Angola revival stalled by global demand slump
Sharply lower oil prices mean the West African country will find it difficult to finance the investment needed to replace its ageing offshore fields
Slumping oil prices and weak demand are reducing investment in Angola’s oil sector, hastening a decline in production that could cut the country’s output by more than a third by 2029.
Angolan president Joao Lourenco, elected in 2017, has sought to reform the country’s sprawling, corrupt bureaucracy and boost dwindling crude production. He created a standalone industry regulator, the National Oil and Gas Agency, separating out the function from NOC Sonangol, and cut corporate taxes in an effort to attract more interest in the country’s costly and risky deepwater marginal fields.
“Going into 2020, it was looking pretty positive,” says Adam Pollard, a senior upstream analyst at consultancy Wood Mackenzie. “The fiscal changes and new incentives had propagated a whole bunch of new investments, some of which are ongoing and others that had yet to be sanctioned. It appeared that Angola had managed to turn things around to a degree, but a lot of investments are now on hold.”
In a belated move to arrest the 64pc drop in Brent crude prices between 3 January and 27 March, Opec+ announced production cuts in mid-April that included a sizeable temporary reduction for the southwest African nation. Angola agreed to reduce its output to 1.18mn bl/d for May and June. For July to December, this will rise to 1.25mn bl/d before further increasing to 1.32mn bl/d for the 16 months from January 2021 onwards.
However, the actual impact of this agreement is less certain. “Details around the production cuts are sparse. There is little in the way of clarity over the breakdown of who will cut what in practice,” says Richard Taylor, a senior industry analyst at intelligence provider Fitch Solutions. “There is no mechanism to monitor or ensure these cuts will be abided by—it is very much a back-of-the-envelope agreement.”
“It appeared that Angola had managed to turn things around to a degree, but a lot of investments are now on hold” Pollard, Wood Mackenzie
Based on reported production at the start of 2020, the agreed cuts represent a c.10-15pc fall in output, according to macroeconomic data provider CEIC. Oil production had already declined from c.1.77mn bl/d in mid-2016 to 1.31mn bl/d in April. The steady decline is the result of the slump in oil prices from mid-2014, which led exploration investment to dwindle.
“Companies are doing things such as bringing forward maintenance shutdowns to meet the cuts,” says Pollard. “Many companies operating in Angola were very quick to announce cost reductions, and work programmes have been delayed. Even without a mandated cut, we were already expecting lower production.”
IOCs had been active in the exploration of Angola’s offshore. France’s Total is the dominant IOC in Africa’s second-largest crude producer, with a 41pc market share, according to a 2019 report by the US International Trade Administration. US majors Chevron (26pc) and ExxonMobil (19pc) are the next most significant with the UK’s BP (13pc) also having a notable presence, followed by Italy’s Eni.
Angola’s annual discoveries were rarely less than 1bn bl over the past decade, and sizeable underexplored acreage remains, albeit in deep- and ultradeep-water, according to a May 2020 Fitch Solutions report.
But as a result of a lack of recent exploration, Angola’s oil production, which will average 1.3mn bl/d in 2020, will shrink to 800,000 bl/d in 2029, according to Fitch. In the short term, the IOCs have stopped drilling entirely as a response to Covid-19, Reuters reported on 20 May.
“The significant fall in oil prices since the start of the year has led to a sizeable drawback in company capex programmes in 2020,” says Fitch’s Taylor. “For the companies that we track in Angola, such as Total and Eni, we are seeing an announced 20pc or so cut in capex this year.
“At $30/bl, I doubt the big oil companies will be interested in Angola” Carvalho, Catholic University of Angola
“Immediately, that has implications for any kind of development plans that these companies had. Over the longer term, it raises huge questions about the production outlook if these companies are not spending as much and their risk appetite is reduced.”
IOCs’ global capex cuts average c.30pc, according to Wood Mackenzie. Yet cost-cutting is more difficult now, as companies have stripped huge inefficiencies from their operations following the 2014 price slump.
“That is not there to be removed this time around, so the main way they will cut costs is by proroguing these big projects,” says Pollard. “Angola is in the midst of that. Everyone wants to cut costs, and logistically it is difficult to fulfil some of the commitments they had signed up to, so on both counts investment will be delayed.”
Twelve FPSOs are operational in Angolan waters, which combined have a processing capacity of 2.02mn bl/d and can store up to 23.1mn bl of oil, according to Petroleum Economist calculations based on the Fitch report. Logistically, this production is relatively unaffected by the pandemic.
“There are fewer expats in the country,” says Pollard. “Many operators shipped out their non-essential expats early on, but they have enough skilled local staff to keep the FPSOs running. They are managing to maintain production. It is more the new developments, the drilling, which requires specialist equipment and staff to come in that has been affected.”
Angola, which has received over half of a $3.7bn IMF loan package tied to neoliberal reforms, had set its 2020 budget based on oil prices averaging $55/bl this year, according to consultancy Capital Economics.
The adverse oil price movement led to the value of the kwanza collapsing, which in turn increased the local currency value of foreign currency-denominated state borrowing.
This led credit rating agency S&P Global Ratings to cut its assessment of Angola in March, warning lower oil prices had swelled its fiscal and external deficits. Government debt is forecast to soar to 127pc of GDP in 2020, up from 45pc in 2015.
“The government must make a lot of budget cuts,” says Carlos Rosado de Carvalho, an economics professor at Luanda’s Catholic University of Angola. “Angola must pay its public debt and, with less oil revenue, it will have less reserves to pay the public debt.”
Economic strains made Angola’s plans to sell up to 55 oil blocks from 2019 to 2025 of even greater importance. It hopes to sell around 30 of these via public bids, with the rest awarded through direct negotiations.
Last year, Angola began by putting licences for 10 blocks up for sale, but only two were awarded to foreign oil companies. Both are located offshore in the deepwater Namibe Basin; Eni was awarded operator rights for Block 28 with a 60pc stake, while 20pc remains open for negotiations.
Total will be operator of Block 29 with a 46pc interest, and Norway’s Equinor will take 24.5pc and BP 9.5pc. Sonangol will retain a 20pc interest in both and also took a 35pc interest in block 27. The remaining 65pc of block 27 remains up for sale, while the other six Namibe basin blocks and another in the Benguela basin went unsold. Contracts meant to be signed on 30 April remain pending.
“We see this as a failure. If only two or three companies were interested it is a problem for the future because Angola has gone a long time without investment in the oil industry and we were counting on these new licences to increase production,” says Carvalho.
This year’s licensing rounds are now in jeopardy, he warns. “It all depends on oil prices, because, at $30/bl, I doubt the big oil companies will be interested in Angola.”
Fitch’s Taylor echoed similar sentiments, noting Sonangol’s relationship with its international partners remains “frayed” despite recent reforms. Sonangol’s debts were $4.9bn as of 2018.
“Even before to the recent price crash, crude prices were not high enough to induce the spending required to develop these new deepwater blocks,” Taylor adds.
“IOCs that had spent a lot of money getting fields operational are getting to the end of that project cycle. Low oil prices will only further damage attempts to focus on greenfield exploration opportunities and even the tieback and brownfield opportunities will take a hit as companies retrench spending.”