Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
WorldMay 1 2013

Angola's oil bonanza keeps flowing

Oil looks set to dominate Angola's economy in the medium term and potentially longer if pre-salt discoveries prove as lucrative as optimists hope. But new regulations in the US and Europe could shake up the industry, while the government hopes to develop gas exports and the mining sector.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Angola's oil bonanza keeps flowing

The 24-storey steel and glass headquarters of Angola’s state oil company, Sonangol, stands tall and proud amid crumbling colonial ruins in central Luanda. The dominance of the building and the brightness of its illuminated logo serve as an indelible marker of the importance of a company that is at once an oil concessionaire, regulator and operator, as well a real estate dealer, global investor, and an aviation and telecoms provider.

The headquarters also serves as a firm reminder of the importance of oil to Angola. Crude accounts for more than 90% of Angola’s exports and 50% of its gross domestic product (GDP), and it is because of growing oil output and rising revenues that the country has enjoyed some of the world’s most rapid growth rates since the end of its civil war in 2002.

Oil powers the economy in Angola – now sub-Saharan Africa’s third largest economy – as well as the country’s strategic alliances with China, the US, Brazil and the EU, making it one of the continent’s most powerful diplomatic players.

Pre-salt bonanza?

A member of the Organisation of the Petroleum Exporting Countries (OPEC) since 2007, Angola is Africa’s second largest oil producer, pumping an average of more than 1.7 million barrels per day (bpd). It hopes to raise this to more than 2 million bpd by 2015.

In April, national reserve estimates were revised upwards from a 2011 OPEC figure of 10.4 billion barrels to more than 12.6 billion barrels, largely due to promising discoveries of oil deposits in so-called ‘pre-salt’ layers.

Although pre-salt drilling is more time consuming, technically challenging and expensive, given its location beneath thousands of metres of rock in what is usually ultra-deep water, it could offer Angola substantial rewards. Scientists believe the country’s pre-salt layers may match formations found off the coast of Brazil, where geological patterns are similar owing to the fact the countries were part of the same continent 156 million years ago. This would mean a lot of oil.

“The pre-salt exploration looks to be promising and could potentially catapult Angola to become Africa's largest oil producer,” says Philippe de Pontet, Africa director at political risk consultancy Eurasia Group. He adds that Angola is increasingly more attractive to big oil industry investors than Nigeria, given Angola’s greater stability and fewer “regulatory uncertainties” and security challenges.

Big players

Four of the five oil ‘supermajors’ are present in Angola: Chevron (as Cabinda Gulf Oil Company), ExxonMobil (as Esso Angola), BP and Total. Between them, they run the bulk of Angola’s production, as well as holding significant equity stakes in other blocks, both onshore and offshore.

Other operators, such as Norway’s Statoil, Italy’s Eni, Brazil’s Petrobras and Denmark’s Maersk, are also growing their interests in Angola, as are leading service companies such as Schlumberger and Halliburton.

Somoil and Sonangol’s operating subsidiary Sonangol P&P are the only Angolan operating companies (those that drill as opposed to just owning equity stakes), although this may change with a licensing round set for 2013 offering onshore blocks that are more accessible and require less technology than offshore ones.

Steinar Pollen, Angola country manager for Statoil, which has equity partnerships in eight blocks and has just begun pre-salt exploration in blocks 38 and 39, is buoyant about the opportunities in Angola. “There is a very high level of activity in Angola and a lot of interest. As you can see, all the major companies are here, plus other smaller operators. Our position in Angola is very interesting. We have a good portfolio and in size it is second only to our portfolio in Norway. We have been in Angola for more than 20 years and we hope many more. Angola is a long-term project for us. It is part of our long-term strategy,” he says.

Tackling hurdles

For all the buzz, however, working in Angola is not straightforward. The technical requirements of operating in ultra-deep water are vast and expensive, and importing highly specialised equipment into the congested Luanda port can take months, delaying operations and pushing up costs.

But the biggest headache, companies say, is finding suitably skilled English-speaking Angolan personnel to staff their operations and meet tough government ‘Angolisation’ quotas. In a bid to try to share the benefits of this capital-intensive sector that creates few jobs, as well as secure longer-term control of it, Angola's Ministry of Petroleum enforces strict rules on foreign oil companies. These require 70% of all staff to be from Angola and can include restrictions on the number of annual work permits an individual may apply for, usually no more than three, while visas are often dependent on a guarantee the post will be filled afterwards by a national hire. The intention is not questioned, but it is hard for firms to recruit sufficiently from Angola, with the entire education system devastated by decades of war and very limited professional training options.

“There is a shortage of experienced support to the oil industry, particularly in terms of human resources,” says Martyn Morris, general manager of BP Angola, which has invested more than $20bn in the country since 2000 via interests in nine deep and ultra-deep water blocks. “We want to recruit, train and develop Angolans to fill and lead this company as time progresses, but it is very challenging to find enough talented staff in the local market.”

Looming FX changes

Another challenge for Angola’s foreign operators is the new foreign exchange law for the industry. Since October 2012, all oil companies have had to make payments for goods and services from bank accounts domiciled in Angola. From July this year, those payments to locally based companies will have to be in Angolan kwanzas, instead of US dollars, while from October the provision will extend to include payments to non-resident service and goods providers.

The idea is to channel the billions of dollars’ worth of industry transactions through Angola’s banking system, thus reducing the dollarisation of the economy, boosting national liquidity and stopping the oil sector operating as it has for decades as an ‘island economy’ offshore.

