At the beginning of 2011, the supply-demand balance in the global oil market had tightened considerably, thanks to growing consumption in emerging economies and limited growth in non-OPEC supply. The onset of civil war in Libya and subsequent disruptions to the country’s 1.5 million barrels per day of oil exports sparked a huge rally in the prices of Brent and West Texas Intermediate crude oil.

OPEC’s response to this lost supply is equally revealing. Although some members balked at boosting their oil output, their reluctance was pure theater: Saudi Arabia’s oil fields account for more than 75 percent of OPEC’s roughly 4 million barrels per day of spare oil production. Ironically, whenever Saudi Arabia ramps up taps its capacity to balance the global oil market, the price of crude oil tends to increase because investors then worry about OPEC’s ability to respond to future supply shocks.

Plus, Saudi Arabia’s oil isn’t an exact replacement for Libya’s oil exports. Whereas Libya produces primarily light, sweet crude oil that’s easy to refine into gasoline or diesel, Saudi Arabia’s spare production yields heavy, sour crude oil that costs more to refine.

Although supply-side analysts have focused primarily on Libya’s lost oil output, long-term investors should focus on potential production growth from deepwater fields off the coast of West Africa. This region is home to some of the largest and most prolific oil and gas fields discovered over the past two decades.

In 2010 the West African nations of Nigeria (2.5 million barrels of oil per day) and Angola (1.85 million barrels per day) were the continent’s leading oil producers. Ghana, on the other hand, produced only 500 barrels of oil per day last year.

But the gap between Ghana and its peers should narrow in coming years. Two adjacent exploratory blocks offshore Ghana–the Tano and West Cape Three Points–have yielded significant oil and gas discoveries in recent years. These fields are located in 3,500- to 6,000-feet deep waters located roughly 60 kilometers (37 miles) offshore Ghana. Three publicly traded foreign companies hold significant acreage in this region: US independent producer Anadarko Petroleum Corp (NYSE: APC), UK-based Tullow Oil (LSE: TLW, OTC: TUWOY) and newly listed Kosmos Energy (NYSE: KOS).

The first major deepwater field in Ghana to enter production, Jubilee yielded its first commercial quantities of oil in December 2010, 42 months after its initial discovery in 2007. Given the cost and complexity of deepwater fields, Jubilee’s development progressed at a rapid pace; oftentimes, seven years passes between discovery and first oil. By the end of 2010, production from Jubilee had ramped up to about 55,000 barrels of oil per day and was expected to reach 120,000 barrels of oil per day by this summer. 

The partners in the Jubilee oilfield include Tullow Oil (34.7 percent stake), Anadarko Petroleum (23.49 percent), Kosmos Energy (23.49 percent), Ghana National Petroleum Corp (13.75 percent) and two smaller players with a combined working interest of less than 5 percent. The partners will develop the play in a series of phases over the next few years. For the most part, the next phases of development will involve drilling infill wells, or wells drilled within the boundaries of a producing oil field.

Although none of the partners has offered concrete, long-term production plans for Jubilee, the field’s total proved reserves amount to more than 600 million barrels of oil. This estimate will almost certainly increase as the partners continue to drill; it’s not far-fetched to suggest that the field could ultimately produce in excess of 500 million barrels of oil per day.

Jubilee isn’t the only discovery offshore Ghana. The aforementioned partners also announced the discovery of the Tweneboa and Mahogany Deep oilfields in the same region. Although appraisal drilling is still underway in these new finds, initial results are encouraging and the fields will likely produce first oil in the next few years.

Better still, the majority of the discoveries offshore Ghana produce light, sweet crude oil that’s of slightly higher quality than Brent crude oil and fetches a premium price.

These finds also have implications that extend beyond Ghana’s borders. Similar geologic features extend around the coast of Africa to other nations, including the Ivory Coast, Liberia and Sierra Leone. Producers have announced a series of important oil discoveries along this 1,000-kilometer (600-mile) trend, including the Montserrado field offshore Liberia and the Venus, Jupiter, and Mercury fields offshore Sierra Leone. Operators are drilling a number of exploratory and appraisal wells in these plays, which should yield more discoveries.

Although West Africa is home to some of the world’s largest offshore oil discoveries, thinking small has paid off for readers of The Energy Strategist. Jubilee and other massive fields may attract the most media attention, but producers also uncover a host of smaller oil and gas fields.

Integrated oil and gas giants such as ExxonMobil Corp (NYSE: XOM) and Chevron Corp (NYSE: CVX) often pass up these smaller discoveries because they won’t make a meaningful contribution to the company’s production levels and earnings. That’s not to suggest that these smaller fields are poorer quality or unprofitable to produce; by virtue of their scale, the Super Oils prefer to pursue game-changing plays.

One of our biggest recent winners in The Energy Strategist is a UK-listed exploration and production name that bought a series of smaller plays offshore Nigeria that were discovered by major international oil companies. By bringing these smaller projects online, this firm has built a growing base of profitable oil production.

In May 2011, management reaffirmed its 2011 net oil production guidance of 40,000 barrels of oil equivalent per day. Much of this output will come from two plays offshore southeast Nigeria, the oil-producing Okoro and Ebok fields.

And the company is now expanding outside Nigeria into a total of 11 African countries. High-potential plays include blocks offshore Kenya, Madagascar and Tanzania, some of which the company is operating and some of which it has farmed out to other producers to reduce the capital needed to fund drilling. To learn more about this stock and our latest take on its growth prospects, sign up for a free trial of The Energy Strategist.

For aggressive investors with the stomach for speculative fare, my colleague Yiannis Mostrous and I recently uncovered a small-cap Canadian oil producer that continues to benefit from growing production as it brings a handful of small oil fields online in Egypt. The stock pulled back earlier amid fears that the ouster of former President Hosni Mubarak earlier would interrupt oil and gas production. Those fears have yet to be realized, and the stock has plenty of room for upside once oil prices surge in the back half of the year.

Readers interested in learning more about our recent visit to Beirut on a fact-finding mission can check out our free blog. For those of you interested in learning about the Canadian energy stock we recently, check out Cocktail Stocks, a service that highlights our favorite stock of the month for a mere $5 per issue.

The next issue of The Energy Strategist will also include my update outlook for oil producers Middle East and Africa. Don’t miss it.