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Oil price recovery eases Chad's gloom

Oil sector investment outlook remains uncertain for the landlocked central African country

Chad's potential to become a major African oil producer remains unfulfilled. But higher oil prices, improved global demand for low-sulphur oil and more cordial relations with the International Monetary Fund (IMF) offer some hope of better investment conditions.

In 2011, with the oil price riding high, Chad's oil revenues totalled around $2bn, accounting for 76pc of government revenues. By 2015, those figures had slumped to just $200mn and 24pc, respectively, according to IMF data.

Increasing demand for the low-sulphur content crude produced in the Doba Basin is one positive for Chad. Asian refineries are driving the thirst, as well as the switch to low-sulphur fuel oils in the shipping sector ahead of the introduction of tougher International Maritime Organisation sulphur content rules in 2020.

An IMF statement in April 2019, also had some positive things to say, despite the organisation having a rollercoaster relationship with the country over the past two decades. It said discussions on new policies and reforms with the Chadian authorities had made "significant progress".

"Looking forward, the outlook for growth is underpinned by an increase in oil production and sustained reform efforts to support the recovery in the non-oil sector," the IMF says, adding that an increase in oil production was expected to boost overall GDP growth, which the Fund forecasts will run at 4.5pc in 2019. However, the IMF is critical of delays to some planned reforms, flags up debt sustainability issues and highlights the need to do more to loosen inter-dependence between the banking sector and the government.

Attacks on the rise

In general, efforts to expand exploration and production since the completion of the Chad-Cameroon pipeline in 2003—giving Chad coastal access—have proved heavy going.

Disputes between the government of long-time president Idriss Déby's governmemnt and oil producers, as well as run-ins between Chad and the World Bank group institutions, have held the sector back. Of late, the risk of operating in the country has become heightened by an uptick in Islamist unrest, led by the Boko Haram group which is now more active in the region beyond its northern Nigerian heartland.

Chad currently produces around 130,000bl/d, nearly all of it from Doba Basin fields, close to the Cameroon border, with easy access to the pipeline. This is well below the country's peak production—some 173,000bl/d in 2005—and the 225,000-bl/d capacity of the pipeline. Estimates dating back several years put Chad's proven oil reserves at around 1.5bn bl.

The main producing consortium in the Doba Basin is led by ExxonMobil (40pc), alongside Malaysia's Petronas (35pc) and Chad's state oil company SHT (25pc), producing over 60,000bl/d. Production capacity of China National Petroleum Corporation's acreage is around 45,000-50,000bl/d, with some 14,000bl/d of that earmarked for the Chinese-built NRC oil refinery, which started operations in 2011.

The upstream arm of Glencore, which acquired licences from other operators in 2014, also operates a group of fields in southern Chad with total production capacity of around 21,000bl/d.

IMF funding

Glencore's trading arm's engagement in Chad has proven controversial. In 2014, the company made a $1.45bn collateralised loan to Chad, set against future oil sales, which SHT used to buy its stake in the Doba consortium from Chevron. The oil price slide left the government struggling to meet repayments, diverting nearly all of its oil revenues to Glencore at the expense of virtually everything else in this impoverished country. After protracted talks and heavy pressure from the IMF, the two sides in February 2018 agreed on a less onerous payments schedule.

Despite the cautiously optimistic mood, further investment in Chad carries risk. During the Glencore loan crisis, Déby threatened to give Glencore's oil trading rights to ExxonMobil. A year earlier, in 2016, a Chad court had ordered the ExxonMobil-led Doba consortium to pay a $75bn fine over unpaid royalties put at $800mn. ExxonMobil eventually settled out of court and secured an extension of its Doba Basin license until 2050.

It is unclear what this means in practice for ExxonMobil's operations. The company has been considering a sale of assets in Chad, as well as Nigeria and Equatorial Guinea, according to a media report in April 2019. The company has declined to comment.

Meanwhile, Déby's reputation for unpredictable behaviour has been reinforced by the sacking in January of two successive oil ministers within a month. No reasons were given, though local media reports suggest a link with disputes over an oil block sale. The current oil minister, Mahamat Koua, may be regarded by Déby as a safe pair of hands, being a former deputy secretary-general of the government and trade minister.

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