Africa: The Aftermath of COVID-19, Price War

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By JEROME ONOJA & JOSEPH CHANG

With the outbreak of COVID-19 in Wuhan, the province of Hubei, China’s demand for crude oil was stifled causing a drop of about 3million b/d as at early February because many of its factories closed. Not a lot of experts predicted the scale to which the disease would escalate. Today it has assumed a global pandemic proportion, eventually spurring a price war between Saudi Arabia and Russia which began early March as they disagreed on the modalities for production adjustment in order to stem the continued oversupply of the market. These unfortunate twin shocks of the novel coronavirus and a historic price fall are beginning to have devastating effects on the African continent, seeing that some countries operate a mono-product economy, with oil being the only commodity. The hardest hit will be countries like Angola, Nigeria and Libya. Others like Equatorial Guinea, Cameroon, Ghana, Mozambique and Senegal aren’t spared as their economic projections have been torn apart. With ongoing negotiations and eventual implementation of production adjustment among OPEC+ countries, following positive outcomes from Russia and Saudi Arabia, initiated by the U.S., we hope to see prices bounce back. But, a reflective price rise is only anticipated after the COVID-19 curve is flattened, factories around the world re-open and life returns to normal. When would that be? How fast can African producers shake off the effect which has added to a plethora of pre-pandemic challenges?

The global economy faces its biggest danger since the financial crisis of 2008. Going by analysis in the OECD Interim Economic Outlook Forecasts published in March 2020, prior to this twin attack, the growth rate in world gross domestic product (GDP) for 2020 was projected to be 2.4%, a drop from 2.9% in 2019. It further stated that, a longer lasting and more intensive COVID-19 outbreak, spreading widely throughout the Asia-Pacific region, Europe and North America, would weaken prospects considerably.

this event, global growth could drop to 1½ per cent in 2020, half the rate projected prior to the virus outbreak
Downward review of global oil forecast
Global demand was projected to contract by 435,000 b/d in the first quarter of 2020,

the first quarterly decrease in more than a decade, according to the latest monthly Oil Market Report of the International Energy Agency (IEA).

For 2020 as a whole, IEA has reduced its global growth forecast by 365,000 b/d to 825,000 b/d, the lowest since 2011. While China’s manufacturing economy is getting back on track and local demand is improving, experts believe it will encounter extremely difficult export conditions. “It’s very possible that Q3 could have negative GDP as well as Q2, and then the question is how big is the bounce back towards the end of the year?” said Rhian O’Connor, ICIS lead analyst. “Our view is that demand for this year, and possibly going into 2021 will not return to pre-crisis levels,” said O’Connor. “We are going to see a more extended downturn than what we were expecting, and then a slower recovery than many are forecasting.” Crude oil prices will also likely be “lower for longer” even if there is a deal between OPEC and Russia or if Saudi Arabia agrees to curtail production, she noted.
Meanwhile, other analysts are also taking down their crude oil price forecasts for 2020 and beyond. “We lowered our already-bearish oil priced deck further as coronavirus containment cuts into global oil demand, while the balance is getting longer on the supply side due to the OPEC+ schism,” said Ed Morse, global head of commodities at Citi, on a 31 March conference call hosted by the NABE (National Association for Business Economics). “We now see Brent averaging $30/bbl this year and $17/bbl in Q2.” In his base-case scenario, Morse sees Brent recovering to about $42/bbl by Q4 2021, still far below the $60+/bbl level before the crude oil crash in late February to March.
Oil majors tremble, slash capex WoodMac reasoned that prices slump would force operators to cut discretionary expenditure at producing fields to protect their cash flows either at an asset level, company level or both. A member of the Wood Mackenzie’s Africa upstream team, Gail Anderson has said:

“The majors, on which Africa depends, have announced sweeping cuts to capital expenditure of 20 per cent-30 per cent.

Based on these disclosures and our assessment of key projects, we expect capital expenditure (capex) cuts in the region of 33 per cent for upstream Africa.” The research body also noted that producers would defer drilling, sticking only to the highest-ranked opportunities in their portfolios. Anderson added: “Operators will again seek to renegotiate contracts downwards – although there is less wriggle-room than before – and defer any advanced contracts that have not yet been signed off.” “We expect less cost stickiness, meaning the cuts will be quick and deep. During the last slump, capex in Africa fell by around 20%. This time we think a third of capex, or around US$10 billion, will be shed across the continent this year.

