Outlook on key oil and gas exporting countries

Outlook on key oil and gas exporting countries in sub-Saharan Africa

Covid-19 has had an unprecedented impact on the global economy and oil and gas sector. This is an extract from a review report released by Jamie Stewart from the Energy and Economic Growth (EEG) research programme focusing on the impact of Covid-19 on Angola, Nigeria and Mozambique, three of the key players in SSA oil and gas, as well as Ghana, a growing energy force, and Senegal, which discovered significant reserves in recent years.

Angola

Angola is Africa’s second-biggest oil exporter (after Nigeria). Oil accounts for 90% of the nation’s exports and a third of the nation’s GDP. As such, the current crisis has intensified calls for the country’s economy to be diversified.

The timing of the pandemic has been particularly problematic for Angola, with the country seeking to attract investors for a sweeping privatisation programme of state assets (“Propriv”), including energy assets like parts of Sonangol, but also a swathe of other interests like ports, banks and telecoms firms. The plan for 30% of Sonangol to be sold in an IPO in 2022, which was always optimistic, now seems highly unlikely.

In an interview, Sergio Pugliese, the Executive President for the African Energy Chamber, expressed his belief that political changes and industry reforms enacted since the election of President João Lourenço in 2017 have helped the country cope with the impact of Covid-19. It is true that Angola was winning plaudits (especially in comparison to Nigeria) for strong leadership and proactive measures, which were reviving an oil industry that had faced maturing fields and declining production.

However, even prior to Covid-19, and despite the post-Dos Santos anti-corruption drive, the country was in a precarious financial position, having been badly impacted by the 2015 drop in oil prices. Angola received a record $3.7 billion loan from the International Monetary Fund in 2019. It also owes billions to China and holds the largest single bilateral debt burden in sub-Saharan Africa, where it is the number three economy. Its debt-to-GDP ratio has climbed to the highest in around two decades (above 100%) and servicing its borrowings eats up $9 billion a year. GDP growth was -1.1% in 2019 and is expected to worsen to -2.3% in 2020.

As a result, in 2019, the World Bank doubled its support to Angola, with an additional $3.1 billion for projects, in line with the country’s privatisation and reform agenda. Further financial support has already been made available to help the government implement its National Contingency Plan (Covid-19 response).

New upstream projects announced in recent years (partly as a result of these changes) have now been delayed, with even lower-value “short-cycle” field projects pushed back. The full impact of Covid-19 on Angola was summed up in a Reuters article, which reported that, “The coronavirus pandemic has done in a handful of months what even a 27-year civil war did not: it has brought oil drilling to a halt in Angola.” All international energy majors operating in the country (Total, Chevron, ExxonMobil, BP and Eni) have halted production.

Nigeria

Nigeria, the largest economy and biggest oil exporter in the region, is expected to contract by -3.4%, mainly reflecting the large drop in oil prices and the impact of containment and mitigation measures on economic activity. Chatham House has reported on the ‘looming financial meltdown’ facing the country, with state-level debts piling up, revenues reduced and the percentage of the world’s poor in the country expected to increase from 15% to 30% by 2030.

A recent OPM paper (‘Briefing Note: COVID19 and the Nigerian oil and gas sector – impact on the Nigerian economy and key mitigation measures’) looked in some detail at Nigeria. That paper found that although the oil and gas industry represents a relatively modest percentage of the country’s total GDP, the Government’s ability to put together an annual budget, contribute to the provision of basic services from security to health and education, and to service foreign debt is heavily dependent on the revenue generated from the sector. As such, a drop in the price of crude to $30 from the budgeted $57 would roughly cut revenues in half, from $30 billion to $15 billion, with a further reduction of around $1 billion from Nigeria’s share of OPEC’s agreed production cuts. A new budget has been drawn up based on the reality of revenue reductions. Although the impact on sectors has not been disclosed, it is clear that the effects will be felt across the economy.

In terms of the oil industry, the Petroleum Industry Bill (PIB), which aims to increase efficiency and transparency and bring operations in line with international standards, has been delayed due to the crisis. Further, the crude price crash has delayed final investment decisions (FID) on a number of upstream projects, which is likely to result in lower production (and therefore lower revenues) over the next four-to-ten years.

Nigeria’s oil and gas sector has also been impacted by restrictions on travel, which vary by state. Maintenance and development operations have in some cases been delayed for months. In one instance oil workers were arrested for landing in the oil hub of Port Harcourt, which is under strict lockdown, despite possessing federal government permits allowing them to travel.

