The Economic and Political Consequences of Falling Oil Production in Sub-Saharan Africa by 2030
The sharp rebound in oil prices since the second half of 2020, to nearly $70 per barrel in May 2021, represents only a temporary respite for oil-dependent African economies that must change their economic model very quickly. The Covid-19 crisis has weakened the oil economies of the Gulf of Guinea even more than those of other African countries, aggravating a situation that had already become critical as of 2014- 2016, the previous period of oil price crisis. While all of Africa’s OPEC producers entered recession in 2020, other historically low- volume producers were much less affected by the economic consequences of the pandemic and avoided economic recession. With oil reserves plummeting, depleted deposits, and high production costs, almost all of the Gulf of Guinea’s oil-producing countries need to reform their hydrocarbon sector to try to retain or attract companies that can make large investments as appropriate. This is the case for Cameroon, Gabon, Congo, Equatorial Guinea, Côte d’Ivoire, Angola and the Democratic Republic of Congo (DRC). Elsewhere in sub-Saharan Africa, this is also true for Sudan and South Sudan, and even for countries with relatively small deposits (Niger and Chad). Finally, it concerns production areas located in deep or very deep offshore fields (Nigeria and Angola). The current environment is moreover becoming more complicated, especially as the volume of oil investments worldwide may decline, owing to the constraints of green finance and the new strategies of the oil majors. Africa’s historic Gulf of Guinea production zone will witness a gradual retreat of the Western majors, which will be replaced by smaller companies with lower structural costs. While Nigeria will likely retain the majors for large offshore projects for some time, the implementation of its Petroleum Industry Bill reforming the sector will nonetheless be critical to engaging in these costly investments. In Angola, however, the majors are expected to divest their aging assets by 2030, or even contemplate their complete exit from the country. The same is true in Equatorial Guinea. If Gabon and the Republic of Congo have seen their oil flows increase recently, the fall in production over the medium-term is set to be inexorable. Nigeria may boast having significant reserves. However, security challenges and systemic corruption at both the federal level and among its nine oil states in the Niger Delta are significantly delaying investment decisions. This is all the more important because large investments will be needed to maintain even a pre-Covid-19 level of production. Angola has no option but to agree to lower its taxation, as well as its local content and participation requirements in its national company Sonangol, to attract the largest oil companies to new exploration zones, in order to curb the decline in production that began five years ago. Diversification of the oil-producing economies in Africa will thus have move forward a pace, and will be essential to fund their public sectors, so as to prevent rapid impoverishment of populations. But, so far, most of these producers have been biding their time, betting that oil prices will rise. Gabon is probably the only country that has attempted to implement a real diversification plan over the last decade, as in agriculture, a sector which requires more labor than the oil sector. Gabon is also the region’s only major producer that has established welfare-state policies, even if these perform poorly. Traditional lenders (like the IMF) are struggling to accelerate the transformation of these economies that are “hooked on” petrodollars, even when loans granted are conditional. The regimes in place in these countries suffer only marginally from falling prices and production. Their resilience seems strong, especially given that the oil sector has never financed any welfare state (save in Gabon) and has never provided any benefits to the population beyond often-regulated gasoline pump prices (which are tending to disappear in Nigeria). Equatorial Guinea – and soon Congo – is probably the country facing the greatest difficulties. Output levels have been plummeting for almost a decade, and the economy has been in recession since 2016. The absence of significant reform of the hydrocarbon sector, coupled with recent rigidities concerning local content, and obstacles to company departures have not helped attract substitute actors suitable to local power centers, and will likely lead to a narrowing of Equatorial Guinea’s extractive sector. Having never developed any welfare state and having increasingly suppressed any protests, Malabo should however not face socio-political difficulties.