According to the firm, Operational expenditure would come under spotlight too, with some operators looking for reductions of as much as 40 per cent. Chevron Corporation has announced the cutting of its 2020 capital budget by 20 per cent to $4 billion as part of its response to a significant drop in revenue due to the spread of the new coronavirus. “With an industry leading balance sheet and a flexible capital program, we believe Chevron is resilient and positioned to withstand this challenging environment,” said Chevron Chairman and CEO Michael Wirth. According to a new research from Norway’s biggest independent energy consultancy, Rystad Energy, ExxonMobil is also considering at least a 20 per cent investment cut, but these plans have not yet been finalized. Considering the company’s underperformance, even deeper cuts may be required to meet most of its important operational targets; it posted weak numbers for the fourth quarter of 2019, announced $20 billion worth of divestments planned for 2020, and maintains big ambitions for exploration and development in Guyana. The same report added that Shell will embrace a 20 per cent total cut strategy, but we expect that upstream budgets will only see reductions of about 14 per cent. The company is also committed to a divestment program of more than $10 billion worth of assets, which could prove challenging to conduct in the current market. It also noted that BP on the other hand has announced potential plans for a 20% cost reduction.

Though the company holds a geographically diverse and resilient portfolio, it is believed that its $15 billion asset-sale target might not be accomplished.  In the same vein, Saudi Aramco, the world’s largest oil producer, is slashing 2020 capex from an expected $35-40 billion range indicated in its IPO prospectus, to a level of $25-30 billion. This is also down from capex of $33 billion in 2019. Aramco’s capex plans for 2021 and beyond are also under review.

“As yet, no one knows precisely the impact on economic activity and energy demand from the coronavirus outbreak, especially in the longer term, and additional efficiencies may be required,”

said Aramco chief financial officer Khalid al-Dabbagh, on the company’s Q4 earnings during a conference call. Rystad Energy’s global capex for exploration and production firms (E&Ps) projected a drop by up to $100 billion this year, about 17 per cent versus 2019 levels, under its updated base case scenario of $34 per barrel in 2020 and $44 per barrel in 2021. In a low case scenario, where Brent averages $25 in 2020, global investments may plunge to around $380 billion this year, falling to almost $300 billion in 2021, a 14-year and a 15-year low respectively.
It further noted that

more than a million oilfield services (OFS) jobs globally “will likely be cut” as the industry grapples with the oil price war and the effects of the coronavirus.

The consultancy said a total of five million people are employed in the OFS market and contractors will look to scale down their workforce by at least 21 per cent this year alone.
Grim prediction for African countries by WHO
Based on the World Health Organization Situation reports (SITREPs) of 24 March, LSHTP estimates that,

almost all African countries are likely to reach 10,000 cases in May, after hitting the first thousand in the beginning of that month.

“Alarmingly, these (peaks) are largely synchronised continent-wide, and real burdens are certainly higher than reports. This calls for urgent action across Africa”, according to the study. “New containment measures, e.g. increased testing, contact tracing, isolation of cases, and quarantine of contacts are likely to slow, but not halt, real epidemic growth. Increased testing may accelerate the time to reporting these numbers, as improved ascertainment increases the identified fraction of real cases, but should ultimately reduce real overall burden”, it adds.
The LSTHP warns that “lags and missingness” in the official data tend to delay onset of the 1,000 and 10,000 case dates, so the real timing may likely be sooner than its estimates for many countries. Egypt, Algeria, Nigeria and Senegal are expected to reach the first 10,000 cases of Covid-19 by mid-April, along with Morocco, South Africa and Tunisia.
Enhancing lockdowns through stimulus packages
President Donald Trump in March signed a $2 trillion bipartisan stimulus package that is intended to address the threat of economic disaster posed by the coronavirus pandemic. The Spanish Prime Minister Pedro Sanchez also announced the largest financial aid package in the country’s democratic history of up to €200 billion ($220 billion) to fight COVID-19. That is approximately equivalent to one-fifth of the country’s GDP. Though Italy is the worst hit in Europe, its Prime Minister Giuseppe Conte’s government is ready to spend as much as €25 billion ($28.3 billion) on stimulus measures to shield the economy from Europe’s worst outbreak of the coronavirus.
The U.K. wasn’t left out as its finance minister Rishi Sunak announced a budget with nearly $37 billion in fiscal stimulus on March 11. Lockdowns, stimulus packages, social distancing ad other measures are being adopted across Africa as countries are beginning to adjust to the new normal in order to beat the coronavirus.

