THE failure to reach an agreement to cut oil production by OPEC countries at a crucial meeting Thursday is set to bring down the crude prices even further, heralding a tight financial position for oil exporting countries in Africa.
Wealthy Gulf states, led by Saudi Arabia, are positioning themselves to ride out the slump in oil prices in a move to protect their market share, which has been fiercely opposed by countries like Venezuela and Iran, which cannot afford to weather the low prices for long.
It’s been seen as an attempt by the Saudi’s to drive prices so low that it becomes uneconomical for US shale oil industry players to continue exploiting shale reserves – perhaps the major reason for the recent glut in the oil market. At $73.50 a barrel, the price of Brent Crude has seen a 30% slump since June.
But the Saudi strategy could backfire badly, if technological progress allows the US shale producers to remain profitable even with prices under $60 a barrel.
Shale oil is an unconventional oil produced from oil shale rock fragments, but for decades, there was no economically viable way to exploit shale reserves – essentially, it entails squeezing oil from a rock.
But recent advances in technology have made it possible for the reserves to be extracted and processed profitably, and the US, with up to 2.6 trillion barrels of recoverable shale reserves, is poised to become a net oil exporter by 2020.
The shale revolution has affected US oil suppliers unevenly, hitting particularly hard those in Africa such as Nigeria, Algeria, Libya and Angola, which produce “light, sweet” crude – low sulphur content - similar to the one pumped in the new oil fields of North Dakota.
But the biggest OPEC producers, Saudi Arabia and Venezuela have been less affected, as they produce a heavy, high-sulphur crude.
Already, Nigeria is feeling the heat. Just five years ago, the country was among the top 5 oil suppliers to the US, accounting for about 11% of US oil imports – about 1 million barrels a day. On the other hand, Nigeria is heavily dependent on selling to the US, with America buying about 40% of Nigerian crude five years ago.
But in July this year, oil exports to the US stopped completely; zero barrels of Nigerian oil were imported by the US.
Angola has been experiencing similarly painful pattern of decline, with its exports to the US dropping about 30% between 2011 and 2012.
This week, the Nigerian government moved to devalue the Naira, as the drop in oil prices is putting pressure on the government’s financial position.
Despite being one of Africa’s biggest exporters of crude, Nigeria is Africa’s biggest importer of refined petroleum products, as years of mismanagement and corruption have run its refineries to the ground.
The Central Bank of Nigeria set the new official exchange rate at 168 naira to the dollar from the previous rate of 155, which makes imports more expensive in the country. Already, the Naira has devalued 6.7% this quarter.
Ghana too, had gone on a borrowing spree over the past few years, only to trigger a currency crisis, and with the price of oil slipping, saw the country in August go to the International Monetary Fund (IMF) hat-in-hand for a bailout.
Godwin Emefiele, governor of Central Bank of Nigeria, said Tuesday that the current downturn in oil prices is not transitory but “appears to be permanent” – a situation that should dampen the enthusiasm of countries like Uganda, Kenya, Tanzania and Mozambique which just a few years ago seemed poised to reap from an oil bonanza.
It’s a sobering scenario for East African governments, which have “become intoxicated by industry hype and have not managed public expectations”, according to this story by Alex Vines of Chatham House for CNN.
In Uganda, for example, local villagers in western Uganda where oil was discovered in 2006 have been selling off their land to real estate investors, and hotels, guesthouses, restaurants and supermarkets were springing up all over the region even before roads to the oil fields were put in place, or even a single barrel is out of the ground.
Africa will now have to turn to Asia to sell its crude to, which means competing with the Middle East for that market, but even there, a recent slowdown in economic growth in China and India has reduced demand for oil and made that market less promising.
To complicate matters even further, China and Australia have their own reserves of shale, and if they were to exploit their reserves, or if South Africa discovers and develops major reserves under the Karoo, then East Africa’s mid-term prospects could change significantly, Vines argues.
And there’s another risk, that with a lower oil price, the financial investment case for green energy becomes relatively less attractive. Africa has increasingly been attracting investment in renewable energy but such ventures may find themselves being put on ice; the continent’s potential for big wind and solar power generation is the highest in the world.
- Additional reporting by Xinhua