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Congo’s disappearing discovery

The Republic of Congo’s announcement of a major discovery appears to be targeted more at extorting EU environmentalists and multilateral lenders than attracting IOCs

One year ago, the cash-strapped Republic of Congo announced it had discovered enough oil in its jungle interior to quadruple daily production. A find of this scale would transform the finances of the central African country (also known as Congo-Brazzaville) and strengthen ruler Denis Sassou Nguesso’s grip on power in the one-party state ahead of presidential pseudo-elections in 2021.

Yet as the discovery’s anniversary approaches, scant information has been forthcoming and the government’s keenness to hype a seemingly bogus find underscores the waning credibility of Sassou’s endemically corrupt administration.

“Some of the figures published in 2019 about this oil ‘discovery’ were totally absurd,” says Francis Perrin, senior fellow at thinktanks the Policy Center for the New South and the French Institute for International and Strategic Affairs (Iris).

SARPD-Oil, a largely unknown oil marketing firm owned by a close ally of Congo’s president, announced in August 2019 it had found a new oil field in Congo’s Delta de la Cuvette region that could hold 359mn bl of crude and double the country’s GDP, several media outlets reported with varying degrees of conviction. The find could add an extra 983,000bl/d to Congo’s output, the country’s oil minister told S&P Global Platts soon after.  

“The technical work in this part of the country was not sufficient to be able to produce figures on reserves and on the future production level,” says Perrin, noting that, were the numbers true, the government and state oil firm SNPC would have published updates on the project’s progress.

“There is market scepticism,” says NJ Ayuk, executive chairman at business association the African Energy Chamber.

“Governance of the oil sector, including at SNPC, was a sticking point with the IMF” Robiliard, Control Risks

“The oil and gas industry is fairly transparent when it comes to geology and drilling. The market is looking for these kinds of deals—hedge funds, private equity funds, big players. If you are going to talk about a 940,000bl/d field, you would see every Jack and Jill in the oil and gas industry clamouring towards it.”

Various IOCs, including Total and Shell, had reportedly explored the area years earlier and concluded it was not economically viable to drill, so why would the government jeopardise its reputation to champion such an unlikely discovery? The answer could lie in Congo’s precarious finances.

Crude sales provide 80pc of state income, estimates research company Fitch Solutions. The prolonged slump in oil prices from 2014 led to 50pc cuts to state spending, with debt repayments equivalent to more than 40pc of government revenue in 2019, debt-focused NGO Jubilee Debt Campaign estimates.

Cash strapped

As of May 2019, Congo’s total debt was $9.49bn, according to the IMF. A month earlier, Congo had agreed to restructure $2.56bn of debt to China, but the African nation was still desperate for cash and committed to wide-ranging anti-corruption reforms to secure a $448.6mn, three-year IMF loan programme in July 2019. This requires SNPC’s accounts to be audited annually and for oil production agreements to be made public.

Congo’s debts include $1.64bn in oil-backed loans owed to commodity traders Glencore, Trafigura and Orion Oil. Dissatisfied with Congo’s progress in restructuring these debts, the IMF withheld the second loan tranche, says Valentin Robiliard, Africa analyst at consultancy Control Risks in Dakar. “Governance of the oil sector, including at SNPC, was a sticking point with the IMF,” says Robiliard.

$905mn – SNPC long-term financial debt secured against oil

Some of that disquiet likely stems from how little of Congo’s oil revenue ends up in the treasury—just 2.4pc in 2017, according to anti-corruption NGO Global Witness. Meanwhile, the country’s financial reserves plunged from $5bn before 2014 to $380mn in 2017, a governance-focused NGO BTI claims.

Last year’s oil find is located in the Congo basin’s tropical peatlands, which were only discovered in 2017 and contain 30bn t of stored carbon—the equivalent of 20 years of US fossil fuel emissions.