Effect on African Countries
The coping mechanism of African nations to the COVID-19 pandemic and prevalent price war is largely dependent on the state of the various economies. In June 2019, a report by the World Bank Global Economic Prospect described the accumulation of public debt by sub-Saharan countries as unsustainable. It stated that between the period 2010-18, the average public debt increased by half from 40 to 59% of GDP, making sub-Saharan Africa the fast-growing debt accumulation continent. The report listed vulnerable countries with fast rising public debt in this category to include Angola, Cameroon, Equatorial Guinea, and Nigeria.

NIGERIA
Nigeria’s government depends on oil sales for about 70 per cent of its revenues and 95 per cent of its foreign earning. But, like analysts forecasted, key players in the oil sector in Nigeria are beginning to respond to the global industry challenge.

Lekoil has said it will reduce workforce numbers as part of the “immediate and accelerated” implementation of the company’s general and administrative (“G&A”) cost reduction measures. “These measures are targeting an annual reduction of US$8.0 million or at least 40 per cent in G&A costs, which is inclusive of a reduction in staff numbers.
The Company has commenced the immediate execution of these measures which will be completed within the next four to six weeks,” Lekoil said recently. Also, Nigeria’s Department of Petroleum Resources has ordered oil and gas companies to reduce their workforce and practice social distancing, tightening measures to stem the spread of the coronavirus. A few days later, Nigeria’s petroleum regulator ordered oil and gas firms to move to 28-day offshore staff rotations after six workers aboard an offshore support vessel tested positive for coronavirus.

The West African nation plans to cut its 10.6 trillion Naira ($28billion) budget for the year by at least 1.5 trillion Naira following the twin attack of coronavirus and a plunge in the price of oil,

Minister Zainab Ahmed has said. The government revenues will decline by about 40 per cent to 45 per cent this year due to the lower oil prices, Ahmed said. Nigeria will now peg the price of oil at “a worst-case scenario of” of $30 a barrel Prior to this year’s oil price crash, several international oil companies operating in the country have failed to sanction a number of projects valued at $58.4bn years after they were announced.
The Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari recently said, “at a crude oil price of USD 22 p/b, high-cost oil producers like Nigeria should count themselves out of the business”. According to Atlantic Council, Nigeria is expected to suffer the biggest loss in the continent with USD 15.4 billion, representing about 4 per cent of the nation’s GDP. Projects that have not reached FID, but announced, will be the first set to be affected. They include Shell’s $9.7billion Bonga South-West/Aparo, which was billed to add 143,274 b/d in extra crude production capacity at its peak flow. Other projects without the FID are ExxonMobil’s $6.2billion Bosi (126,784 b/d), Chevron’s $8.2billion Nsiko (95,685 b/d), ExxonMobil’s $8.2billion Owowo West (138,301 b/d), ExxonMobil’s $6.1billion Uge-Orso (99,532b/d) and Nigerian Agip Exploration Ltd’s $9.2billion Zabazaba (146,739 b/d).
According to the report, there are multiple gas projects worth nearly $5billion (led by Eni/Shell) that could achieve the FID in the coming years in Nigeria. Announced gas projects that have not been sanctioned include Shell’s $1.5billion Gbaran Phase 3, Eni’s $1.1billion Samabri-Biseni and Shell’s $1.2billion Uzu. Simultaneously, in a bid to contain the novel Coronavirus, the nation’s apex bank, Central Bank of Nigeria (CBN) will increase efforts “in boosting local manufacturing and import substitution by 1 trillion Naira ($2.7 billion) across all critical sectors of the economy,” it said in the statement.

Having recorded 238 cases with 5 deaths, the bank also plans to provide a 100-billion Naira loan to health authorities. It had earlier approved a one-year moratorium on all principal debt repayments from March 1, and reduced to 5 per cent from 9 per cent the interest rate

EQUATORIAL GUINEA
Despite its small size, Equatorial Guinea is the third largest oil exporter in sub-Saharan Africa. The country has vast resource of gas; its petroleum sector accounts for 85 per cent of the nation’s GDP and more than 94 percent of exports. Prior to the twin attack, the Ministry of Mines, Mineral and Hydrocarbon (MMH) was targeting $1 billion in foreign direct investment (FDI) to be channelled into several crucial investment opportunities into the country’s energy sector. The inflow was targeted at modular oil refineries, an ammonia plant, a gas import terminal, liquefied petroleum gas storage tanks and other projects spanning the entire energy value chain.

