The dramatic fall in oil prices over the last two years has sent shockwaves throughout Africa. From a high of $115 a barrel in June 2014, oil prices have dropped to under $50 a barrel and had fallen as low as $26 earlier this year, the lowest in over 20 years. This has had a profound impact on the African growth story and prospects for development, well beyond the oil and gas sector.
Oil producing giants like Nigeria and Angola were hit the hardest. Their currencies have tumbled in recent years: in June of last year the Nigerian Naira dropped more than 40 percent against the dollar, displacing the country as the largest economy in Africa; the Angolan Kwanza fell by over 30 percent in 2015. Low and unstable oil prices have plunged both countries into economic turmoil. Once the shining star of the ‘rising Africa narrative’, with some predicting economic growth rates of over 8 percent for the next 40 years, Nigeria is now officially in recession.
During the annual Africa Oil Week Conference held in Cape Town two weeks ago, one of the largest gatherings of oil and gas players on the continent, there was little optimism of a speedy recovery – “lower prices for longer” seemed to be the overall sentiment.
Crude oil price (per barrel)
(Click to enlarge)
Resurgence of the oil and gas industry?
Two factors are largely blamed for the weak oil prices: over production and falling demand from countries such as China, where economic growth in 2016 is expected to drop to below 6.6 percent – the lowest in 25 years. Hopes of a more stable market were raised in September when the OPEC members agreed during a meeting in Algiers to cut production volumes. But making this plan work also requires non-OPEC countries such as Russia to cooperate. According to Peter Elliott, who spoke at the Oil Week Conference and is director of the London-based consultants NVentures, “gas is the new oil for Africa.” New exploration, especially in countries believed to have large gas reserves such as Tanzania and Morocco, was argued to show the greatest promise for the continent. Related: U.S. LNG Is Changing The Global Gas Game
But hints of optimism are overshadowed by the obvious difficulties in the market. Prolonged low prices and less demand do not bode well for oil-dependent countries like Nigeria, and explorers are unlikely to spend as heavily as they used to on new finds. For example, East Africa has long been seen as the next frontier for oil and gas. Investors have shown excitement for the potential in on-shore oil in Kenya and Uganda and off-shore gas in Tanzania. But low oil prices, less capital and a significant downsizing of oil companies over the last two years have directly impacted any potential exploitation. While oil still has the potential to further enhance economic growth in East Africa – today the continent’s fastest growing region – it is unlikely that countries such as Uganda will reap any revenues in the near-term scenario.
Gloomy outlook for oil and gas
In a sign of tougher times ahead for the oil and gas sector in sub-Saharan Africa, Wood Mackenzie’s latest report on upstream activity in sub-Saharan Africa presented at the conference found that capital expenditure in the region’s industry will be cut by $100 billion over the next five years. As a result, long-term oil production in sub-Saharan Africa is expected to decrease by 46 percent by 2030, as investors increasingly move away from capital-intensive exploration, instead focusing on known discoveries. In fact, off-shore drilling in Africa is estimated to have fallen to an all-time low of 9 active rigs in September. To jump start the industry, Femi Oso, a researcher at Wood Mackenzie, stressed that African governments must offer “attractive fiscal terms” to firms, if the region’s oil and gas sector is to rebound. Related: Why Mexico’s Oil Reform Is A Huge Opportunity For Investors
The price drop and subsequent shock of the last two years highlights the urgent need for African oil producing countries to diversify their economies. Nigeria and Angola are the best examples of the crippling effect that over-dependence on such commodities have on economic progress. They enjoyed exceptional levels of economic growth during the boom years, but are now choked by the unstable market and are in a downward economic spiral. Nigeria and Angola offer instructive lessons to prospective oil and gas exporters such as Uganda and Kenya. Even with vast wealth and potential in oil reserves, it is essential to invest in other sectors of their economies, to avoid the vulnerability that comes with price fluctuations.
By Adrian Kitimbo via Global Risk Insights
More Top Reads From Oilprice.com:
- Oil Prices Rise As EIA Report Adds To OPEC Optimism
- Texas Oil Prices Could Rise As Asian Demand Grows Stronger
- OPEC’s Matrix: If 1 Million Bpd Are Cut, Oil Will To Rally To $59