Oil and Gas economics has
changed. In Africa’s hydrocarbon-dependent economies, petroleum frequently
accounts for 80-90% of government revenues (Angola 80%, Libya, 90%, Nigeria
80%); which makes them very susceptible to the risks of boom-bust cycles in oil
prices. These states normally use stabilization Sovereign Wealth Funds (SWFs) -
accumulated from oil sales - to smooth state budgets and reduce the fiscal
shocks arising from price volatility.
Years of fairly stable and
high oil prices, as well as boom periods that lasts longer than the bust periods
have seen SWFs grow; stimulating many ambitious, long term infrastructural
projects in some countries. However, the current, continued fall in oil prices
is a consequence of novel (permanent according to some analyst) shifts in the
global demand - supply dynamics of crude oil.
Considering the impacts of
US shale production and genuine concerns that prices may never return to the
$100 per barrel region again; these African economies will have a need/duty to
re-govern Sovereign Funds. Given the near-permanent erosion of excess earnings
from the principal commodity (Oil) through which they are usually accumulated,
the reserves will continue on the downward path already witnessed since July
2014.
In the sidelines of this
year’s World Economic forum in Davos, Bob Dudley, BP’s boss mentioned that they
(at BP) were already planning on low oil prices for years to come. “We have to
plan on this (price) being down, but we don’t know exactly what level, but
certainly a year, I think or maybe probably two or three” he told the BBC, affirming,
the potential for prices to stay low in the medium to long term.
Furthermore, the
characteristic weak institutions of governance and non-transparent trades in
these economies often encourage executive profligacy and opaque fund management
practices. Unless SWFs are re-invented to reflect the recent, strategic market changes;
domestic fiscal stability and numerous infrastructural projects may be dragged
down with it.
Early signs are already
emerging, as nations like Angola has not seen its SWF grow since June last
year. Nigeria’s SWF, the governance of which is shrouded in what observer has
pointed out to be excessive executive control may be currently functioning to
supplement the budget but how long? is the valid question. In Nigeria’s Oil and
gas industry which has suffered enormously due to the non-passage of a Bill
(The petroleum Industry Bill) activities are gradually waning.
Some projects that were
financed on an above $100 per barrel price estimates are now stranded. Owners
will have to battle with unfriendly financial institutions for fiscal deal restructuring.
The cushion effects of SWFs will save Nigerian’s budget the anticipated shock,
but that will be for a limited time.
The real challenge will be
seen in the region of the curve were SWFs has been significantly depleted and
oil prices remain low. In a diversified economy this would pose less grave
threats, as earnings from other sectors could be quickly deployed to play a
similar role. Furthermore, to develop an alternative will take many years with
austerity measures targeted at the masses.
In Angola, the Fundo
Soberano de Angola, managed by president Dos Santos’ son, Jose Filomeno Dos
Santos, had already made plans of very ambitious portfolios in 2015, before
prices began to crash. $1.6 billion has been set aside to back projects which include
an Africa wide investment in hospitality, as well as, other infrastructural
development project.
These may go on, but
certainly not at the speed at which they were earlier projected. Even in
non-hydrocarbon economies, the impact of falling crude price is being felt due
to its relational effects on commodities such as gold and cereals, further
putting an organic strain on other sectors of the economy.
While SWFs can be said to
be currently serving the very purpose for which it was create/accumulation in
affected countries; sustainability is clearly threatened by current event in
the global crude oil market.
Chijoke K. Mama is a Senior Oil and
Gas Analyst based in Lagos.
Sources
BBC | News Wires | Forbes | Sweetcrudereports |Reuters
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