Low oil and gas prices : How should African governments respond?

Image result for oil & gas

Yemisi Izuora/Agency Report

World oil prices have declined significantly over the last couple of years from a high of US$ 115 in June 2014 to less than US$35 in February 2015.

The development has ruffled some feathers and causes of the price drop are numerous and have been well documented by analysts.

These include the slowing growth in emerging markets, mainly China;
Growth in unconventional oil sources such as Shale oil, Oil sands and Biofuels resulting in low demand for traditional oil, hence creating an oil glut;
Appreciation of the US dollar.

According to the World Bank Group, “between June 2014 and January 2015, the US dollar appreciated by more than 10 per cent against major world currencies”. The effect of this is for countries in non-dollar linked currencies finding oil more expensive, reducing demand.; and Geopolitical tensions in the Middle East and Eastern Europe during 2014 & 2015 which had a speculative impact on oil prices causing the drop.

Most African Economies are very heavily commodity based and as such fluctuations such as these have a significant impact on them, some of which are discussed below:

Delayed investments in exploration projects, especially those in deep-water acreage are typically very expensive and capital intensive to carry out.

Angola, for example, has significant prospects in deep – water, ultra- deep water and pre-salt areas.

According to the recent PwC Africa Oil and Gas Survey for 2016, these opportunities are significant and can be described as high risk, high reward.

Unfortunately, in a low oil price environment, the appetite for risk is lowered and as a result capital expenditure/investment is reduced.

Other African nations are also feeling the brunt of this development. According to Reuters online, projects by Royal Dutch Shell and Tullow Oil in the West African region have become uneconomic to carry out.

Oil exporting countries such as Angola and Nigeria have experienced significant losses in Government revenues due to the reduced oil prices, and have been forced to explore economic diversification which in itself is not a bad thing.

President Muhammadu Buhari has stated the economic diversification of Nigeria was necessary and urgent and would focus on areas such as agriculture, manufacturing and mining.

Angola has probably been one of the worst hit African countries in this area. It is one of the least diversified economies in the world, and has experienced a reduction in public spending which in turn has resulted in public sanitation problems and health epidemics such as the recent yellow fever outbreak.

Oil and gas prices are inextricably linked and low gas prices have also meant that potential gas exploration and development projects have been delayed or indefinitely put on hold.

It is often said that difficult times are meant for reflection and present an opportunity to chart a different path for the future.

Similarly, this lull in the oil and gas environment presents an opportunity for the governments of oil producing countries to consider making changes in the following areas:

Simplifying the tax and regulatory landscape;
Abiding by provisions in contracts and agreements thereby instilling confidence in existing and potential investors;

Partnering with oil and gas companies to build capacity within Government organisations as well as the private sector; and
Creating a business environment of certainty, speed and consistency.

The tide will surely turn for the better and the behaviour of African governments during this period will determine investor response when things improve.

Add Comment