By Godspower Ike,

Margaret Nongo-Okojokwu

The low oil price has brought in its wake a number of challenges for oil and gas producing countries in Africa. These countries are faced with declining foreign exchange reserves, dwindling revenue, rising expenditure, declining growth and risk of a number of oil companies defaulting on their loans with some in danger of going bankrupt. This article seeks to analyse the many challenges confronting these countries and oil companies that operate within these countries, while also exploring the solutions proffered by experts on how these countries and companies can escape from this quagmire.

The declining crude oil price has plunged oil producing countries in Africa into serious economic dilemma and it is also threatening the social and political fabric of these countries and the continent in general. These countries are faced with declining foreign exchange reserves, dwindling revenue, rising expenditure and declining growth.

Analysts are also unanimous in their views that the decline in oil price has thrown Africa’s oil and gas industry into dire straits, a situation exacerbated by factors such as uncertain regulation, corruption and the prospect of political and social instability.

According to analysts, it is a particular burden on those economies most reliant on the industry for revenue, and could have far-reaching socioeconomic results.

It is estimated that with almost 90 percent of African countries now exploring hydrocarbons, the global decline in oil prices would throw up extra hardship for those countries, especially as investors are averse to taking risks in the midst of the global turmoil.

Nevertheless, report stated that despite the fact that a number of African countries are already diversifying their economies, it is impossible for them to escape the global turmoil in markets and growing insecurity brought about by low oil prices.

Already, it is common knowledge that many currencies have performed badly against international currencies. Particularly, the South African rand plunged to its lowest level in the last 13 years, while the Zambian kwacha also fell to a record low price against the euro and the dollar.

Duncan Clarke, Chief Executive Officer of Global Pacific and Partners warned that with oil prices dropping by more than 50 percent, many African economies are in deep trouble.

He declared that the industry is under a global shock and all oil producing countries, as well as non-producing countries are going to witness less capital coming in for exploration into their countries. Clarke stated that projections in Africa that were done in the past were oversold.

According to him, there is still growth and opportunity in the continent, but only countries that adjust quickly will do best.

However, he said, “The market has adjusted to the crude oil prices overnight. The companies have taken a little bit longer but they have all adjusted on portfolios, on layoffs. Now it’s up to the governments.”

In the same vein, the International Energy Agency had said that African crude oil exports will fall by 600,000 b/d over the next six years as production from its biggest producers’ slips and rising regional refinery activity absorbs more domestic output, Africa will observe the steepest absolute decline by a major crude exporting region, with regional crude production set to decline by 400,000 b/d mainly due to fall in output in Nigeria, Algeria and Angola, according to the IEA’s Medium-Term Oil Market Report, as published by PLATTS Africa Energy Outlook, February 24th 2016.

In this report, the IEA said that West African oil producers are likely to have problems marketing their crudes over the next couple of years due to the existing global glut of sweet crude, which has made this region a new “swing producer.”

According to the report, the Dangote refinery project in Nigeria which is expected to start-up by 2021, will process Nigerian crudes and thus reduce the volumes for export. Crude runs are expected to reach 300,000 b/d in 2021 with the full 500,000 b/d nameplate capacity reached in subsequent years.

Algeria is expected to post the biggest loss in crude production in Africa and in OPEC over the six year forecast period because exploration and development of new Algerian oil fields has ground to a halt.

IEA said that Algeria’s oil production will fall by 170,000 b/d to 990,000 b/d in 2021 as a lack of investment pushes aging oil fields into decline.

Declining Nigerian, Angolan oil

The IEA said the oil price collapse was causing “particular pain” for Africa’s two largest oil producers Nigeria and Angola, as oil output is expected to slow down along with declining state revenues.

Nigeria’s oil production is expected to decline by 70,000 b/d by 2021 to 1.85 million b/d as investment slows in the country’s high-cost deepwater projects and “large-scale oil theft and pipeline sabotage in the Niger Delta continues unabated.”

Africa’s second largest producer Angola will see its crude production fall to 1.8 million b/d in 2021, a fall of 20,000 b/d over the six-year forecast period, according to the IEA.

The IEA said that Angola’s official 2 million b/d target looked unachievable even before the fall in oil prices due to technical problems besetting its deep water projects.

