The drop in oil prices over the past 12 months to levels in the vicinity of 50 USD is expected to have a major impact on Africa, which during 2014 and the first two quarters of 2015 has already been grappling with poverty, food shortages, HIV/AIDS, regional conflict and the Ebola virus in West Africa. These low prices are impacting economies that depend on exports, such as Nigeria and Angola where Moore Stephens network member firms and clients are experiencing various aspects of the pricing levels. It is likely that financial institutions in countries across Africa are stress testing for operations in countries at 40 USD per barrel.
The dynamic forces that have led to the recent decline in global oil prices, with supply exceeding demand, seem to differ from those that led to previous price reductions. Indications are that it is likely that prices will remain low for a prolonged period of time. In its Energy Outlook, British Petroleum concludes that the United States is on a path to achieving energy self-sufficiency. The United States has taken the lead in producing shale gas and shale/tight oil. This technology has transformed the US from a major importer to a rising exporter.
During this period, oil consuming countries have also been seeking to diversify their energy mix. The focus will start to move in reducing the share of fossil fuels and it is likely that Africa will see an increase in the share of alternative energy, particularly renewable sources. These efforts are driven mainly by concerns over energy security as the majority of African countries utilise petroleum products to power their energy needs. During these changing times, the multinational oil and gas companies continue to face challenges in the operating environment such as regulatory uncertainty, fraud and corruption, poor infrastructure and a lack of skills in highly technical areas.
It may become necessary for Africa’s major oil producing countries to realign their economies to focus on the new demands of local and international consumers, owing to the integrated nature of intra-Africa trade specifically between neighbouring countries in West and Central Africa. As the demand from thousands of people who shop and trade across the region potentially decline once the lower oil prices impact on salary levels, economic activities in some of the key economies, and the value of their currencies will also decline.
Another interesting impact is that low oil prices have put agriculture back on the radar in countries like Nigeria. The IMF also informed the press that the depreciation of the Naira will add to the inflation rate, which in turn will influence the sky-rocketing prices for the imported goods. At the same time, food prices are not expected to grow so fast due to the increased local production of staple food crops that is now coming onto the national radar.
African countries with high levels of investment already committed to current production and projects already approved may not be able to change in the current pricing environment. The impact will most likely affect the exploration processes, specifically in deeper water areas, and planned investment into offshore fields which can be put on hold.
In discussion with a client in Nigeria, the CEO reported this week:
We are deeply in debt both at federal and state levels as the oil price crash has badly hit the economy. The Naira keeps sliding and quantitative devaluation seems to be the order of the central bank.
But it is not as bad as Greece, as long as the new government can curb corruption in the oil and gas sector and diversify the economy. It would almost certainly have been worse than Greece if the previous government had continued.
Interest rates remain in the mid 20%, so I am not sure how you jump start such an economy. Tighter controls on the dollar are hitting imports, good for local jobs in the medium-term. However, in the short-term there are difficulties ahead on an import-dependent economy.
It is reported that the Nigerian government owes many months of workers’ salaries. The transition of political power this year, whilst being great for the country, creates a situation whereby 16 years of administration need to be carefully analysed to ensure all bad practices are eradicated.
As Moore Stephens engages with clients across the region, a surge now to introduce production methods using Biomass, Wind and Solar Power across countries such as the Cameroon is clearly evident. Africa has the opportunity to benefit from the changing energy mix shift. All Green Energy Power Production will be a key focus for meeting Africa’s increasing domestic energy needs. Countries new to the oil and gas production process will be coming into a more competitive environment where many of the old practices have been challenged and where more efficient and sustainable practices need to be implemented.