Sassou has implicitly threatened to develop the peatlands unless international donors pay Congo not to do so. It seems to be working: last September, a fund managed by France, Norway and the EU (with additional contributions from the UK and Germany) pledged $65mn to help preserve Congo’s rainforests.

Congo may have exaggerated the oil discovery to obtain aid from international donors, says Iris’s Perrin. “It is one of the possible explanations behind this huge oil discovery which is not a huge oil discovery,” he adds.

The controversy comes as greater scrutiny is placed on SNPC’s dealings with the IOCs that pump all of its crude. SNPC does not do any exploration or production itself, instead awarding production-sharing agreements (PSCs) in return for about one-third of the oil produced, according to Fitch. Congo’s biggest producers are Chevron, Eni, and Total.

Yet despite having to invest little in developing its own infrastructure, SNPC has racked up huge debts that appear unsustainable relative to its income. At the end of 2018, SNPC owed at least $2.41bn to IOCs including Total ($1.23bn), Chevron ($753mn) and Eni ($296mn), Global Witness estimates citing the company’s audited accounts.

These are in addition to Congo’s government debts and were more than double SNPC’s 2018 revenue of $1.01bn. IOCs charge SNPC for exploration and development costs that should be reimbursed once the oil starts to flow.

SNPC made a profit of $130.6mn in 2018, a sevenfold increase on 2017 that was largely eaten up by annual interest payments of $103mn, according to Global Witness, which also criticises SNPC’s failure to audit its partners’ costs, noting the most recent in 2004-05 found that IOCs overstated their expenses by $127mn.

IOCs can expense various tangential costs to SNPC such as school fees, medical care and telecoms bills, in addition to salaries and pension costs, the London-based NGO claims.

“These practices raise serious questions about the interests at play in Congo’s oil sector. Are IOCs ripping Congo off? Why did Congo and SNPC’s representatives agree to these contracts?” the report states.  

Total and Eni did not respond to requests for comment, while Chevron says it operates its business legally in according to local laws and PSCs.

“SNPC could drive a harder bargain, but financing is key,” says the African Energy Chamber’s Ayuk. “Over-reliance on IOCs to call all the shots on every producing asset is really not beneficial to state interests. You have to put skin in their game in order to win [better terms].”

“There is market scepticism” Ayuk, African Energy Chamber

SNPC, which did not respond to requests for comment, owes a further $905mn in long-term financial debt secured against oil, up from $144mn in 2012.

“With Covid-19 and the slump in oil prices, Congo’s ability to repay its debt is being impacted and SNPC will likely face further difficulties,” adds Robiliard.

Slumping fortunes

Congo is Africa’s third-largest oil producer, pumping an average 324,000bl/d in 2019 according to Opec based on secondary sources, although production fell to 272,000bl/d in May 2020 as part of Opec-led production cuts.

Fitch Solutions forecasts production will drop to 288,400bl/d in 2028 as mature fields decline. It also predicts Congo’s proven oil reserves will fall below 300mn bl by 2028, from 1.6bn bl in 2015.

This could spell trouble for Sassou, who became president in 1979 and, aside from a brief hiatus in the 1990s, has been in power ever since.

Sassou, 76, will be the ruling Congolese Labour Party’s candidate in next year’s presidential election and is again the heavy favourite to win, although the country’s economic difficulties, bogus oil discovery and multimillion-dollar corruption cases in Europe and the US have weakened him domestically and internationally.

Should Sassou prevail in 2021, the question of his succession will return and SNPC’s generous agreements with IOCs could be reconsidered, especially if Congo’s finances fail to improve.

Yet, dubious discoveries aside, the outlook for Congo’s oil sector is fairly positive despite subdued global consumption.

“The moderated price environment supports increased interest in the development of small, shallow-water discoveries, such as those in Congo,” Fitch wrote in a June report. “The close proximity to shore and the presence of existing infrastructure will enable shorter project lead times with the possibility for quick and cheaper tie-backs when compared to field developments in frontier basins.”

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