Mozambique

According to the latest IMF projections, real gross domestic product (GDP) in Mozambique is expected to increase by 2.2% this year, although Fitch Ratings reduced its forecast to 0.7% in June. This latest figure is much lower than the initially projected 5.5%, but still significantly better than many countries – both developed and developing – which are anticipating severe contractions. For Mozambique, the pandemic has knocked the recovery from two devastating tropical hurricanes in 2019.

Mozambique discovered huge gas reserves in 2010. It holds 100 trillion cubic feet of proved gas reserves, and is geographically well placed to serve demand in Asia. As such, prior to Covid-19 it was expected to become a major global LNG exporter.

Covid-19 has delayed upstream investment (although it should be noted that delays have occurred over the past ten years). The start of the Rovuma LNG project, one of Africa’s flagship projects, is likely to be delayed by a year, with its FID deferred. Additionally, ExxonMobil has already announced that it has indefinitely postponed the FID on its Area 4 gas megaproject.

However, the Mozambique LNG project, backed by a number of companies, is expected to progress and should come on stream before 2025. This is despite construction being halted in April due to an outbreak of Covid-19. At that time, 19 of the country’s 31 confirmed Covid-19 cases could be traced back to the project site in Afungi. In fact, the project was able to raise $15 billion in debt financing in the middle of Covid-19 – an ‘astonishing achievement’ according to a Standard Bank analyst.

Ghana

Ghana is a relatively new oil producer. In the three years prior to Covid-19, its oil industry doubled in size, helping to fuel annual GDP growth of at least 6.3%. This progress was helped by the country’s first offshore licensing round in 2018, which gained significant interest from international energy companies. This progress built on the long-debated Petroleum Bill of August 2016, which improved the regulatory environment and removed some of the major barriers.

Although Ghana does not rely on oil or gas to the same extent as Angola or Nigeria (gold is its biggest export and services count for around half of GDP), reduced output this year will have a significant impact on the economy. In its preliminary impact assessment, announced in April, Ghana’s Ministry of Finance anticipated incurring a total cost of $1.64 billion as a result of the outbreak of COVID-19, with around $1 billion of that resulting from reduced crude oil sales. Other costs identified included reduced import duties and other tax revenues, and the direct costs of the preparedness plan and the coronavirus alleviation program.

As a result of these costs, a request was made to parliament to amend the country’s petroleum revenue management act (PRMA) to allow for the withdrawal of funds from both the petroleum heritage funds and the Ghana stabilization fund. Further, the Ministry expected financing assistance from the World Bank and the International Monetary Fund, and planned to adjust expenditure on goods and services as well as capital expenditure to create fiscal space for the response.

With upstream projects delayed or cancelled, and the volatility of oil prices again brought to attention, there have been calls for diversification. On taking power in 2017, President Nana AkufoAddo identified planting for food and setting up factories as key policy areas to reduce the country’s dependence on imports. However, the government has achieved mixed success, with agriculture lagging the economic growth average while manufacturing has exceeded it, although not to the same extent as oil.

As a result of Covid-19, the country’s central bank in May revised its GDP growth expectation from 6.8% to between 2% and 2.5%.

Senegal

As well as more established producers, Covid-19 has also impacted the plans of countries which were in the process of developing natural resources when the pandemic hit. Between 2014 and 2017, reserves worth more than 1 billion barrels of oil and 40 trillion cubic feet of gas were found in Senegal (most of it is shared with Mauritania). As such, Senegal began 2020 with ambitious plans to become an energy powerhouse. The national oil company (NOC), PETROSEN, launched its first offshore licensing round, focused on the Mauritania, Senegal, Gambia, Guinea-Bissau and Guinea Conakry basin (MSGBC), in January.

However, Covid-19 has resulted in delays to the country’s two mega offshore oil and gas projects. The Senegal-Mauritania Greater Tortue Ahmeyim LNG megaproject has been delayed, with first gas now expected in 2023. Also, in March the developer of the Sangomar project failed to secure debt, citing adverse market conditions and a plunge in global oil prices amid the pandemic. The project requires oil prices of at least $55 to be profitable.

The government announced in April the deployment of an economic and social resilience plan worth $1.68 billion, in order to support the country’s economy during the crisis. In a recent interview with the Financial Times, President Macky Sall warned that the best case scenario is for GDP growth to drop from the forecast 6.5% to 1%. If the pandemic continues he expects the country to enter recession.

Access the full report at www.energyeconomicgrowth.org