Cameroon ramping up oil production as prices decrease

For the first time, since April of this year, the international price of oil has dipped below $50 a barrel. This lower price environment, created by growth in U.S. output and Saudi Arabia's unwillingness to cut production, has forced many oil exporting countries to scale back production.

For the first time since 2002, the West-Central African country has increased oil production to over 100,000 barrels a day – a 17 percent increase over 2014 levels. What's more, the World Bank predicts Cameroon will produce more than 150,000 barrels a day next year, for a total of 57 million barrels in 2016.

It seems ,counterintuitive that, such a small producer would increase production in a low-price environment. You would think the Cameroonian government would preserve its admittedly meager 200 million barrels of crude reserves for sale into a more favorable market. And while that logic is sound, the circumstances are forcing Cameroon to act against its own long-term interests.

The late 1980's were a boom time for Cameroon, whose producers increased daily output to more than 180,000 barrels a day. But technical setbacks and maturing fields forced Cameroon to cut production, leading to historically low output of 75,000 barrels a day in the late 2000's.

In the high-price environment of the late 2000's and early 2010's, Cameroon saw an opportunity to increase production and invested heavily in the development of new fields, attracting foreign capital and expertise from Russia's Lukoil, China's Addax, and France's Total, while opening up concessions in Dissoni, Padouk, Barombi and other fields as recently as last year. But the 2014 price drop caught Cameroon's producers by surprise, and now Cameroon is poised to produce at historic highs while the price of oil plummets to historic lows.

Cameroon and its oil producers seem to have only two options: they can heed the long-term incentive by reducing output and preserving mature fields, but this means foregoing returns on massive investments and sacrificing government income, or they can heed the short-term incentive and increase production to make up for the lower oil prices. And while Cameroon seems to have chosen the latter option, increasing production by 17 percent since 2014, it's not enough to make up for the millions of dollars in lost revenue.

Fortunately, Cameroon and its oil producers do have other options. Government and private producers have joined forces to expand crude refining capacity at the country's only oil refinery in Sonara. The facility currently processes 60,000 barrels a day, up from 45,000 last year, with plans to increase capacity to 100,000 barrels a day by 2017.

The Cameroonian government is also working with Russian engineering firm Rusgaz to open a second refinery in the southern city of Kribi, potentially doubling Cameroon's refining capacity. With those facilities fully operational, Cameroon will have the capacity to refine excess crude from neighbors like Angola and Nigeria, exporting it to end-markets and shifting Cameroon's position along the value chain.

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Another option has also revealed itself.

The discovery of 212 billion cubic meters of natural gas reserves in the Logbaba field has spurred Britain's Victoria Oil & Gas to open the Logbaba-Ndogpassi natural gas treatment plant. The plant now services 28 companies in and around Douala, Cameroon's economic capital. According to a source at Cameroon's state oil company, the National Society of Hydrocarbons (SNH), as first reported by McGraw Hill Financial, the SNH is now “focusing more on gas, and we see it as the future in the hydrocarbon industry. We don't have much offshore crude like Nigeria and Angola.”

Cameroon's challenge in a low price environment is to make up for the loss of crucial revenue. Both public and private producers feel the sting of working to produce more oil while watching profits shrink. And although the World Bank predicts Cameroon's crude oil production will increase to 180,000 barrels a day in 2016, they also predict maturing fields and technical challenges will cut production to 65,000 barrels a day by 2018.

If nobody in Cameroon finds new and provable reserves, the dips in price and production could make Cameroon unattractive to foreign investors.

Knowing that diminishing reserves and low prices present an unfavorable long-term outlook for the government's oil revenue, Cameroon and its foreign investors have committed to diversifying its energy sector.