The fall in global oil and gas prices is multi dimensional and hinges on several large trends playing out all at once. These include slow growth in emerging economies, the “shale gas revolution” in the U.S., and a shift towards renewable energy in Europe.
However, for Stefan Andreasson, senior lecturer in comparative politics at Queen’s University Belfast and a specialist in Africa’s energy sector, the heart of the matter for Africa’s producers is the rise of shale. He notes that between 2001 and 2010, exports from Western Africa to the American market increased by about 40 percent on strengthening ties between the regions, only to be followed by “an absolutely astounding and precipitous drop.”
He says that Nigerian exports to the U.S., for example, have effectively ceased in recent months, following a 75-percent drop from 2010 to 2013.
Other driving forces include slowdowns in emerging markets, and the Organization of Petroleum Exporting Countries (OPEC’s) apparent strategy of retaining market share at the expense of price support.
Considering the changes in the industry, the prospects afforded by shale extraction, and the level of new discoveries in Africa, it’s uncertain how prices — and thus extraction activities — will be affected in the coming years.
Godwin Sweto, managing director of Encorex, an energy focused consultancy, trading, and investment company, sees only a slow return to higher price levels.
“There will be some price reversal as supply is impacted somewhat,” from an eventual drop-off in spending on high-cost projects, Sweto said. “This will apply to the more marginal shale, ultra-deep, pre-salt, oil sands, and frontier plays where the marginal cost of the new barrel exceeds $90.”
That being said, Sweto sees lower prices lingering for some time. “The slowing demand… (and) increases in energy efficiency will continue to support a surplus in the market for the medium term. I do not see oil prices scaling the circa $110-per-barrel heights in the next three-to-five years,” Sweto said.
Could this derail plans for new developments in countries like Mozambique and Tanzania, which have just started tapping into their own reserves?
“There’s excitement in the industry (from new discoveries in Africa)… That could be put in temporary jeopardy because of this damper and sense of uncertainty,” Andreasson said. “There seems to be a success story that everyone is talking about and that is looking less secure now.”
Generally speaking, however, current infrastructure spending has not been revisited or reduced.
Joseph Rohm, portfolio manager for Investec Asset Management’s Africa public equities fund, said, “If I look at countries like Kenya where they’re pushing through with a big oil pipeline between Uganda and Kenya, that’s going ahead.
“Similarly for some of the newer oil and gas countries, such as Mozambique and Tanzania, that infrastructure spend has been committed and it will be ongoing — (though) again, that will be impacted if the oil price (remains) at a sustainably low level.”
While the eventual price shifts are subject only to speculation at this point, the competition for market share remains stiff.
The adjustments required to adapt to changes in global demand could come at the potential cost of political stability and economic investment. Andreasson said, “You have shaky economies coupled with very high dependency on oil exports,” across the region, including exporters like Nigeria, Gabon, and Equatorial Guinea.
He continued, “I have a hunch, partly to do with geographics but partly to do with the ability to offer good prices, that the African exporters might not be as competitive as the ones in the Persian Gulf.” These factors could pose a threat to economic growth and general stability.
Sweto also cautioned that “economies that are heavily dependent on oil and gas revenues will battle to achieve fiscal break even. The biggest risk is the socio-economic and political impact, which could result in civil instability.”
A period of prolonged lower oil prices could also impact those new infrastructure projects in Mozambique and Tanzania, which until now have the potential to “improve energy security for the whole region and promote much-needed regional economic integration,” Sweto said.
Of course, that being said, there are also beneficiaries to the price drops, particularly if lower prices continue to linger for some time.
“What would be the impact of a low oil price? Well, the consumer would benefit, especially in oil-importing countries, like Kenya for example, where a low oil price would mean a stronger current account, it would mean a drop in inflation — and that would be passed through to the consumer,” said Investec’s Rohm.
Certain business sectors, such as the rapidly growing cement industry, could also see major gains. “The cement industry would be one of the biggest beneficiaries (of low oil and gas prices), also logistics companies and transport companies would be key beneficiaries,” Rohm noted.
Lower prices could also have a positive impact on governance, both at the political and corporate level.
Rohm sees such opportunity not only for existing exporters like Nigeria, but also for countries developing their oil industries, like Kenya and Mozambique. “I think there will be much greater scrutiny on governance, on leakage, and on ensuring that the right fiscal regime is in place for these countries,” he said.
Sweto is similarly positive. “I… see the lower prices having the effect of lowering operating margins, which, inter alia, attract greater shareholder scrutiny, and ultimately improved governance.” (emphasis author’s).
In other words, the economic impact of both higher and lower prices is mixed, and only time will tell what oil will bring.
