The old saying goes: “hedge your bets” (best understood as protect yourself on the downside). A plummeting oil price and its effect upon Africa may be the best manifestation of the rule. Last week’s article highlighted the continued positive outlook for oil and gas exploration in 2014 for Africa. But a downward trending oil price is likely to spell a downturn for production on recent finds.
Current data shows 30-plus projects, representing more than 20 billion barrels of oil equivalent (boe) of commercially recoverable reserves, yet to take final investment decision. An oil price below $70/bbl suggests that more than 50 percent of the projects should be scrapped or delayed based on the breakeven prices. It is these statistics that have investors worried about the near term for Africa. Such project breakeven prices – coupled with budget breakeven prices – point to growingly tough times for certain countries.
This week’s article looks at the top countries to watch as the oil price struggle.
Africa’s twelfth biggest economy is already home to one of the world’s worst performing currencies, the cedi, which has dropped more than 25 percent this year against the dollar. Slumping earnings from gold and cocoa were already sticking the country with a rising debt bill. The country approached the IMF earlier this year for a ‘bailout’ in the short term and saw a rally in its currency following the announcement of the talks which are ongoing.
All the potential for a positive boost in the currency may fall victim to a lowering oil price. Oil accounts for 30 percent of government revenue and 20 percent of exports. Most statistics suggest that Ghanaian officials plan the country budgeted based on a lower oil price, possibly sub-$50. But, even if projects remain commercially viable at that price, the coffers of Ghana will suffer horribly as the country is starved for dollar reserves and a medicinal injection to its fiscal health which is still reeling across the board. At a $100/bbl, Ghana could earn $1.6 billion annually from oil. At a price level between $60 and $70, that number plummets below $1 billion.
Libya is home to largest proven oil reserves in Africa. Africa’s ninth biggest economy relies on oil for nearly 75 percent of government revenue and over 95 percent of the country’s export. The oil sector’s newly rediscovered vibrancy may soon lose its ‘oomph’ as the country banked on $110/bbl price to fill coffers and quell conflict at home.
Saudi Arabia’s direct rejection to Libya’s oil representative to OPEC also signals that Libya, along with Angola and Nigeria, will have to find a way to ‘survive on its own’ in the near term. However, unlike Angola and Nigeria, Libyan officials are definitely fretting over a potential interruption to economic growth and the subsequent disruption it would bring to the precarious security situation.
Nigeria arguably feels the greatest pain in Africa from a plunging oil price. Africa’s biggest economy depends on oil for about 80 percent of government revenue and 95 percent of exports. Government spending, particularly on infrastructure, indicates a breakeven price north of $110 for the country. Earlier this year, this estimate already implied that the country would need more debt. At a current price below $70, investors are rightfully growing more fearful and the Nigerian currency, the naira, is bearing the greatest burden of that fear.
The naira has dropped 11 percent against the dollar this year. Interest rate hikes by the Nigerian Central Bank has not slowed the bleeding. The government, focused on an upcoming election, will likely maintain current levels of spending to sustain public support. A resulting bump in debt however could spell a jump in inflation and trigger numerous downside effects in multiple parts of the economy.
Angola is positioned only slightly better than Nigeria. Africa’s 5th biggest economy depends on oil for more than 70 percent of government revenue and 95 percent of exports. Government spending suggests a lower breakeven price at around $94/bbl. But that price indicates obvious trouble for the economy with the current oil price and is building pressure on officials to increase debt to maintain investment.
Current deepwater projects in the country largely rely on a breakeven prices north of $80 (up to $120 for certain projects) which implies a few project will likely be dropped for 2015 and beyond. The Angolan currency, the kwanza, accordingly has taken it fair share of depreciation with a 4 percent drop since September. Officials are currently projecting next year’s budget on a price between $79 and $83 which will not exactly alleviate the pressure if the oil price remain sub-$70 in the near term.
Africa’s fourth biggest economy was just hitting stride. The country endured some destruction to its pipelines in recent years due to uprisings and violence.
A lowering price conceivably will weigh heavily on government spending in the near term as the country still must pay back debts for its infrastructure revitalization. Coupled with gas production issues, officials will have to be creative to protect two sectors that account for 97 percent of total exports. That may prove to be a tough task.