African producers feel pain of lower oil prices
About 14 countries on the continent produce oil, revenue from which accounts for most of their budgets. These include Nigeria, Angola, South Sudan and Gabon
African oil producers are early collateral damage in the dispute between major oil producers, as they scramble to re-adjust budgets tied to the price of crude.
A collapse in talks between Opec members and non-Opec members led by Russia earlier this month caused crude oil futures to fall to their lowest levels since 2014, with Brent falling below $30 per barrel.
About 14 countries in sub-Saharan Africa produce oil, which accounts for most of their annual export income. These include Nigeria, Angola, South Sudan and Gabon among others. Current national budgets are built around a dollar price in the $50 to $60 range for most of them.
Many producers were already hurting as the volume of crude sales fell in February, after major customer China drastically curtailed purchases as it struggled with the coronavirus outbreak that cut deep into energy consumption.
In early March, Bloomberg reported that about 70 per cent of April-loading cargoes from two of Africa’s largest producers Angola and Nigeria, had yet to find buyers.
Now, these orphan cargoes are going to have to compete with a flood of oil as major producers battle it out for market share.
“When the elephants fight, it’s the smaller producers that suffer,” says Kola Karim, chairman of Shoreline Group, an energy investment company in Lagos. “Because our income is based solely on the foreign exchange income from oil.”
Nigeria remained heavily dependent on oil for foreign income, even though it had opportunities to diversify. It has not even developed the technology to use gas produced from the oilfields, flaring it off into the atmosphere instead.
“We need to look to our gas sector,” Mr Karim says. “Gas would be a natural hedge against oil price fluctuations. If we were exporting gas, we would be in a dollar-earning position right now.”
Crude oil sales make up around 90 per cent of Nigeria’s foreign exchange earnings. In turn, the national budget is built around the barrel price of crude.
The latest budget published last December assumed production of 2.18 million barrels a day at a price of $57 a barrel. At 10.6 trillion naira (Dh127bn), this was the largest budget in the country’s history.
This will now have to be revised sharply downward. “There will be reduced revenue on the budget and it will mean cutting the size of the budget,” said Finance Minister Zainab Ahmed, according to Reuters.
This will also likely drive up government borrowing.
“It means Nigeria will face higher deficits,” says Usoro Essien, head of research at Vetiva Capital in Lagos. The administration of Muhammadu Buhari, President of Nigeria, had pledged to invest in the country’s decrepit infrastructure to kickstart the economy, but now the budget blowout will probably mean greater borrowing to meet commitments.
For Mr Buhari, the oil meltdown comes at a particularly inconvenient time. His administration has a lot riding on a $22.7 billion external loan package that narrowly passed through parliament in early March. The money is to be spent on crucial infrastructure projects such as electricity, road and rail network.
“The central bank is going to have to look at how it manages borrowing, because borrowing is a big part of the success of this project,” Mr Essien says.
Other countries are also feeling the pain. Opec’s smallest member, Equatorial Guinea, produces around 420,000 barrels a day which accounts for more than 90 per cent of the state’s budget. Last year it opened an investment drive, with 27 offshore exploration blocks put out to auction, with the intention of ramping up production.
These plans appear dead in the water for now. An investor conference in the capital, Malabo, scheduled for June, which was intended to get the process under way, has now been postponed.
Angola, Africa’s second-largest oil producer, is also in bad shape. The country owes $60bn in external debt, mostly to China. It was the pioneer of the "Angola model" that leveraged crude in return for soft loans from China.
“You know they have got to be getting nervous in Beijing about where things are going given that so much of their loan portfolio in Congo, Angola, South Sudan and others is oil-backed,” says Eric Olander, managing editor of the multimedia organisation China Africa Project in Beijing.
According to the US non-government organisation Natural Resource Governance Institute, China had issued at least $152bn in resource-backed loans over the past two decades, much of these in Africa.
“These deals, sometimes labelled as oil advances, often resemble pay-day loans,” says David Mihalyi, a senior economic analyst at NRGI. “They have short maturities, high interest rates and fees, and no commitments on how the money will be used. Countries should stay away from oil advances containing such harmful terms.”
Countries should stay away from oil advances containing harmful terms
David Mihalyi, senior economic analyst, NRGI
Even South Africa, which is not a crude producer, has not escaped the oil-shock carnage. Sasol, the industrial group that converts coal and gas to liquid fuel and one of the country’s flagship corporations, saw its stock suffer its worst week this month in the group’s 35-year-history as Opec+ failed to agree on either deeper, or even an extension, of production cuts.
Once a blue-chip company on the Johannesburg Stock Exchange whose shares traded at 470 rand (Dh100) a year ago, it has now plunged to mid-cap status with shares at only 44 rand each. On its worst day March 12, shares fell below 30 rand.
“The disruption in the global oil market, coupled with the ongoing impact of Covid-19 has significantly changed the outlook in just a few weeks,” said Fleetwood Grobler, executive vice president for Sasol's chemicals business.
Sasol is also struggling to meet payments for a $10bn loan for a vast chemical plant under construction in Louisiana, US. Most analysts believe Sasol needs an oil price of at least $50 a barrel to break even. With prices languishing in the $30 range, the company remains deep underwater.
Even the one glimmer of good news – that African motorists will see a fall in the price of fuel – may be blunted by the sharp decline in the value of local currencies against the dollars needed to pay for imports.
Most African energy producers including Nigeria and Angola import almost all of their refined petrol and diesel from abroad, says Chiedza Madzima, head of operation risks at Fitch Solutions in Cape Town.
However, any benefit gained from the import of cheaper fuel needs to be weighed against currency depreciation and reduced fuel levies, Ms Madzima says.
“Definitely Angola, Nigeria, Congo Brazzavile, Gabon and other oil exporters will see red with these super low oil prices.”
Updated: March 23, 2020 01:05 PM