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AfricaAugust 3 2008

Oil wealth fuels Angola resurgence

Angola’s transformation from civil-war-torn state to booming oil producer has both bankers and fuel giants taking note.
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Though Angola continues to draw huge investment into its deep offshore oil search, its newer onshore territories, plans to export liquefied natural gas (LNG) and other post-civil war opportunities are also ­exciting foreign investors.

Record oil prices are not only filling government coffers but also encouraging more investment in the deep offshore wells that have held the key to Angola’s burgeoning oil wealth. Development of the Angola LNG scheme has opened the way for a whole new industry to develop, helping to cut gas flaring by oil producers and exploit previously ‘stranded’ gas fields to significantly raise income for the next decade.

The macroeconomic numbers are already exceptional: the United Nations Economic Commission for Africa reported that gross domestic product (GDP) grew by 21% in 2007, some 12% ahead of its next African peer. No wonder it is not only int­er­national oil companies but also bankers who are excited about Angola’s prospects.

The speed of Angola’s emergence was underlined when it joined OPEC in early 2007. Another step was taken in April this year when it overtook Nigeria as Africa’s biggest crude producer, a lead it maintained in May. While Nigeria’s industry has been weakened by strikes and attacks by militants in the Niger Delta, Angola’s emergence from decades of conflict has been hugely boosted by a boom in the deep offshore industry. International oil companies (IOCs) have been encouraged by state oil company Sociedade Nacional de Combustiveis de Angola (Sonangol) to use ever-more sophisticated and costly technologies to explore deeper and farther into the offshore. Many of the new developments are in very deep water where costs are high, with new discoveries in water depths of a couple of kilometres, pushing the boundaries of technical ­innovation.

According to OPEC data, Angola ­produced 1.87 million barrels a day (b/d) of crude oil in April, compared with 1.81 million b/d in Nigeria. When it joined OPEC, Angola was assigned a production target of 1.9 million b/d. This has yet to be reached, but according to one executive in Luanda, “the level of output continues to go up, so something will have to give – and this could eventually lead to conflicts between the government and IOCs as Sonangol is called on to decide which company can do what”.

The Paris-based International Energy Agency has warned that the apparent gap between Angola’s OPEC allocation and potential future output raises a number of questions, not least whether foreign investors will be able to recoup their investments from production in new fields. IOCs usually recoup costs from their share of the oil once a development comes on-stream, but if OPEC imposes curbs on output, this may take longer.

José de Oliveira, editor-in-chief of local magazine Revista Energia, says that by the end of this year, output could reach two million b/d. As this report went to press, the ­Saxi-Batuque well was scheduled to start producing 100,000 b/d on the ExxonMobil-­­­operated Block 15 (see map on page 18). Meanwhile, Shell expects to add 40,000 b/d this year from shallow water on Block 4. Next year, Chevron will develop the Tombwa-Landana field (Block 14) which, according to vice-president Robert Peterson, could start up with a production of 125,000 b/d.

Roaming with the majors

Oil income has allowed President José Eduardo dos Santos to radically transform his government’s fortunes, making ­hydrocarbons policy a critical strategic consideration for Angola. The oil industry accounts for more than half of GDP, 85% of export revenues and at least 80% of ­fiscal receipts. This means that the ­government has no need to rely on taxing its citizens while the country works its way through the transition from post-conflict economy to emerging market.

One observer adds that this fiscal ­situation “also has the side-effect of removing some of the domestic pressure for public accountability”. With the exchequer filling up from oil revenues, the government does not feel constrained to comply with strict International Monetary Fund and World Bank ­conditionality. Instead, it is able to turn to oil-backed loans from China to finance infrastructure projects. Sonangol seems relaxed about accelerating production. According to one local analyst, “its strategy is to have a rather flat curve before the production may start to decline, towards 2015 perhaps”.

The world’s oil supermajors have, in the past, made the running when it comes to contracts, but in its last two licensing rounds the Angolan government has been mounting a challenge. It aims to attract smaller players to more marginal fields and to territory relinquished by IOCs, which are now focused only on the biggest prizes. Relinquished areas are already yielding significant new finds, such as Eni’s Sangos discovery on Block 15/06 at the start of May.

Among the main players, Total hopes to overtake ExxonMobil to become Angola’s leading operator within two to three years, targeting production of 700,000 b/d, compared to 290,000 b/d now. Accompanying French president Nicolas Sarkozy on an official visit to Luanda in May, Total’s chief executive Christophe de Margerie called Angola one of the company’s main priorities in the Gulf of Guinea.

Total operates production from the prolific Block 17, where the Pazflor development is due on-stream in 2011 to follow Girassol and Dalia, bringing into production the Perpetua, Hortensia, Zinia and Acacia fields. This will be followed by the Clov development, for another four fields. Total is also studying development of ultra-deep Block 32, where a dozen discoveries have been made.

