The diverging fortunes of Africa’s crude kings
Profound differences in governance style will impact the speed and development of future energy projects across Angola and Nigeria
The 2014 oil price collapse hit Nigeria and Angola hard. Successive years without final investment decisions (FIDs) left sub-Saharan Africa’s top two oil producers confronting maturing fields and declining production.
In Nigeria, president Muhammadu Buhari has done little to rekindle investment since assuming office in 2015—operators now face another three years of his slow-moving administration. By contrast, Angola’s head of state, Joao Lourenco, was quick to enlist the support of oil majors after assuming power in September 2017. The countries’ trajectories will continue to diverge in 2020 as Lourenco’s reforms reap rewards and Buhari continues to dither.
Key to reviving Angola’s fortunes has been a series of 2018 presidential decrees. These allowed Angola to establish new fiscal incentives for the development of marginal fields in costly ultra-deepwater. Legislation permitting drilling within development areas to rejuvenate exploration was also passed and the country’s first terms for IOCs relating to gas have enabled companies to commercialise the Kwanza Basin.
Angola also renewed its institutional landscape, with a new national agency for petroleum, gas and biofuels (ANPG) assuming responsibility for licensing and negotiating PSCs. This will reduce investors’ exposure to Sonangol, and the high levels of graft long associated with the state-owned oil firm. Verisk Maplecroft’s Corruption Index projections point to an 88pc chance of corruption risks in Angola decreasing by the second quarter of 2020.
Foreign investors will also seize the chance to increase their equity stakes in existing blocks, as Sonangol divests to repay its debts. The privatisation of Sonangol’s prized E&P arm, as well as downstream interests, offer an opportunity to reduce the NOC’s dominant role. Once this process is complete, Sonangol intends to launch an initial public offering (IPO). Although set for 2022, we anticipate this to be delayed, barring a sudden uptick in the oil price or a dramatic improvement in Angola’s hard currency reserves. Decades of opaque bookkeeping currently preclude Sonangol from pursuing an international listing, while low trading volumes on the local stock exchange point to the difficulties of raising capital in Luanda.
In marked contrast to the shake-up in Angola, President Buhari has actively blocked regulatory reform in Nigeria. Investors were left disillusioned when they learned in August 2018 that he had secretly vetoed the Petroleum Industry Governance Bill (PIGB) a month earlier but neglected to consult parliament or investors.
Buhari shows no willingness to expedite projects that might rekindle hydrocarbons development
Buhari has retained the overly-centralised style of leadership he enjoyed as military leader in the 1980s. Chief of staff Abba Kyari is particularly obstructionist, limiting investor access to the president. Investors complain that between Kyari and Buhari, contracts can remain unsigned on the presidential desk for months.
The Nigerian parliament is now under the leadership of members of president Buhari’s party, the APC. A more amenable legislature will facilitate the passage of key bills, although Buhari’s backing for a speedy passing of the PIGB remains unlikely. An opaque NNPC, unreformed by the PIGB, perpetuates the patronage system which underpins Nigerian governance.
Foreign investors will remain concerned that the legislation may retain provisions from an earlier draft that exposed them to debt repayment risks. That version of the PIGB planned to spin-off NNPC’s liabilities to a separate entity not backed by state guarantees.
There is little prospect of new laws such as those which facilitated Angola’s gas bonanza. Instead, Nigeria’s president and parliament are intent on imposing stricter fiscal terms. A new uniform 10pc royalty was signed into law in November 2019, eliminating the more favourable rates enjoyed by deepwater operators. An additional price-based royalty will see IOCs pay a further 2.5pc when oil prices are low, rising to 4pc when crude exceeds $60/bl. The revised terms are set to render deepwater projects uncompetitive by increasing breakeven costs.
Only five new deepwater licences have been awarded in Nigeria in the last decade. In contrast, Angola launched the first of six annual licensing rounds in October 2019. Investment opportunities in the Kwanza and Namibe basins will enable Angola to attract new entrants, hot on the heels of Maurel & Prom, now backed by Indonesia’s Pertamina, which entered in 2018.
NNPC has remained an unreliable partner for IOCs, and our corruption outlook for Nigeria indicates the country will remain an extreme risk location. Buhari shows no willingness to expedite projects that might rekindle hydrocarbons development. He is seemingly content with personally controlling distribution of the existing pie rather than taking steps to grow it—given that the latter might enable others to benefit financially and undermine his power.
Control over petroleum rents is central to Buhari’s strategy for managing militancy in the Niger Delta. Attacks by militant or criminal groups targeting oil infrastructure have significantly decreased since a 2016 peak, when fiscal pressures threatened to end amnesty payments. The draft 2020 federal budget provides for continued financing of the amnesty and the improvement in security should continue for now.
While the amnesty looks set to placate the Niger Delta Avengers, dilapidated infrastructure means even a relatively minor increase in theft and sabotage could increase production disruptions to 300,000-400,000bl/d.
Sonangol has served as a potential model of reform for NNPC and will continue to make Angola an increasingly attractive investment destination in the regional race for capital expenditure. Buhari’s approval of the PIGB in 2020 would also be a step in the right direction for investors, although they will likely remain frustrated by the pace of contract and project approval while Buhari remains in office.
Nick Branson and Ed Hobey-Hamsher are senior Africa analysts at Verisk Maplecroft
Keep up-to-date with how the predictions in Outlook 2020 are playing out and get a first look at the themes that will shape Outlook 2021, as well as with relevant events such as the Outlook launch party and publishing schedules, by subscribing to Petroleum Economist’s bi-monthly Outlook newsletter. http://go.pardot.com/l/45692/2020-01-17/89x558