African Energy Outlook, Africa’s oil states facing fresh challenges in 2015



The slump in global oil prices is expected to hit Africa’s economies far more than the Ebola epidemic and will likely have more far reaching implications for countries facing elections and states heading for first oil.


With the price of Brent crude at five an a half year lows, Africa’s top oil producers, Nigeria, Angola, Libya and Algeria face growing fiscal challenges because more than 70% of these countries’ revenue stems from oil production.


Deutsche Bank and the International Monetary Fund say Libya would need $184/barrel to balance its budget,Nigeria would need $123/b to balance its spending plans.


Nigeria’s oil output was already falling before the drop in oil prices largely due to oil theft and pipeline vandalism in the oil-rich Niger Delta.


Nigeria’s oil unions suspended a four-day national strike after the government agreed to discuss their demands including an immediate passage or the petroleum industry bill.


While the unions may well be taking advantage of the political climate ahead of the February 14 elections to boost their bargaining powers, these demands are unlikely to be resolved any time soon and will be issues for the next government.


President Goodluck Jonathan will face a tough battle to win re-election February 14 against former military ruler Muhammadu Buhari, the candidate for the main opposition party, who are looking to take power for the first time since the return to civilian rule in 1999.


Jonathan has been attacked by the opposition for his record on security, his inability to tackle corruption and his handling of the economy, now reeling from low oil prices.


In the likely case of disputed elections, the risk of severe political violence will continue after the elections and raise the currently low probability of a military coup, according to IHS Control principal analyst Robert Besseling.


What is certain is that Nigeria’s elections are a watershed for the country.


Will they produce an effective government able to pass key reforms in the oil industry? Will they address the ongoing power crisis?


Will they address the social-economic issues in the Niger Delta and Boko Haram in the north, and so set the Nigerian economy back on track?


Shale, price impact


Nigeria was the first casualty of the US shale boom, but oil flows to the US displaced by shale has also altered oil trade in Angola, Libya and Algeria, which produce light sweet crude oil, similar to the type produced in new fields in North Dakota.


Angola’s exports to the US fell to 4.9 million b/d in July from 21.9 million b/d in March 2007.


The drop in exports to the US means Angola will be hard pressed to find other buyers for its crude.


“The biggest market challenges is finding new clients but we are confident we will do so,” Sonangol US president and CEO Elma Pegado de Almedia told local media this month.


Lower oil prices come on top of declining oil production, below the government expectation which averaged 1.66 million b/d in the first half of 2014, due to technical difficulties at existing fields.


Angola’s draft budget for 2015 is currently based on $81/b compared to $98/b in 2014 but it also includes a provision that a number of projects will receive funding only if the oil price exceeds a given threshold, according to a report by Deutsche Bank December 5.


If oil prices average $80/b in 2015, export revenue could fall by over $10 billion or 7% of GDP which would translate into a major current deficit in 2015, Deutsche Bank said.


Lower oil prices coupled with declining oil production are likely to lead to a reduction in Gabon’s exports in 2015.


Exports are also hit by the US shale boom. The US used to be Gabon’s main export market.


Tension in the oil industry, which contributes 50% of government revenue and 80% of exports, has climbed to its highest point since a four-day strike in February 2013 that shut down all of the country’s 240,000 b/d.


The country’s power ONEP workers’ union is forcing the government to settle a long-standing dispute over the use of expatriate labor and other employment issues, and is ready to stop production again unless it gets its way.


In spite of the modest oil revenues, oil has become a major source of financing the government of Ghana’s capital budget.


With average production of 100,000 b/d, annual oil revenues have risen from $709 million in 2013 to $780 million in 2014.


The projection for 2015 is put at $215 million but this is unlikely if oil prices stay low.


Ghana hopes the Tullow Oil-operated TEN project will boost the country’s production when it is completed in 2016.


But the TEN project economics was based on an oil price of $80/b.


With oil below $65/b industry experts are skeptical about the schedule of the project.

East African frontier

While newly discovered commercial natural resources could significantly bolster Kenya, Tanzania and Mozambique’s economies, the region’s regulatory and infrastructure gaps could hinder the transition from gas exploration to production in the medium term.


Other much cited regional challenges include political instability, financial constraints and border and land disputes.


Kenyans have become increasingly angry with president Uhuru Kenyatta’s failure to protect the nation from the increasing violence caused by Somalia al-Shabaab Islamist militants.


The group, which warns it will keep up attacks until Kenya pulls its troops out of neighboring Somalia, has killed hundreds of people since 2013.

However, domestically grown terrorism will become more prominent in 2015, while al-Shabaab faces a greater military challenge to its territorial control in Somalia and internal leadership rivalries, according to Besseling.


In October 2015, Tanzania will hold general elections.


Opposition parties such as the Civic United Front and Chadema are increasingly undermining the ruling party’s political dominance in key locales such as Dar es Salaam and Arusha.


Allegations of corruption, rising prices for fuel, and persistent power shortages are likely to increase the opposition’s support and have triggered riots in major cities in the past.


Tensions too are emerging over the discrepancy between promises of future resource wealth and the lack of visible progress within Tanzania to unlock this wealth, according to Shah Jahan Khandokar, energy lawyer at global legal practice, Norton Rose Fulbright.


Tanzania’s gas reserves have risen to an estimated 50 trillion cubic feet following discoveries over the last five years.


The country is now considering exporting gas as LNG in addition to other gas monetization options.


According to Khandokar however, there is no comprehensive legislative framework in place to regulate the gas sector and establish a balance between the interests of Tanzania and of international investors.


“As global economic conditions lead oil companies to reduce exploration budgets, 2015 is likely to see more focus on the development of existing discoveries,” he added.


Tanzania’s government said a proposed LNG plant could cost up to $30 billion and said it was in the final stages of drafting long-delayed gas legislation.


“The onus is now on the government to provide an adequate legislative framework to enable a final investment decision,” says Khandokar.


Troubled states


South Sudan has postponed presidential elections amid a deepening power struggle between two troops loyal to president Salva Kiir and his former deputy, Riek Macha with polls unlikely before 2018.


Each side accuses the other of using mercenaries and rebels from neighboring Sudan, from which the south became independent in 2011.


The fighting has already disrupted the country’s production recovery, and given the fractured nature of the conflict and the heavy rebel presence in the oil producing states, further outages are anticipated next year.


Analysts also warn of risks in Libya and Algeria next year with both subject to the threat of terrorist activities.


Political violence is likely to increase in Libya in 2015, and the current division of the country between the largely Islamist government in Tripoli and a more secular one in Tobruk could plunge the country into further chaos.


Radical militancy and ethnic tensions present key threats in Algeria.


The kidnapping and execution of a French tourist in September in the northeastern Kabylie region, by a splinter militant group, risks damaging Algeria’s already poor image as an investment destination.


South Africa is facing rolling blackouts and electricity shortages that are crippling output and leading to increased political pressure to come up with alternative sources of energy.


The nation is largely dependent on foreign imports for crude oil needs, and while the country may be benefiting from low oil prices now, the government will have to aggressively continue with the diversification of its primary energy sources away from the overdependence on coal towards a more balanced energy mix if it is to avoid a crisis in energy security.


Despite severe criticism from environmentalists, the government is pushing for shale gas in the Karoo, with a view to exploiting commercially viable gas reserves in the future.

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