ExxonMobil’s main asset is Kizomba, a phased development on Block 15. With the addition of the Marimba North field, which came on-stream last October, this block is producing about 540,000 b/d, with estimated recoverable resources of two billion barrels. A fourth development on the block, Kizomba C, is planned to develop another 600,000 barrels in the Mondo, Saxi and Batuque fields.

BP brought the Greater Plutonio development on-stream in October, and is developing the ultra-deep Block 31, where it has made some 15 discoveries so far. Brazil’s Petrobras is gearing up for an 11-well drilling campaign due to start by the fourth quarter of this year or early next year on its blocks 6/06, 18/06 and 26.

IOCs, which have come under pressure from many oil and gas producers while ‘resource nationalism’ and other trends take hold, seem to feel more comfortable in Angola. “Because of the technical complexity and huge cost of developing ultra-deep finds, Luanda needs to work closely with IOCs, making resource nationalism less of a factor than in countries where the technical challenges are smaller,” says one consultant.

But no one doubts that Sonangol, and players in the political system led by President dos Santos, are extremely ­powerful. Furthermore, Sonangol’s various subsidiaries have a commanding position in the oil services sector.

Downstream development

With the Angola LNG project, Luanda should monetise a major commodity that was previously ignored and wasted, exploiting the rising global demand for ­gas to develop substantial new income flows. Looking further ahead, gas might also be exploited to promote industrial development.

The 5.2 million tonnes-a-year Angola LNG project at Soyo is being developed by Sonangol with major partners Chevron, BP, Total and Eni. Once on-stream – expected in 2012 – most of the gas is destined for US markets.

The government is also due to decide this year on construction of a second oil refinery at the port of Lobito, using heavy oil from the Dalia field. A deal for China’s Sinopec to develop the refinery collapsed last year, apparently because of the government’s reluctance for the project to be foreign-owned. Officials say that Angola wants to build the refinery itself – although there is some scepticism about its capacity to do so.

Manuel Vicente, chairman of Sonangol’s board, said recently that the company’s ambitions for this year included the development of new projects using its own resources.

Local participation grows

A potentially important recent development is the emergence of local private companies operating upstream. These new generation emerging independents, led by players such as Falcon Oil and Somoil, have given well-­connected Angolan businessmen a stake in the upstream industry. A number of new players have won acreage in the past two licensing rounds.

One of the first to enter the sector was Somoil, a well-connected outfit, which has a stake in onshore Block 3/05. Julio Sampaio, who has been an executive at national airline TAAG and worked for the ministry of planning, is also involved.

Prodoil is active in exploration and production, in a joint venture with UK-based oil and gas specialist Amec. Prodoil general manager Pedro Godinho Domingos has worked hard to create a functioning upstream concern, which in 2006 acquired a working interest in Block 1 ­offshore.

Among other local independent oil firms, Angola Consulting Resources, whose managing director is Carlos Amaral, is present in the Gimboia field (Block 4/05), while Poliedro-Oil, linked to National Assembly chairman Roberto de Almeida, is present in Block 02/85. According to analysts in Luanda, these players are likely to have a more important role in the future.

They also expect tenders for onshore blocks to be launched after the September elections and IOCs may find themselves having to line up with local firms.

Sonangol is not contenting itself to taking upstream stakes and developing a local downstream industry. The state company is already an investor abroad, for example, taking a 20% stake in the Petroci refinery in Côte d’Ivoire. Sonangol’s subsidiary in Houston is not only trading crude, but is already involved in LNG trade – learning useful skills ahead of Luanda beginning to export the product. The company has bought into a terminal to reprocess imported LNG.

Sonangol’s financial strategy

Furthermore, Sonangol has acquired a 45% stake in Amorim Energia, which in turn controls 33.3% of Galp Energia in Portugal. So clearly is Sonangol perceived as a potential investor, particularly in Portugal, that chairman Mr Vicente has had to publicly rule out purchase of stakes in Portugal Telecom and Energias de Portugal recently. There was much speculation around this year’s ‘strategic purchase’ of a 4.89% stake in Portuguese bank Millennium BCP.

This says much for Sonangol’s position as one of the more efficient arms of the Angolan state. According to one Luanda source, Sonangol is being used, for the time being, as a sovereign fund to carry out strategic investments on behalf of the Angolan state.

“It is possible that in the near future, Sonangol will sell to a specially designed investment fund the stakes it has in Millennium and in its Banco de Fomento Angola subsidiaries [in which it has a 49.9% stake]. There are also negotiations with Banco Santander for a similar investment,” says one source.

Sonangol has indicated that it plans an international listing – probably on the Johannesburg Stock Exchange but also possibly in New York – by 2010 at the ­latest. This will require a reorganisation of the company’s finances and the certification of its accounts by an internationally recognised body, representing an extraordinary transformation for a company that has been, for so long, the subject of transparency campaigners’ interest.

For all these changes, Sonangol is still a player in the structured finance market, where it has long been welcomed by banks, which during the years have provided 50 international borrowing facilities to the Angolan parastatal.

