I have vowed never to use the overused phrase “˜Africa Rising’ ever again, having long been somewhat cautious of the integrity of the projected growth rates and prospects for inclusive prosperity as I wrote here. However, while there is a lot to be positive about regarding African economic development, the commodity-driven stellar growth narrative is now being subverted by the oil price collapse.
Using estimates produced by the World Bank, the falling oil price could hit African economies much harder than Ebola as investments and explorations are cut back, with the biggest producer Nigeria a major casualty. An oversupply of oil and weakening global demand along with rising US shale production has seen the oil price tank dramatically by more than half from around $100 per barrel in July 2014 to just $49 per barrel of the benchmark Brent Crude price on 25 January 2015. By November 2014, oil prices were decreasing for 5 months consecutively, and this is when alarm bells started. 2015 began with investment bank Goldman Sachs revising its oil price forecast, summarily triggering a further fall in oil prices.
Oil prices can be quite volatile due to the supply and demand in the market, but the price of $100 per barrel was thought to be artificially high by some such as Saudi Prince al-Waleed bin Talal, who says we will never see $100 per barrel ever again. At the same time, others are worried that should the Organization of the Petroleum Exporting Countries (Opec) not intervene and make a decision on production, we may see prices as extreme as $200 per barrel several years down the line.
The jury is out on what highs the oil price may scale again and how soon, but it is worth noting that historical price charts show the price may take several years to recover. Saudi Arabia has opted to protect its market share by not cutting back on production, and this has obviously further contributed to the price’s extreme and rapid fall.
The $100 per barrel witnessed in June 2014 became an optimistic benchmark with which most countries idealistically started planning for increased economic growth and public spending. Things are looking rather gloomier now. While the collapse is obviously good news for oil-importing companies who will see their energy costs lowered, it is potentially catastrophic for oil-exporting companies who will see further downward pressure on the currencies, as we have seen with the Nigerian naira, and spectacularly so with the Russian rouble, and further deterioration of current account deficits and inflation prospects.
It is also bad news for those with recent finds as companies cut back on their exploration and investment. Tullow Oil, a big player in East Africa, has written down $2.2bn as a direct result of the oil collapse. Goldman Sachs has said that almost $1trn worth of investments are at risk unless oil companies urgently restructure. According to analysts at Goldmans, a price of $70 is already too uneconomic for projects already approved.
How will this affect African countries which have been buoyed by increased interest from investors excited by the Africa Rising story and the potential for oil and gas markets in particular?
Audit and advisory firm PWC’s Oil and Gas review 2013 crowed that the oil and gas sector “is experiencing significant growth with East Africa emerging as a significant oil and gas province as a result of the large gas finds in Mozambique and Tanzania, and oil potential in Uganda and Kenya”. Other players include Namibia, Angola, South Africa, Ghana, Cote D’Ivoire, Nigeria, and Morocco.
According to PWC, in 2013 Africa supplied about 12% of the world’s oil with untapped reserves estimated at 8% of global proven reserves – “Africa produced nine million barrels of crude oil per day (bbl/d) in 2011. 81% of this oil production came from Nigeria, Libya, Algeria, Egypt and Angola in 2011 but political unrest in North Africa led to a loss of production of more than a million bbl/d.”
Nigeria is one of Africa’s major producers, but there is also interest in frontier states such as Namibia, Togo, Liberia and areas where activity has diminished such as Cí´te d’Ivoire and South Sudan. Other exciting developments highlighted by PWC have included the Jubilee field in Ghana which is thought to be the fastest ever deepwater development – it took just 24 months to start production.
However, even at the $100 barrel price oil and gas production in Africa would be extremely concentrated with the top five producers accounting for 87% of all production, according to Global Counsel. They see the higher price of oil as a potential drag on growth responsible for boosting revenues for exporters, but at the risk of “entrenching economic reliance on hydrocarbons”, and turning these states into “˜dependent producers’ and also impacting those African countries which are net importers of oil by making them “˜vulnerable consumers’.
I spoke to Matthew Duhan, adviser at Global Counsel, who says “for Africa’s oil and gas hopefuls – those with big investment plans in the energy sector which are not yet producing – the fall in the price of oil is a serious threat to their aspirations. Kenya, for example, needs to build new infrastructure to export future oil production, but ambitious plans to link this to Ugandan and South Sudanese oil fields will come under pressure.”
The political ramifications of project cancellation for oil and gas hopefuls is potentially damaging, for example, in Ghana (currently a minor oil producer hoping to expand production). According to Duhan, “expectations among the public and government of big revenues were already reflected in spending patterns. The result has been the return of the IMF, but elsewhere there may be political stability implications if high public expectations of future hydrocarbon wealth are disappointed.”
There may also be trouble ahead for Mozambique, which has relied on large inflows of foreign capital to cover the cost of importing gas production equipment. Duhan says “If export revenues do not eventually flow this [will leave] these economies very exposed and with large current account deficits … There are also risks for the East Africa offshore gas finds where despite much excitement few final investment decisions have been made. Proliferating gas production and export opportunities in the US, Australia and the Middle East has increased competition for investment dollars.”
PWC’s 2013 Shale Oil report indicated there would be increasing competition for African economies with other oil producers for the lucrative Asian markets with US shale oil production. This has been particularly bad news for Nigeria, which exported a third of its production to the US.
The fall in the oil price could also be problematic in Angola where the oil story and potential rent-seekers in the succession battle for the regime could significantly constrain plans to diversify the economy and further inhibit the distribution of oil revenues through a highly unequal society. The Wall Street Journal reports here that Angola has already had to start planning austerity measures. Human Rights Watch asked the Angolan government to account for an alleged US$32 billion of missing government funds thought to be linked to the state oil company, Sonangol, reported in December 2011 by the International Monetary Fund (IMF) “to have been spent or transferred from 2007 through 2010 without being properly documented in the budget. The sum is equivalent to one-quarter of the country’s Gross Domestic Product (GDP)”.
As if this weren’t bad enough, there are additional problems in African markets that will make the impact of the drop in the oil price harder to resolve. The falling oil price is likely to compound existing challenges in the oil and gas sector highlighted by PWC such as political interference, infrastructure lag, theft and other criminality, uncertainty and delays in passing laws, energy policies and regulations into law.
There were those such as Emerging Market Advisors who warned as early as February 2013 that the Africa Rising narrative was a story primarily driven by commodities and potentially, hubris. But African economies are more diversified than commonly thought, and there is an argument that the oil price collapse could free up capital for investment in other sectors in Africa, but this probably depends on the relative diversification of those economies and the vagaries of investor appetite as well as whether economic recovery takes hold in Europe.
The low oil price could also stimulate growth in Europe and divert capital from frontier markets to safer havens. It is probable that investors who want a piece of the Africa growth story will already be in other sectors. Those investors who are in oil and resources may do so because they want to invest in oil per se. It remains to be seen what the price will do next and how countries will amend their plans for growth and development – a roller coaster ride awaits in the oil and gas markets over 2015.