Low oil price to smother infrastructure spend in Nigeria, Angola

15th April 2015 By: Natalie Greve - Creamer Media Contributing Editor Online

Low oil price to smother infrastructure spend in Nigeria, Angola

Photo by: Bloomberg

Infrastructure spend by Africa’s largest oil producing countries, Nigeria and Angola, will be hard-hit by the retreating global oil price, which has more than halved since June last year and is currently at $58/bl, it emerged on Tuesday.

“Angola and Nigeria are not in a fortunate position. Nigeria, for example, has a severe infrastructure backlog requiring significant capital [investment]. These will be severely impacted by the decline in the inflow of oil revenues [and] we have already seen the naira losing some 10% of its value since the start of the oil price shock.

“Meanwhile, with oil revenues representing over 90% of Angola’s earnings, 70% of government revenues and 44% of its gross domestic product (GDP), the government has been forced to revise its Budget [in response to the retreating oil price], cutting about $14-billion of planned public spending,” Encorex director and former PetroSA corporate strategy VP Godwin Sweto asserted during a Frost & Sullivan webinar this week.

Despite lower oil revenues, Nigeria’s growth was expected to remain fairly robust, reaching 4.8% this year and 5% in 2016, driven primarily by the nonoil economy.

Sweto cautioned the Nigeria oil market to ready for a consolidation in the small- to medium-sized upstream oil companies in the next 6 to 12 months, as larger players with stronger balance sheets snapped up well-priced assets.

The continued delay in the implementation of the country’s Petroleum Industry Bill was, meanwhile, expected to continue to impact on investor sentiment.

“We’re all keeping our fingers crossed that it will be implemented soon…as it is expected to redefine the role of the State in the industry and outline the sector’s risk/reward metrics,” he commented.

On the upside, the Nigerian economy could benefit from the sustained lower oil price, as it would be forced to diversify its economy, reduce its reliance on oil revenues and further develop nonoil industries.

In Angola, meanwhile, Sweto reiterated that key infrastructure spending and social programmes had been “massively” cut down or frozen, citing delays to the roll-out of a $5-billion electricity coverage programme and the stalling of a road construction plan.

KNOCK-ON EFFECTS
Elsewhere on the continent, former adviser to Engen Petroleum's CEO, Dave Wright said upsides to the depressed oil price were likely become visible in nonproducing African countries, such as South Africa.

Consumers could well enjoy greater spending power, with a positive GDP spin-off, he added.

However, the lower cost of raw materials could be offset by other operating costs, while increased parallel demand could lead to a lag in cost benefit.

“In addition, we are already seeing a slowdown or halt to riskier projects, such as Shell’s recent decision to withdraw from the South African shale gas exploration sector. Lower oil prices could also lead to job losses at petrochemical firms, such as PetroSA and Sasol, he averred.

PUSH/PULL FACTORS
Elaborating on the drivers of a retreating global oil price, Frost & Sullivan Africa operations director Mani James suggested that, on the supply side, an increasing stock of gas from shale gas producers, particularly in the US, had eroded oil’s market share.

Moreover, Organisation of the Petroleum Exporting Countries (Opec) had taken the decision not to reduce production quotas of 30-million barrels a day of crude oil, resulting in an overstocked market.

“In addition, despite conflicts in Iraq and Libya, oil production has continued unabated, and the speculation at the beginning of last year that production would be interrupted remained unrealised,” he commented.

On the demand side, the slowdown in global economic growth had depressed global oil demand, particularly in major markets, such as Europe and Japan.

An increasingly diversifying global energy mix and energy efficiency focus had also emerged in response to over three years of oil pricing in excess of $110/bl, as consumers looks to cheaper substitutions.

This was evidenced by a decision by Japan to alter its energy mix and focus on restarting some of its nuclear reactors, invest in liquefied natural gas and reduce forward demand for fuel oil in the power sector.

Elsewhere in Asia, a slowdown in Chinese demand for oil had also emerged as a consequence of lower economic growth in that country.

“The Energy Information Administration estimates total Chinese oil demand growth of just 2.5% in 2014 and 2015, with gains in transport fuels and petrochemical feedstocks only slightly outweighing weakening demand for gasoline, diesel and fuel oil,” James outlined.

PRICE INDICATORS
Wright added that, over the short term, the oil price would likely be influenced by the extent of oil exploration, changes in oil discoveries and oil drilling technologies, adjustments in global demand and the application of oil, as well as shifts in the global energy mix.

Global GDP growth and increases in income in emerging markets, the nature of conflict in Libya and elsewhere, possible sanctions against Russia, and potentially rebel-controlled oil-producing regions could impact on the oil price over the medium to long term.

“There was no consensus on the oil price before the crash last year and, similarly, there is no consensus on the future pricing of oil.

“However, [it is generally agreed] that the oil price will recover to between $60/bl and $70/bl in the shorter term. The oil price is only expected to remain low for the next two to three years, although it is believed that Opec could sustain itself, despite the low price, for much longer,” he predicted.