“The country’s aging offshore oil fields need continuous support from new and costly projects to offset steep declines and since output peaked in 2008, Luanda has struggled to stem the drop,” the report added.

West African Crudes under pressure

The report said that WAF oil producers like Nigeria and Angola may be forced to cut prices to sell barrels, with low prices, oversupply and high stocks projected to prevail until at least early-2017. There is currently a glut of WAF crude in the global market and a lot of these cargoes have been unsold leading to excess barrels being stored on tankers.

But the IEA said WAF producers have the geographical flexibility to sell oil east or west as demand requires. It also said that customers for African crude will remain relatively similar over the forecast period.

Europe is expected to remain the main demand outlet for WAF crude, but imports of African crude to OECD Europe are set to decline by 500,000 b/d accounting for 2.2 million b/d in 2021.

The IEA added, however, that if Libyan production rose, “incremental volumes are expected to be shipped to traditional European markets likely backing out similar light, sweet crudes from West Africa.”

By 2021, Chinese imports of African crudes are set to inch up by 200,000 b/d to about 1.5 million b/d with the bulk of these coming from Angola.



While corroborating this stand point, another report by Gulf Intelligence declared that the collapse of oil prices at the start of 2016 had comprehensively dashed hopes that a brief bounce in prices in mid-2015 heralded the beginning of the first uptick since June 2014.

According to the GI report, oil prices sank below $30 per barrel in mid-January – hitting a 12-year low, ensuring that governments and companies with oil revenues at the heart of their economic security will spend the rest of 2016 grappling with budget-crippling prices.

The report further stated that the United States’ decision to lift a four-decade ban on crude exports, bar the 500,000 barrels per day that is largely already exported to Canada, will fuel a change in African exporters’ routes this year.

The report explained that over a third, about 38 per cent of respondents to its survey, expect Africa’s dominant producers – Nigeria, Angola, Algeria, Egypt – to focus on local markets across the continent, which are backed by a population boom and up to six per cent economic growth.

It also added that Africa’s shift away from US markets could create more competition between African and Gulf producers for market share along the new Silk Road and wider Asia.

It, however, stated that Africa’s annual appetite for gasoil and gasoline is expected to

Climb by as much as eight per cent over the coming year, while demand for liquefied petroleum gas (LPG) hit double digits.

The report noted that Africa’s expanding home-grown energy supply will help satisfy some of the swelling demand.

But East Africa, it said, is elbowing its way under the spotlight and will change Africa’s energy map in 2016 – a move easily justified by its wealth of oil and gas assets. For example, Tanzania hopes to use its 55 trillion cubic feet (tcf) of natural gas reserves to become a LNG exporter by 2025, while Tullow and Canada’s Africa Oil have identified 600m barrels of oil reserves in Kenya’s South Lokichar basin.

PriceWaterHouse Coopers (PWC) in its latest oil and gas review, stated that the countries that have been most affected by the dramatic decrease in crude oil price are those that are highly dependent on oil exports. The countries that would be hardest hit, according to the report include Nigeria, Cameroon, Chad, Angola, Republic of Congo, DRC, Gabon and Ghana.

The report stated that the situation may require governments to implement austerity measures and develop realistic budgets based on a significantly lower oil price.

Particularly, the report said Angola’s economy will suffer from significantly lower oil prices, adding that the risks to the Angolan economy are not just limited to the implementation of austerity measures.

“A reduced budget could mean the government is not able to pay civil servant salaries and a reduction in the provision of social services. This could increase the risk of social instability– which makes its appearance as the third most likely factor to affect business,” the report noted.

In the case of Nigeria, PWC explained that the non-passage of the Petroleum Industry Bill (PIB), has had less of an impact on funding than expected as many companies have factored in the country’s risk.

According to the report, it would also appear that the risk is relativity high, and IOCs are divesting, while international financiers may also look at funding other capital projects and shift more investment into the ‘new frontier’ countries that have fledgling oil and gas industries. It projected that an estimated $50 billion has been lost in oil and gas capital investment in Nigeria.

There is also the risk of increasing non-performing loans in Nigerian commercial banks, heavy indebtedness of indigenous and international oil companies and high risk of default by indigenous companies that acquired the assets of oil majors a couple of months ago.

