African governments are preparing to experience declining incomes; Several exploration projects are suspended; Thousands of local jobs are threatened if nothing is done.
While the short-term effects of Covid-19 on global economies are already being felt and putting millions of people in a precarious situation, its long-term effects are still unknown. In sub-Saharan Africa, the impact will be felt even more as the pandemic is combined with a historic collapse in oil prices, putting pressure on state budgets and testing the resilience of the continent’s most powerful energy companies.
The immediate effect of Covid-19 on the hydrocarbon sector was first felt on the demand for crude oil and on its prices. Most analysts and operators now agree that 2020 could see negative growth in global oil demand, as industries close and countries around the world confine themselves. The price effect has been devastating: they have bottomed out since 1991 and are currently below $ 25 a barrel.
For Africa, this means immediate pressure on state budgets and their macroeconomic stability. Outside of South Africa, the continent’s largest economies are heavily dependent on oil revenues to fuel the state budget and public spending, and to ensure macroeconomic stability. All producers in sub-Saharan Africa had budgeted 2020 with an oil benchmark well above $ 50, from $ 51 in Equatorial Guinea to $ 57 in Nigeria.
Given current expectations that oil prices will not exceed $ 30 for the rest of the year, most budgets must be readjusted and government spending must be cut considerably.
According to the Atlantic Council, major African producers could expect billions of dollars in revenue losses this year.
The Congo Brazzaville could be the most affected, with a loss representing 34% of its GDP, in a country where the debt / GDP ratio is already around 90%. The same goes forAngola, where the price of oil at 30 dollars would cause a loss of income of nearly 13 billion dollars, or 13% of GDP.
The Equatorial Guinea, the Gabon and the Chad could experience losses of almost 10% of their GDP due to the current crisis. The Nigeria would finally suffer the biggest setback with a loss of $ 15.4 billion, according to the Atlantic Council. If it would represent only 4% of its GDP, the impact on marginal producers and local jobs would be potentially devastating.
The new producers would also suffer loss of income: Ghana, the African Center for Energy Policy (ACEP) estimates a potential revenue loss of 53% to 743 million dollars instead of the 1.567 billion dollars that the country expected to receive this year.
“Thousands of Africans and expatriates will be laid off in oil-producing countries as companies close their drilling rigs and planned projects. We have to face reality because these times are unprecedented. The uncertainty is even more frustrating for oil companies and workers. Forgive me, but there is blood on the streets, in the water and the air has the coronavirus, “said NJ Ayuk, president of the African Chamber of Energy and oil lobbyist.
“The oil producing countries must come together and work with the private sector in order to get us out of the Covid-19 crisis and mitigate as much as possible the economic fallout. When the United States and Europe speak of a recession, most African countries and our citizens have probably already gone into depression, “added Ayuk.
The long-term effects that the Covid-19 will have on the sector in Africa depend on what will happen there this year. Cuts in exploration spending and the cancellation of today’s drilling plans could potentially mean years of delay in new discoveries, replacement of reserves and production of new deposits. The largest international oil companies operating on the continent are already cutting all spending by an average of 20% worldwide, which is expected to have an impact on exploration and projects in Africa. While ExxonMobil is considering several spending cuts, Shell has already announced a reduction in underlying operating costs from $ 3 billion to $ 4 billion and a reduction in capital spending by $ 5 billion. Total’s organic Capex is reduced by more than $ 3 billion, which represents 20% of its planned investment spending for 2020. Chevron also reduced capital and exploration spending by 20%, notably resulting in a reduction of $ 700 million for upstream projects and exploration.
These ICCs were expected to make major final investment decisions this year or in the near future on multi-billion dollar projects in Africa.
These include the Shell Bonga Southwest, the Bosi, Owowo West and Uge-Orso projects of ExxonMobil and the Nsiko project of Chevron. Whatever their stage of progress, it is very unlikely that these projects will be sanctioned this year.
Recent freelance statements point in the same direction. For example, Woodside Energy is currently examining all options to preserve and enhance the value of its Sangomar offshore oil project in Senegal, the first oil of which was expected in 2023.
Beyond petroleum, natural gas and LNG projects are also affected. ExxonMobil’s announcement that it would postpone the green light for its multi-billion dollar Rovuma LNG project in Mozambique sends worrying signals.
Likewise, BP and Kosmos are already working to postpone capital spending for Phase 1 of Tortue 2020 for their multi-billion dollar floating LNG unit project in Mauritania and Senegal. Together, Rovuma LNG and Big Turtle Ahmeyim represent Africa’s greatest hopes for strengthening its position as the world’s new LNG export center. Delaying such projects will have important consequences for the expected economic growth in each of these countries.
Finally, the long-term impact of the Covid-19 is playing out right now, while exploration programs are suspended. The long-awaited drilling as FAR plans in Gambia this year have been suspended. Other planned seismic acquisition projects have also already been canceled, such as those of EMGS off Senegal and Mauritania for BP which was to start this month, or the 3D seismic acquisition project of Polarcus in off West Africa.
Meanwhile, most of the licensing cycles that were to confirm Africa as a frontier of global exploration this year are unlikely to live up to expectations. South Sudan, for example, has already announced the suspension of its oil and gas license cycle this year.
As African nations grapple with the Covid-19 crisis and the OPEC price war between Saudi Arabia and Russia, the initiatives they are taking today will determine the future of their oil and gas industries for the next few years. Local businesses, whether producers or service providers, are on the front line and need all the support they can to avoid cutting jobs and surviving the crisis.
As Shoreline Energy CEO Kola Karim recently said, “When elephants fight, it is the small producers who suffer. Supporting these small producers and their local sub-contractors should be a priority to preserve the future and long-term prosperity of the oil and gas sector in Africa.
By APO
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