As a major thrust in the country’s Year of Investment, the pursuit was to diversify the country’s energy sector, boost entrepreneurship, generate profit for investors and create jobs. In line with the country’s focus for the year were three key events and exhibitions. Plans for these have been shelved in the wake of COVID-19 pandemic.

In a statement, the MMH boss reiterated commitment to the country’s investment outreach plans but acknowledged limitations as the outbreak of the virus had brought with it mounting travel restrictions.

“As a result, we will continue our negotiations with investors under a more targeted approach and keep the number of conferences in Malabo to a minimum,”

said Equatorial Guinea’s Minister of Mines and Hydrocarbons Gabriel Mbaga Obiang Lima. Again, U.S. upstream giants like Marathon Oil, Noble Energy and state-owned Sonagas, had planned investment in the country’s downstream sector through the construction of a methanol-to-gasoline and derivatives unit. But this also, might have to be delayed. According to World Health Organization (WHO) Equatorial Guinea has recorded 16 Coronavirus Cases since the epidemic began, without any death. To contain the pandemic, the government has deployed an initial health spending plan of 0.07 per cent of its annual GDP.
In 2018 Equatorial Guinea recorded a government debt equivalent to 43.30 per cent of the country’s GDP. However, the GDP continued contracting at a rate of 4.10 per cent in 2019 from the previous year where it also registered a contraction of 6.1 percent. The country’s unemployment rate has remained unchanged at 9.20 per cent in 2019 but concerns are mounting if this figure will stay the same at the end of the year.

CAMEROON
Cameroon is a commodity-dependent economy with oil accounting for over 50 per cent of total exports. It recorded a government debt equivalent to 34 per cent of the country’s Gross Domestic Product in 2018, and has a rating of B with negative outlook as at April, 2019 according to Standard & Poor’s credit rating for Cameroon.

Tower Resources carrying out development in the Thali block in the country’s offshore has declared force-majeur based on the present global crisis.

The company also revealed that activity on the NJOM-3 offshore well may also be suspended. It further stated, “…however, in any event, the company remains committed to drilling NJOM-3 as quickly as possible.” Trading Economics noted that the country has registered about 658 cases infected with the Coronavirus, with 9 deaths. The authorities’ preparedness and response plan envisage COVID-19-related health spending to reach CFAF 6.5 billion (or US$11 million) over the next three months (about 0.1 percent of GDP on an annualized basis). Its economy presently enjoys a growth rate of 4.2 per cent which is expected to dip from the twin attack to the global oil industry at the end of the year.

GHANA
“If prices should stay around the $30 mark, then the government is less likely to get half of the revenue that it projected. Already, we’ve seen Tullow cut back it’s production. So, aside the international fall in crude oil price that we have to match with in selling our own bit of oil that we get as a country, production is also falling in our own shores,” said Paa Kwasi Anamua Sakyi, Executive Director at the Institute for Energy Security. Tullow Oil has revised its production targets and terminated the drilling contract with Maersk Drilling for the Maersk Venturer drillship offshore Ghana.
Ghana’s President Nana Akufo-Addo in February said he expected Norwegian oil firm Aker Energy to make a final investment decision on the Pecan offshore development “within a month or two.” The wait is now set to be prolonged “indefinitely.” Aker Energy’s parent company Aker ASA, said in its annual report recently that given the unprecedented collapse in oil prices in the first quarter of 2020,

Aker Energy “has decided to postpone the Pecan project indefinitely.”

“At the top of Aker’s ownership agenda is to find potential for improvement, including for the technical solution, as well as supporting Aker Energy’s strategy of exploring opportunities for transactions. Aker Energy has a constructive dialogue with the authorities in Ghana, and have a shared understanding of the challenges being faced,” Aker Energy said.
Ghana Health Service has reported 287 coronavirus cases and 5 deaths. According to IMF, starting March 16, the government adopted sweeping social distancing measures and travel restrictions to avert an outbreak, including (i) suspension of all public gatherings exceeding 25 people for four weeks; (ii) closure of all universities and schools until further notice; and (iii) mandatory 14-day self-quarantine for any Ghanaian resident who has been to a country with at least 200 confirmed cases of COVID-19, within the last 14 days.  The government committed US$100 million to support preparedness and response. Additional funds have been earmarked to address availability of test kits, pharmaceuticals, equipment, and bed capacity.
Ghana’s economic outlook by African Development Bank (AFDB) Group showed that it continued to expand in 2019, with real GDP growth estimated at 7.1 per cent Following rising public debt and deteriorating debt service metrics, Ghana was re- classified from moderate risk of debt distress to high-risk of debt distress in its Debt Sustainability Analysis (DSA) report by the IMF and World Bank in March 2015. In 2018, the stock of public debt stood at GHS172, 875.81 million ($32 billion) comprising 49.8 per cent external debt and 50.2 per cent domestic debt. The most recent DSA in March 2019 indicates that Ghana continues to remain at high risk of debt distress. While its public debt burden is expected to peak at 62 per cent of GDP in 2019, its rate of poverty stood at 23.4 per cent in 2016/17.