In the area of South Africa, the report said, “Investment in South Africa has stalled for another year as lawmakers work to approve amendments to the Mineral and Petroleum Resources Development Act (MPRDA). “Companies have put spending on hold until there is clarity on the Act. A new clause entitles the state to a 20 per cent free carry in exploration and production rights and an ‘uncapped’ further participation clause enables the state to acquire up to a further 80 per cent at an agreed price or under a production sharing agreement. This bill is now up for re-evaluation and is expected for release later in 2015.”

As a growing oil-producing state the Republic of Sudan was pumping 500,000 barrels-per-day prior to 2011. Since the partition both Khartoum and the Republic of South Sudan have both suffered growing economic difficulties.

Reports alleged that South Sudan was receiving the lowest price internationally for its oil. This is in part the result of a negotiated deal with the Republic of Sudan where additional costs were placed on the export of each barrel of oil in order to compensate Khartoum for its ownership of the pipelines and the potential damage done to its economy resulting from the partition.

According to Financial Times, war-torn South Sudan is receiving what traders say is arguably the lowest oil price in the world, $20-$25 a barrel, because of falling prices and unfavorable pipeline contracts. It claimed that South Sudanese revenues have now fallen to about $100 million a month, equal to an oil price of about $20.5 per barrel based on output of 160,000 barrels a day.

The report further stated that oil executives believe South Sudan could become an example of how falling oil prices can exacerbate political risk as countries are forced to slash budgets.

In addition, the report stated that the discovery of large-scale oil deposits in East Africa fuelled speculation centred upon phenomenal economic growth dependent on increased exports where prices would remain above $100 per barrel.

Moreover, BP Plc, in its latest annual Statistical Review of World Energy, wondered how energy companies in West Africa are coping with the ever-declining oil price.

Specifically, Panoro Energy ASA’s second quarter results for 2015 revealed a $34.13 million operating loss at the Earnings Before Interest and Tax (EBIT) level, which was a significant drop from the EBIT level operating loss of $2.19 million posted during the second quarter of 2014 and $1.93 million in the first quarter of 2015.

In spite of the losses however, the company reported a cash balance of $33.3 million as at June 30, compared to $36.1 million at March 31. Around $26 million of this cash was earmarked for the development of the Aje Cenomanian oil field, located in Nigeria, which is on schedule for first oil at the end of this year, according to Panoro’s second quarter 2015 results statement.

Also, Mart Resources Incorporated, which focuses its activities in the Niger Delta region of Nigeria, posted net loss of $24.30 million for the six month period ended June 30, 2015 compared to a net income of $13.07 million registered in the first half of 2014.

Net loss rose to $6.8 million in second quarter 2015 from $1.4 million in second quarter 2014 and one of the main reasons for this increase in loss was the lower oil price experienced by the oil and gas industry at the time, according to Mart Resources.

Seven Energy, which has two core areas of operation in the northwest and southeast Niger Delta, posted an operating loss of $13.68 million in first half 2015, which was $67.85 million less than its first half 2014 operating profit of $54.17 million.

Côte d’Ivoire and Ghana-focused oil and gas company Azonto Petroleum Limited reported a similar waning trend in its second quarter 2015 results, reporting that its cash at the end of the quarter stood at $2.57 million, compared to $3.64 million at the end of first quarter 2015 and $5 million at the end of fourth quarter 2014.

Azonto also recently sold its entire 35 per cent stake in Vioco Petroleum Limited, the operator of the CI-202 block offshore Côte d’Ivoire, to Vitol E&P Limited for $4 million, effectively ending its activities in the West African country. Azonto claimed that the increased cost growth experienced by the CI-202 Block’s Gazelle project in recent months was one of the reasons for the planned sale of its asset, as was the ‘increasingly challenging’ oil and gas sector environment.

Oando Energy Resources, which largely concentrates its activities onshore and offshore Nigeria, posted a loss of $50.35 million in the first half of 2015, while first half 2014 financial statement shows a $177.54 million loss, which highlights a significant year on year improvement.

Oando’s revenues more than tripled during this timeframe too, going from $62.60 million in first half 2014 to $222.65 million in first half 2015.

