Human

How crude oil surplus is affecting Africa

 By Nicholas Newman

Rising inventories of oil are just one response to the oil glut. It is a common sight around Africa’s coasts to see two-million-barrel oil-tankers lie at anchor for months at a time. Oil traders have been parking surplus oil in South Africa’s Saldanha Oil Terminal, the largest facility of its kind in the world, with a combined capacity of 45 million barrels of oil

Despite OPEC, Russia and other oil exporters agreeing to cut output by 1.8 million barrels a day for the first half of 2017, the oil price in May has once again fallen to just under $46 a barrel, before recovering slightly to $48. Persistently high oil stockpiles, a resurgence of shale oil output and fears of weakness in China’s manufacturing sector together with a plateauing of demand have revived doubts over a sustained price recovery. Indeed Brent for delivery in December 2020 reflects expectations of a continuing oil surplus at just above $50 a barrel which is problematical not only for “ Big Oil“ but also for oil exporters, long accustomed to high and growing revenues from oil production.

Nevertheless, African OPEC members, with the exception of Nigeria, agreed to cut oil production in order to re-balance supply with demand and raise prices. For example, Algeria agreed to cut production from 1.089 MMbbl/d (million barrels of oil per day) to 1.039 MMbbl/d for the first half of 2017. Likewise, Angola agreed on a reduction from 1.7 million barrels a day to around 1 .2 million b/d for the first half of this year in compliance with OPEC’s Monthly Oil Market Report. Reduced prices and production have hit Africa’s largest oil exporters particularly badly. According to Fitch’s 2017 oil break-even calculations, Nigeria requires $139 a barrel to balance its budget, Angola $82 and Gabon $66 a barrel.

Inside Oil Tankers - Documentary Films

Government

For African oil producing nations, low oil prices have badly depressed government revenues. For example, crude oil sales contribute up to 70 percent of Nigeria’s government budget Nigeria’s budget deficit doubled to $11 billion in 2016, thus jeopardizing long-planned infrastructure and power projects, which may now be financed by a $9 billion loan from assorted lenders including the World Bank, the African Development Bank and The Export-Import Bank of China. Other measures ranging from economic reforms and letting the Naira float are seen as too little and too late.

In Angola, where oil accounts for 95 percent of government revenues, the government cut the 2016-2017 budget from $30 billion to just $24 billion. Public investment was reduced by 53 percent with waste collection services suffering a near 70 percent cut in spending, which has resulted in a sharp rise in communicable diseases such as, yellow fever, diarrhea, malaria and cholera. In effect these spending cuts have hit what were ambitious economic development plans, as well as health and social spending.

Cape Town

Africa’s consumers

Low oil prices have benefited African consumers in general and car owners and drivers, bus, truck and fleet owners, oil gen-set operators as well as distribution companies among others. Oil importing countries like, for example South Africa, have saved precious dollar foreign exchange reserves on oil imports and benefited from a reduced fuel subsidy bill. However, at the same time South Africa’s industry and service sector has found lower market demand in traditional markets such as Angola and Nigeria, adding to the country’s economic problems.

Slow-down in oil exploration and development

In response to lower oil prices, more than $1 trillion worldwide has been cut from investment in oil and gas development projects planned through the rest of the decade, according to Wood Mackenzie’s research. “Also, what is affecting investment strategies is the prospect of peak demand in the next decade,” says Paul Eardley-Taylor, Oil & Gas Coverage, Standard Bank, since world demand is changing as gas replaces oil in power generation and electric vehicles compete with petrol-fueled cars. “Across Africa, we have seen the majors slow down on projects” says Eardley-Taylor. In West Africa offshore projects that made economic sense at $100 a barrel are uneconomic when oil is below $50 a barrel, have been postponed. For instance, Shell has postponed its final investment decision on the offshore Bonga South West project in Nigeria, which it is estimated will require $12 billion of spending. Total, for its part, has delayed a final investment decision on Zinia 2, an offshore satellite of Angola’s Pazflor field.

Oslo-based consulting firm Rystad Energy, estimates that capital spending on East African oil and gas projects fell from $4.6 billion in 2012 to just $2.5 billion in 2015. Whilst Tullow Oil, the UK-listed but Africa-focused exploration company has sold part of its Ugandan interests to Total, and is increasingly turning its attention to Jamaica, Guyana, and Uruguay.

Finding The Prize: A story of oil exploration and discovery

Across Africa, oil companies have cut costs, postponed projects, and reduced investment. This is not surprising says Eardley-Taylor, “given that oil companies with African projects are finding it difficult to raise capital at a time when the markets are more interested in fracking in the U.S.” Africa was home to nine of the top 20 oil and gas discoveries in 2015 and to six major discoveries in the first half of 2016. Africa is largely unexplored and, given recent exploration success, remains a valuable prospect. This episode of low oil prices has at least one silver lining. As Eardley-Taylor points out, African governments “are beginning to understand how tough things are for oil investors.” This is a valuable lesson to keep in mind for the future.

SEE MORE: Africa you never expected by Robin Wylie

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about the author
Nicholas Newman
Freelance energy journalist and copywriter who regularly writes for AFRELEC, Economist, Energy World, EER, Petroleum Review, PGJ, E&P, Oil Review Africa, Oil Review Middle East. Shale Gas Guide. https://nicholasnewman.contently.com/