SENEGAL
Though the country’s first offshore licensing round was launched earlier this year by the national oil company, PETROSEN not much will be expected to fall through until the global narrative changes.

Senegal has seen Cairn Energy reduce its planned investment below $330 million from the initial forecast of $400 million.

Also, the $4.2 billion Sangomar deepwater offshore project has suffered immense pressure as project partner FAR Ltd fails to finalize debt arrangements. Further delay is expected with the global fall in prices. While Senegal has reported 226 Cases and 2 Deaths, according to IMF and in line with fighting COVID-19, the government has declared a national state of emergency and adopted strict containment measures, including suspension of international air travel, closure of borders, limits on inter-regional travel, bans on public gatherings, school closures, and a curfew.
The government also plans to set up an emergency fund of up to FCFA 1000 billion ($1.68 billion) which is 7 percent of its GDP, financed by a mix of donor contributions, voluntary donations from the private sector, and the budget. Economic outlook by AFDB Group shows Senegal with a real GDP growth above 6.0 per cent on average since 2015. Its external borrowing has raised the public debt to 54.7 per cent of GDP in 2018 from 47.7 per cent in 2017 and presently has an unemployment rate of 14.6 per cent as at 2018.

ANGOLA
Namibe Refinery Complex worth $12 billion is a project being developed by an investment vehicle set up by two Russian groups (75 per cent investment by Rail Standard Service and 25 per cent by Fortland Consulting Company) and local partners which was proposed in 2017. It was pencilled to deliver a new 400,000 b/d refinery to be built in Namibe. Project delivery date will be uncertain.
Angola had included the privatization of state-owned companies and plans to reduce public debt to less than 60 per cent of GDP by 2022 from approximately 90 per cent in 2018 and, over 100 per cent in 2019. Finance Minister Vera Davis de Sousa revealed that

the country’s oil production is expected to tumble to 1.36 million barrels per day (bpd) if the oil price stays at $35/bbl.

She also stated that capex would be suspended pending completion of the budget review. In an earlier statement, she had already confirmed that the country’s economy will shrink by 1.21 per cent this year, signally a fifth year of recession Angola has reported 16 Cases and 2 Deaths from COVID-19. Passengers arriving from high-risk countries are quarantined for 14 days. According to IMF Policy Tracker on COVID-19, the government is working on a package of measures to fight the coronavirus outbreak in the country and its economic fallout.
Lasting truce, survival

As the U.S. mediates between Saudi Arabia and Russia, it is expected that both warring camps would tow the path of lasting peace if the U.S. leads by example. Anything else will be superficial. Should a truce be reached between Saudi Arabia and Russia to cut production, and the U.S. joined by other non parties to OPEC+ continue to increase production, the expected effect would cancel out.
The U.S. has ramped up its production from 5.4 million b/d in 2009 to 19.51 million b/d in 2019 where it is now a net exporter, and the highest global supplier of crude, until the recent crash. Thanks to shale technology. A rational deal would be one in which all major contributors to the global supply market engage in production adjustment as it will strengthen the resolve of parties to OPEC+, thus bringing back the days of decent oil prices in the global crude oil market.
However this pans out, diversification away from crude oil remains a sure way to protect the African oil producing economies from a highly turbulent oil market in the future. In the interim, surviving these twin storm will depend on how deep each country’s reserve is, or how much of its critical infrastructure and assets it’s willing to stake as collateral for more debts, just like Zambia. Otherwise, untold hardship looms. Resultant effect on oil price being expected from ongoing negotiations by the U.S., Saudi Arabia, Russia and the rest of OPEC+, would only be traceable after the COVID-19 scourge. African producers can only hope that, as they manage to contain the spread via lockdowns, travel restrictions, and social distancing, among other measures, efforts by neighbours, and countries across other regions would do so simultaneously in order to bounce back early.

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