Doing Business in a low oil price environment: The impact on Africa

17 October 2016

World oil prices have declined significantly over the last couple of years from a high of US$ 115 in June 2014 to less than US$ 35 in February 2015. To say that this development has ruffled some feathers is an understatement. Causes of the price drop are numerous and have been well documented by analysts, including:

  • Slowing growth in emerging markets, mainly China;
  • Growth in unconventional oil sources such as Shale oil, Oil sands and Biofuels resulting in low demand for traditional oil and hence creating an oil glut;
  • Appreciation of the US dollar. According to the World Bank Group, “between June 2014 and January 2015, the US dollar appreciated by more than 10% against major world currencies”. The effect of this is for countries in non-dollar linked currencies finding oil more expensive hence reducing demand.
  • Geopolitical tensions in the Middle East and Eastern Europe during 2014 & 2015 which had a speculative impact on oil prices causing the drop.

Most African Economies are very heavily commodity based and as such fluctuations like these have a significant impact on them, some of which are discussed below:

Delayed investment in oil exploration projects

Delayed investments in exploration projects especially those in deep-water acreage, are typically very expensive and capital intensive to carry out. Angola, for example has significant prospects in deep –water, ultra- deep water and pre-salt areas. According to the recent PwC Africa Oil and Gas Survey for 2016, these opportunities are significant and can be described as high risk, high reward. Unfortunately, in a low oil price environment, the appetite for risk is lowered and as a result capital expenditure/investment is reduced.

Other African nations are also feeling the brunt of this development. According to Reuters online, projects by Royal Dutch Shell and Tullow Oil in the West African region have become uneconomic to carry out.

Reduction in public revenue for large oil producers

Oil exporting countries such as Angola and Nigeria have experienced significant losses in Government revenues due to the reduced oil prices, and have been forced to explore economic diversification which in itself is not a bad thing. The President of Nigeria Muhammadu Buhari, has been quoted as stating the economic diversification of Nigeria was necessary and urgent and would focus on areas such as agriculture, manufacturing and mining.

Angola, has probably been one of the worst hit African countries in this area. It is one of the least diversified economies in the world, and has experienced a reduction in public spending which in turn has resulted in public sanitation problems and health epidemics such as the recent yellow fever outbreak.

Gas projects also affected

Oil and gas prices are inextricably linked and low gas prices have also meant that potential gas exploration and development projects have been delayed or indefinitely put on hold.

Africa’s response

It is often said that difficult times are meant for reflection and present an opportunity to chart a different path for the future.

Similarly, this lull in the oil and gas environment presents an opportunity for the Governments of oil producing countries to consider making changes in the following areas:

  • Simplifying the tax and regulatory landscape;
  • Abiding by provisions in contracts and agreements thereby instilling confidence in existing and potential investors;
  • Partnering with oil and gas companies to build capacity within Government organisations as well as the private sector.
  • Creating a business environment of certainty, speed and consistency.

The tide will surely turn for the better, and the behaviour of African Governments during this period, will determine investor response when things improve.

We invite you to join us at our Africa Oil & Gas Tax Day in London on Wednesday 16 November, where we will examine in more detail some of these key challenges, particularly from a tax and regulatory perspective. If you would like to join us on the day, please click here to register interest.

 

Ayesha A Bedwei
PwC | Partner – Africa Energy Tax Leader

Email | +233 (0) 302 761 500

View Alan McCrae's profile

 

Click here to read our PwC Africa Oil and Gas Survey for 2016 report

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