Angola’s central bank, Banco Nacional de Angola, has given strong assurances that banks will be able to cope and has installed new regulatory frameworks, but there are concerns. Asked what impact the new legislation may have on the industry, Mr Morris at BP says cautiously: “It is very early days to say about the law. The principles exposed in the law are sound ones... It will require a rapid growth of the capacity of the local banking environment and it is going to take time to implement.”

There are some fears that the Angolan banks will struggle to handle the high volumes of cash and there is insecurity regarding longer-term repatriation of currency. One former offshore manager with a great deal of experience in Angola says: “Angolan banks have limited capacity. Sometimes they have no electricity or there is ‘no system’; that is the computers go down. Failure to process a payment could mean equipment doesn’t make it in time. Then you’re talking whole operations being delayed and that is big money.”

Dodd-Frank impact

Other legislation that could also potentially shake up the Angolan oil industry has to do with transparency and disclosure. The US Dodd-Frank Wall Street Reform and Consumer Protection Act dates back to 2010, although it is still being vigorously appealed by the American Petroleum Institute and others. Section 1504 will require all US-listed oil, gas and mining companies that have to report to the US Securities and Exchange Commission (SEC) to disclose payments of more than $100,000 that they make to any government anywhere in the world.

The EU Accounting and Transparency Directives (whose terms have been agreed by the European Parliament, European Council and European Commission, but still faces a vote in parliament) go further, compelling EU-listed privately owned oil, gas, mining and logging firms to disclose all payments of more than €100,000, including taxes, royalties and licence fees.

Sonangol, which insists on strict confidentiality clauses in all its contracts and is renowned for its opacity, is understood to be deeply unhappy about foreign legislation trying to override its own terms and conditions. It is not clear how the new EU and US laws will play out, but in 2001 BP was reported to have backed off plans to disclose its Angolan payments under the terms of Publish What You Pay – a social movement advocating financial transparency – after Sonangol allegedly indicated such a move may risk its contracts.

Chinese demand key

Although Western companies dominate Angola’s oil industry operationally, it is China that leads consumption of the end product. According to the US Energy Information Administration (EIA), 35% of Angola’s 2011 crude exports went to China, 14% to the US, 14% to the EU and 11% to India. Chinese government figures for the same year show Angola was the second largest source of China’s oil (12%), behind Saudi Arabia, and for some years Angola has been China’s largest trading partner in Africa.

Angola would have a more diversified market and one closer to home in Africa if it could refine more of its crude, but its single refinery in Luanda, which was built by the Portuguese in the 1950s, struggles to process 40,000bpd.

A second refinery will be located in Lobito, strategically close to the country’s second port and the Benguela Railway which, thanks to a Chinese makeover (made possible by a credit line paid for with oil), will soon link the Atlantic coast to neighbouring Democratic Republic of Congo. However, construction has been slow, with several potential partners, including the state-owned China Petrochemical Corporation, coming and going, and there is still no completion date for construction. As a result, the country is forced to import more than 80% of its fuel, a frustrating irony given oil is one of the few things that Angola actually produces.

Government subsidies ensure local fuel costs are kept down, fixing pump prices at 40 cents a litre for diesel and 60 cents a litre for petrol, some of the lowest levels in the world. The cost to the wider economy in maintaining these prices is significant. According to the EIA, subsidies account for as much as 7.8% of Angola's GDP.

The International Monetary Fund is urging the government to cut the subsidies. Sonangol announced in February that it would implement this, a decision reinforced by long-serving oil minister José Maria Botelho de Vasconcelos in March. But in April, Sonangol appeared to backtrack, issuing a statement to say petrol prices would not change. This is being read as a political move to protect the country from protests similar to those that occurred in Nigeria when it tried to drop fuel subsidies last year.

Other commodities

The most significant downstream development in Angola is the much-hyped $9bn liquefied natural gas (LNG) plant in Soyo. It is hoped the plant will finally begin exporting this year.

Angola's LNG plant was built and is being operated by a consortium of Chevron (36.4%), Sonangol via its gas subsidiary Sonagas (22.8%), Total (13.6%), BP (13.6%) and Eni (13.6%). It will use pipelines to transport waste gas from offshore rigs and compress it into a marketable product.

The repeated delays to shipment have been blamed on technical testing, but insiders say the company has struggled to find a willing buyer, given the recent shale gas developments in the US, to where exports were initially going to be sold. If Angola can find a market, LNG could become a major contributor to its GDP.

In the meantime, Angola continues to be one of the world’s leading exporters of diamonds, although output has stagnated in recent years due to the drop in global prices that led to some operators mothballing mines.

The country also has significant reserves of other commodities, including iron ore, copper, gold, manganese, marble and granite. Non-oil receipts came to just 17% of total income in 2012, according to government budget documents released in February 2013. But the hope is that a new mining code ratified in November 2012 will attract investors to the industry to exploit its potential and create jobs, something the oil sector has largely failed to do. Under the new code, mining taxes have been slashed from 35% to 25% and investors are given more rights and guarantees.

A number of colonial-era iron ore mines that were closed during the war are being brought back into commission, and there are manganese and phosphate mining projects under way. In the longer-term, there are plans to build factories producing fertiliser for export, as well as an aluminium smelting plant.

“Angola is clearly keen to diversify its mining sector beyond diamonds and it has put the pieces in place, from a regulatory and infrastructure perspective, to move aggressively in that direction,” says Mr de Pontet of Eurasia Group.

He cautions, however, against Angola having too much exposure to falling commodity prices and adds that “infrastructure constraints render most greenfield projects uneconomical at current prices”.

Was this article helpful?

Thank you for your feedback!