A Potential Oil Sands Boom You've Never Heard Of
By Chris Mayer, editor, Capital & Crisis
June 14, 2008

There is a map of the world on my office wall. What I like about this map is that the mapmaker paid particular attention to getting the scale right.

That means Africa gets its proper gigantic sizing. It is truly a massive landmass.

It's also fitting that it sits close to the center, because Africa is a big part of the future of natural resource exploration and production. In some sense, it's retaking its historical preeminence. For instance, consider the former rich trading cities in the East.

Zanzibar, Dar es Salaam, Mombasa, Mogadishu, Mumbai, Mangalore… all trading cities along the fabled rim of the Indian Ocean. These east African trading cities thrived between the 12th and 18th centuries, with ships sailing in and out on monsoon winds.

Africa had good harbors and plentiful fish and lots to trade with India and Arabia. Ties between India and Africa, especially, strengthened under the common influence of Islam and the Portuguese. (Portugal colonized both Goa and Africa's coast.) Africa is also home to a large population of ethnic Indians, which helps bridge trade further. One of Africa's better known industrialists – Manu Chandaria – was born in Kenya, but his parents are from the Indian state of Gujarat.

These historical ties and those old trade routes are reviving once again. In the spring, Delhi hosted the first Indian-African summit. Trade between India and Africa tops $25 billion per year. Nigeria, for example, accounts for 10% of India's crude oil imports. But China's trade with Africa is a lot more – $55 billion annually. The reason for this boom in trade? A hunger for the natural resources of Africa.

Africa increasingly is right in the middle of the global quest for natural resources. It has the highest ratio of light and sweet crude in the world – the best-quality stuff you can find. And most of its oil – some 83% – comes from large fields that produce at least 100 million barrels per day. Meaningful amounts of premium oil in large fields explains why Africa attracts so much investment. Between 2002-2006, the big oil companies tripled their spending in Africa.

The recent discovery of oil sands in the Congo by Eni, a big Italian oil group, lends more credence to the idea of Africa as the future of global oil supply. Eni hasn't said how much resource its vast acreage might hold. But the Financial Times reports early samples suggest, "The area as a whole could hold more oil than Eni's entire reserves of 7 billion barrels of oil equivalent." That would put Eni's resource on par with the huge Kashagan field in Kazakhstan. Eni potentially doubled its oil reserves with this one African find.

Right now, Africa produces only about 12% of the world's oil output. By 2012, that could be 30%. No wonder, then, it has become such a competitive battleground for the oil companies. In a recent auction, India's state oil company bid $321 million for an Angolan oil block. A Chinese oil giant bid $725 million. Guess who won?

It's not just about oil, either. Africa holds tremendous amounts of natural gas, minerals, and natural resources of all kinds. Much of it is in places where it's easy to do business. But there is often a fragile social fabric, which seems ever on the brink of a civil war or a coup or worse.

In Niger, for example, you will find some of the world's largest deposits of uranium. Niger plans to double its output over the next several years.

Companies from all over the world – Australia, Canada, China, India, and France – scramble to lock down claims. But the uranium deposits lie in the ancestral home of the nomadic Tuareg. The Blue Men of the Desert (so-called due to the color of their favored indigo dyes) return to old ceremonial grounds to find red flags marking uranium deposits. The result is predictable – battles between the Niger army and Tuareg fighters, and bloodshed.

Yet the rewards dangling before the world's eyes are so great. Many companies will walk the edge of that precipice for a shot at glory. A longtime holding in my Capital & Crisis advisory, Canadian Natural Resources has a mix of West African oil properties that could be significant. Another longtime holding, electrical infrastructure specialist ABB Ltd, has a big power project in Namibia and a growing presence in Africa.

Betting on Western companies that have this sort of backdoor exposure to Africa is my preferred modus operandi.

It's far safer, for one thing. But I wouldn't mind investing in more of a pure play if I could find a company that offers enough safety and enough upside. In my Mayer's Special Situations letter, we recently doubled our money in Vaalco Energy, a small West African oil explorer and producer, in about eight months. So there are success stories here.

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Ryszard Kapuscinski, the late journalist, once wrote that Africa was too large to describe. Africa was "a veritable ocean, a separate planet, a varied, immensely rich cosmos." (The Heat of the Serengeti Plain, 1962) "Only with the greatest simplification," he wrote, "can we say 'Africa.' In reality, except as a geographic appellation, Africa does not exist."

I think the same holds true today. But one generalization is safe to make: Africa is in the thick of the race for more natural resources.

Good investing,

Editor's note: Chris Mayer is the editor of Capital & Crisis, an investment advisory we read religiously at DailyWealth. If you're an investor in agriculture, mining, energy, and infrastructure, Capital & Crisis will become some of your favorite monthly reading. Click here to learn about one of Chris' top ideas right now.