Deutsche Bank Securities
60 Wall St.
New York, N.Y. 10005
(Tel) (212) 250 2500

HERE OUR OILS TEAM EXAMINES the growing challenges and future potential off the coast of West Africa's growing oil powerhouse -- Angola.

The United States' interest in the region's success is growing parallel to that of the majors. With continued political pressure to lessen dependence on the pariah nations of the Middle East and diversify sources of crude imports, West Africa is an increasingly attractive source.

Never mind that these nations' governments aren't exactly squeaky clean. As far as politics is concerned, at least it's not the Middle East. U.S. imports from West Africa have reached 1.8 million barrels per day, making up nearly 20% of U.S. imports, and accounting for over 40% of the source countries' production.

Given both the technical challenges of West African development (primarily deepwater) and the inherent geopolitical instability (ask any of Shell's or Chevron's employees in the Nigeria Delta region), is West Africa worth the risk?

The region, and Angola in particular, is much more important to international companies, particularly the majors, than purely a look at its volumes would indicate.

Despite slowing from the frantic pace of discovery in the late 1990s and early 2000s, Angolan deepwater remains one of the hottest plays on the planet.

Angolan production accounts for 16% of projected global production growth over the next five years, and 26% of growth in non-OPEC nations. West Africa is of particular importance to the integrated majors, which dominate the region. Nearly a quarter of the majors' capital expenditure is spent in Africa, and only the deepwater Gulf of Mexico exploration has created more value over the past 10 years.

Pride International and Transocean are key winners among services. Development in deepwater Angola will continue to play a major role in the integrateds' portfolios…and we believe they should be exploring more.

Risks are growing -- deepwater costs, fiscal terms in a seller's market, rig availability and new challengers (namely China). Yet the region is still greatly underexplored when compared to the Gulf of Mexico. The government is accommodating, and the ultra-deepwater and reissuance of previously held deepwater blocks should drive continued exploration success. Look for established players to continue deepwater dominance.

We see a theme of more relative attractiveness for integrated oil stocks through 2006. Positions that have high barriers of entry, where returns will exceed cost of capital, are key to this. Oils can no longer rely on rising commodity prices to make them look good.

--Paul Sankey, research analyst