield when, right next to Sierra Leone, in Mali and Guinea-Bissau, there have been military coups! Under these conditions, the administration of the "Country of Lions" has to pursue its sovereign course, not letting go the helm of state even for a second, through the stormy waters of regional politics. Yet even this is not enough. At the same time, the country's socio-economic rise has to be accelerated as much as possible. And, it should be noted, the search for large quantities of oil are now the priority here.

RUSSIAN OILMEN WELCOMED

The LUKOIL Overseas delegation at the branch opening ceremony in Freetown on April 5, 2012 was headed by Vice-President for geological exploration Anatoly Katoshin and Director for offshore projects Rim Bagmanov. The event was attended by the head of the Sierra Leone presidential administration (de facto Prime Minister) Kaifala Marah, Minister of Justice and Prosecutor General Franklyn Bai Kargbo, Minister for Industry and Trade Richard Konteh, and head of the Minerals Agency Cabineh Koroma. Others who attended included the Sierra Leone Ambassador to the Russian Federation mentioned above, John Sahr Yambasu, Honorary Consul of Russia in Sierra Leone Husein Basma and other officials, as well as representatives of the partner company Oranto Petroleum (Nigeria) and a number of service organizations.

The event consisted of two parts - ceremonial "registration" of the LUKOIL office and a reception in a marquee at the city's best hotel - Country Lodge. And beyond the scope of these planned events, several personal, including spontaneous meetings took place at various Freetown addresses, which were a pleasant surprise and, at the same time, useful for the members of the LUKOIL Overseas delegation. Best wishes for the debutante Russian investor in Sierra Leone were expressed by the Republic's President Ernest Bai Koroma and first lady Sia Nyama Koroma. As for the author of these lines, I recall a dialogue with colleagues from leading media of the country: the newspaper Awoko ("News"), Standard Times, New Citizen and the national TV channel SLBC. I was also delighted by the active coverage of our events by the local correspondents from the world information agencies Reuters, Associated Press, France Press and Xinhua. Here is what Alexander Bregadze, Russia's Ambassador to Guinea and Sierra Leone, told me briefly just before the opening of the office: "It is a very important and joyful event. I am truly delighted for you. Now Russia will be much better known in both the countries where I am accredited. Our big business has so far been known mainly in the bauxite sector and the mining industry as a whole, but is now markedly expanding the range of its activities. What a symbolic coincidence: on the eve of LUKOIL's Sierra Leone housewarming, another promising project, also connected with the ocean and its resources, was also launched in Freetown. Construction began of a sea fishing school with Russia's help".

Indeed, in consideration of the experience accumulated in Soviet years of successful co-operation between Russian and Sierra Leone sailors and fishermen, the country's authorities decided to renew partnership relations with the Kremlin in this sphere. So young Africans will be taught the art of fishing by experts from Russia. By financing this branch educational project to the tune of $1.5 million through the international organisation UNIDO, Moscow is making a weighty contribution to fulfilment of the strategic tasks of assisting West Africa under UN auspices. It is also a pleasure to note that the fishing industry, which Sierra Leone is providing with personnel with the help of our sailors, is directly related to resolving a pressing and acute issue for the Black Continent - that of foodstuffs.

Besides, without diverging into adjacent spheres of Russia's presence in Sierra Leone, we now need to take a look at the shelf upstream project for the sake of which LUKOIL actually came to this exotic country. And, at the same time, to view the main events currently taking place in the local hydrocarbon sector.

TIME TO DRILL

The main task of the new LUKOIL Overseas operating office, which was discussed directly, is to manage a project in which both Moscow and Freetown lay great hopes. This is geological exploration and development of the SL-5-11 deepwater block in the country's oil-bearing waters. LUKOIL Overseas joined the project in July 2011, not only as the biggest shareholder in this investment programme with a 49% stake but also as the operator. The other SL-5-11 participants are Nigeria's Oranto (30%) and the U.S. Vanco (21%). The block is over 4 thousand km2 in area. It is located on a continental incline and ocean shelf at a depth of from 100 to roughly 3300 m, 100 km from the nearest town, Bonthe. 2D and 3D seismic studies have been carried out on the contract sector over an area of 1500 square kilometers, revealing several promising structures. The block is attached to the Liberian geological basin, where a number of oil and gas discoveries have been made in recent years.

"For our part, we have provided everything needed for increasing the rhythm and scale of this work constantly and, most important, without hindrance", the above-mentioned Sierra Leone Minister of Justice Franklyn Bai Kargbo told the author at the Country Lodge reception. "I do not want to offend our friends and neighbours in the region, but it was specifically in Freetown that the most liberal and favourable industrial legislation in West Africa for investors was developed and put into effect. In addition, it is not encumbered by any fine-spun attachments, far-reaching conditions or reservations that might potentially make our shelf less attractive for foreign business."

A model contract has been signed for the project for exploration and development of the block, covering a period of 30 years. The program for geological exploration work includes re-interpretation of the seismic maps obtained earlier, electrical exploration and drilling of one exploratory well by August 2013.

"As for the volume of investment", LUKOIL Overseas Vice-President Anatoly Katoshin noted at the branch opening ceremony, "they amount to about $100 million. The direction and volume of capital investments at the next stage of geological exploration will, of course, depend on the results of the drilling. In addition, the contract envisages substantial social obligations. In particular, a payment of $10 million for sponsorship and charitable programmes, as well as contributions for training and further training of local personnel".

At the same time, the situation surrounding block SL-5-11 is heating up in the professional sense of the word. Pushing one another to be more active, investors are speeding up drilling work and are trying to read between the few telegraph agency short lines concerning the successes of neighbours on the Sierra Leone shelf. In terms of discovery statistics, for instance, the U.S. company Anadarko Petroleum has pulled ahead. In March this year, its drilling vessel Discoverer Spirit, leased from the service giant Transocean, distinguished itself. The Jupiter-1 well on the SL-07b-11 block (literally only 500 meters from the LUKOIL, Vanco and Oranto block) entered a 30-meter layer of oil-bearing sand. Though not so huge, this collector, discovered at a depth of 6465 meters (the sea water being 2199 meters deep), does, even so, confirm in general that Anadarko's efforts are in the right direction, meaning the Venus-B1 and Mercury-1 wells, which also proved oil-bearing. "This region evidently needs further study", says Bob Daniels, head of the global geological exploration service at Anadarko, whose partners on the block are the Spanish company Repsol and the Anglo-Irish Tullow.

In a word, the Russian oilmen in Sierra Leone definitely have a good chance. On the global map of LUKOIL presence, to which many little flags have been added in recent years, an entire region of corporate presence in Africa has appeared, consisting of 5 synergistically interlinked projects in Ghana, Cote d'Ivoire and now in Sierra Leone, too. We have here considerable financial, technological and, finally, personnel resources of the Russians and, on the other hand, the good hospitality of the owners. Moreover, the Sierra Leone lion is far from savage in its endeavors. The qualitative leap currently being attempted has nothing to do with a bloody hunt for "younger brothers". It is rather a hard-won leap out of poverty towards stable development and prosperity, relying, moreover, both on its own resources and on investment assistance from friends and partners.



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