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African oil producers struggling

Bram Vermeulen
October 28, 2015

The big players in Africa's oil industry are meeting in Cape Town to discuss the ongoing turmoil in the industry. Falling oil prices are not just causing doom but could be beneficial to the continent.

Oil platform in Angola
Image: MARTIN BUREAU/AFP/Getty Images

You may think it's all over for Africa. This is a continent that for the past half century has heavily relied on the rise of commodity prices. Even in recent years, while Europe and the United States economies slumped, many African economies were booking double digit growth figures.

Magazines like The Economist and Time that previously declared Africa the ‘dark' and 'forgotten' continent, ran front pages with 'Africa is rising.' Most of this growth was driven by the mineral wealth of the oldest continent and most enduring land mass. It is not only home to big reserves of platinum, gold, or copper but also to one tenth of the worlds oil reserves.

Now that oil prices have fallen with more than 50 percent many African economies are in deep trouble. "The industry is under a global shock," said renowned oil strategist Duncan Clarke. He is one of the speakers at the 22nd Africa Oil Week in Cape Town, where oil companies and African governments are meeting this week to discuss the ongoing turmoil in the industry.

“All the countries that are producing it, even the countries that are not, are going to see less capital coming in for exploration into their countries," said Clarke.

Deep trouble

Angola is one of Africa's biggest oil producing countries and has been hit hard. Angola's GDP shrank to only three percent, down from the average annual growth of 11,1 percent since the end of the civil war in 2002. The country had to put much of its ambitious plans on hold to rebuild the infrastructure that was ruined by the war. Many lost their job. Fuel subsidies were stopped.

Africa's biggest economy and biggest oil producer Nigeria seems in even more trouble. The country pumps around two million barrels of oil a day. According to the IMF, 90 percent of its foreign export earnings comes from oil. Shortly after the elections that brought President Muhammadu Buhari to power in April, the country's economy came to a standstill. Government revenues are expected to fall by 40 percent.

Some analysts predict that the falling oil prices can turn to the good for his country. "There is less corruption, because there is no money to support it," says Ese Avanoma, managing director of Brade Consulting in Lagos. "The little we have is just to take care of basic things. People will understand that we have to weather the storm. There is not much to waste."

Small players

Many African countries are still hoping to attract investors to explore for oil and gas. At the 22nd Africa oil week newcomers, like Malawi and even Zimbabwe, are presenting their opportunities. Strategists like Duncan Clarke, himself born in Zimbabwe, doubt if the country will walk away with much interest from Cape Town.

"They are a long way from there. They have other problems, presenting investors with sovereign risk issues," Clarke said.

Foreign investors started shying away from Zimbabwe after the often violent repossessions of white owned farm land began in 2000.

Oil production in Angola
How will countries like Angola and Nigeria survive the staggering drop in oil Prices?Image: MARTIN BUREAU/AFP/Getty Images

Almost 90 percent of African countries are now exploring hydrocarbons. The global downfall will be extra hard for those countries. Investors are not willing to take risks in the midst of global turmoil.

The Africa rising slogan was a way to sell the continent, but was not always based in reality.

"Projections that were done in the past were oversold," said Clarke. "There is still growth and there is still opportunity. The countries that adjust quickly will do best. The market has adjusted to the crude prices overnight. The companies have taken a little bit longer but they have all adjusted on portfolios, on layoffs. Now it's up to the governments."

African economies are doing just that. Many are diversifying including Nigeria. Services now represent 60 percent of Nigeria's GDP. Mobile phone companies are now present in almost every street and village in the country. Banks and construction are other growth sectors.

Yet Africa could not escape the global turmoil in markets and growing insecurity. Many currencies have performed badly against international currencies. The South African rand plunged to its lowest level in the last 13 years. The Zambian kwacha also fell to a record low price against the euro and the dollar. This presents the government with a huge financial challenge after they just bought a 1.25 billion dollar Eurobond.

Adapt or die

Oil producing countries are presented with the same challenges. Experts at Africa Oil Week are urging companies and governments to think out of the box.

"The oil industry sees this downturn every six years," said Nigerian consultant Ese Avanoma. "It's a time for recalibration. It's time to look at all the projects and to look at what is viable. It's a time to strategize for the future. So it's a good time to meet," Avanoma said.

The message from Cape to Town to the industry is to adapt, or die.

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