African Petroleum, which holds ten licenses across Côte d’Ivoire, Liberia, Senegal, The Gambia and Sierra Leone, reduced its year-to-date second quarter loss from $8.93 million in 2014 to $8.08 million in 2015, despite the fact that its revenue decreased from $2.93 million to $350,000 during the same period.

According to its most recent comprehensive results statement, Nigeria-focused energy company Eland Oil & Gas Plc also improved its losses from $26.14 million, for the year ended Dec. 31, 2013, to $16.29 million for the same period in 2014. In a separate financial statement, Eland revealed a cash balance of $13.1 million as of June 30, which was $4.9 million higher than the cash balance of $8.2 million as of March 1.

Indigenous Nigerian upstream exploration and production company Seplat Petroleum Development Company Plc managed to buck the trend of recording losses and registered a $71 million operating profit for the first half of 2015, despite suffering a 59 per cent decrease in operating profit compared to the previous year.

The Managing Director of Seplat Petroleum Development Company Plc, Austin Avuru, at the 13th Aret Adams Annual Lecture Series in Lagos recently, said that Nigerian independent oil
companies were most affected by the drop in price of oil globally.

Speaking on the topic: “Low Oil Prices: Challenges and Opportunities,” Avuru said: “We all borrowed to fund acquisition and growth capex. Many are now cash negative and yet need more investments for production increase to survive,”

According to him, an average of $60 per barrel was required for most companies to survive in 2016, adding that the nation needs to embrace effective domestic utilisation of fossil fuels to survive.

The Seplat boss said that because Nigeria heavily depends on oil to balance its economy, the drop in oil prices was a huge blow to the country’s major revenue.


However, with the decline in prices, there may be some benefits for non-producing states but this fact poses serious problems for those who have planned to focus development plans on increased drilling and exports. Some analysts are of the view that the falling oil prices can turn to the good for some African countries.

According to Ese Avanoma, Managing Director of Brade Consulting said, “There is less corruption, because there is no money to support it. The little we have is just to take care of basic things. People will understand that we have to weather the storm. There is not much to waste. “The oil industry sees this downturn every six years. It is a time for recalibration. It is time to look at all the projects and to look at what is viable. It’s a time to strategize for the future. So it is a good time to meet.”

Despite the lull in crude oil price, PWC projected foreign direct investment into the continent to come from the three main regions with North America and Europe continuing to invest and China entering through the likes of Sinopec, CNOOC and CNPC aggressively targeting the African market.

It explained that the Chinese Government is reliant on oil produced in Africa, especially Angola, which is now the second-largest exporter after Saudi Arabia to China. There is concern that Chinese funding might be detrimental to other investors.

To succeed in these tough times, analysts are of the view that African oil producers should strengthen their local content laws and concentrate on empowering indigenous companies as this will help fast-track the growth of the economy.

The Gulf Intelligence report also stated that African producers can cope by creating greater opportunities for partnerships between Africa and the Middle East on the emerging South-South energy corridor and also create competition for market share in Asia between African and Gulf producers.

It added that African producers will increasingly find markets locally, with a population boom and six percent Gross Domestic Product (GDP) growth across the continent.

In conclusion, drawing from arguments posited by experts, it is obvious that the best safeguard for the shocks brought about by low oil price is for the affected countries to diversify their economy away from dependence on oil, deepen local content laws and place increased emphasis on investment in renewable energy.

There is also the need for continued investment in the oil and gas sector while attempt should be made to increase the competitiveness of the continent in global oil and gas market.

Like Nigeria’s Minister of State for Petroleum Resources and Group Managing Director of the Nigerian National Petroleum Corporation, NNPC, Mr. Ibe Kachikwu said, there is the need for oil producing countries to position themselves and ensure they play a strategic role in the Organisation of Petroleum Exporting Countries, OPEC and in the global petroleum industry in general.

Kachikwu, who stated this in Abuja when announcing the commencement of preparations for the African Petroleum Producers Association’s, APPA, 6th Africa Petroleum Congress and Exhibition (CAPE VI) to be hosted by Nigeria, had maintained that the volatility in the global oil industry has made it imperative that smaller producer countries in Africa huddle together to be able to find ways and means of encouraging and pushing forward their agenda.

This, it is believed, is going to be critical in the 2016 timeframe when obviously, the strategic movements and realignments over the issue of oil pricing would be happening.

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