“Sonangol is trying to grow, and will probably always have a need of liquidity – so it will be no shock if it comes to market again this year,” says one continental European financier.

Standard Chartered had been hoping to put a new Sonangol syndicated loan in place during the first quarter of this year, but this was delayed.

“The question seemed to be whether it would fly in the current market at about 1%,” says one financier. “The subprime fallout has led to pressures on liquidity, pricing and structures and Angola is no exception – but there will always be a market for good deals, at the right price.”

If Sonangol was reluctant to refinance credits at higher margins than those at which it has most recently borrowed, “China could step into the breach again”, says Ian Barnes, special risks division director in broker Heath Lambert’s London office. “China Eximbank and other Chinese banks extended a multi-­billion-dollar, oil-backed tranche to Angola two years ago and remain very active in Africa on all sides.”

Private market support

Western bankers believe the private risk insurance (PRI) market will almost certainly be required to back any major new borrowing structures. Rates for Angola in the global PRI market have fallen significantly during the past two years, in tandem with oil price increases.

“Sonangol credits are taking up much of the [market’s] capacity – and multi-year contract frustration cover on Sonangol is priced at about 0.9% per annum, or about 70% of the lending spread,” says Mr Barnes.

PRI market cover for ministry of finance-guaranteed reconstruction projects is offered at about 50% more than Sonangol credits, according to Mr Barnes. It is clear then that international banks are slowly moving into what can still be a challenging operating environment. Absa Bank has invested in Banco Comercial Angolano; Banco Regional do Keve has a Russian shareholding; and Standard Bank has set up a Luanda office.

Trade financiers are faced with confirming letters of credit that can be sizeable, and which emanate from a local banking sector still seen as under-capitalised. “Generally, spreads in Angola have come down,” says Margrith Lutschg-Emmenegger, president of Malta-based specialist FIMBank. However, she adds, “this trend has slowed down due to the liquidity issue in the market”.

Another trade financier says that the process of obtaining decent-sized credit lines can be aided by Portuguese shareholdings in issuing banks. He argues that state-owned banks still suffer from insufficient financial transparency and that private banks tend to be better managed. According to him, it is the pricing versus liquidity equation that is the big challenge.

“Due to the big foreign interest in the oil industry, Angolan banks get a false sense for the pricing – and should see that people who lend to Sonangol at 1% are dealing with a vastly different credit risk,” he says. “One could go as far as saying that at the rates currently achieved, they are doing so for relationship purposes or for the purposes of market exposure achieved.”

Angola has huge non-hydrocarbons financial needs, stretching into tens of billions of dollars for new bridges, ports, roads, hospitals and power facilities – and for which a new infrastructure financing template will need to be established.

“When you have an emerging market, such as Angola, Nigeria or Zambia, that receives 90% or more of its export receipts from just one main commodity, drawing investment and lending into the infrastructure sector represents the next step up the financial ladder and can take time to structure,” says another international banker.

Infrastructure finance

Financing demands are huge. State power company Empresa Nacional de Electricidade (ENE) must live with generation capacity demand rising at 13% a year – without major industrial projects going ahead (Norway’s Hydro expressed interest, in 2006, in building a 600,000 tonnes-a-year aluminium smelter in Angola which would require some 1635 megawatts [MW] of power). Installed capacity comprises only 810.7MW from hydropower and 1157MW of thermal. Euclides Morais de Brito, head of ENE’s internal restructuring process implementation unit, says that actual available capacity might be just 872MW.

But the potential is huge. Angola’s hydroelectric potential is estimated at 18,000MW, notably from the Kwanza (6500MW), Queve (3020MW), Cunene (2045MW) and Catumbela (1679MW) basins. Paulo Matos, director of planning at the ministry of energy, told a ministry of planning/World Bank seminar in Luanda in May that the development of the Kwanza River projects alone could cost up to $7.3bn between 2009 and 2016.

Angola also has considerable potential to harness its natural gas for power ­generation. Mr Morais de Brito says that the authorities would have to consider the relative costs and benefits of gas versus hydropower.

Gas-fired plants could be built near to the production centres at Soyo, near to the LNG export terminals or close to major demand centres, such as Luanda or the Port of Lobito. Mr Morais de Brito says that this was a political decision, adding that the government would also eventually have to make a decision about tariffs, because the prices now being charged to consumers do not cover ENE’s operating costs.

In other sectors, some financing models have been laid down – for state-owned telecoms, diamond mining and aircraft companies – but the deal volumes involved have rarely been substantial. One of the more innovative steps was taken several years ago by Deutsche Bank, which extended several hundred million dollars in maximum five-year credits for the ministry of finance, under a framework agreement originally signed in 2003. The deals were extended on strictly commercial terms in support of equipment purchases for social and reconstruction projects, and involved risk-sharing between Deutsche Bank and some private investors. These are now working their way through the system.

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