Preparing for a turbulent flow – Part 2

Two years into the global energy market collapse, Saudi Arabia has hurriedly approved a radical economic diversification plan after firing its long serving oil minister.

Last June, the Saudi government approved the first phase of Vision 2030; to transform the economy and reduce dependence on oil with policy measures to privatise state-owned companies, reduce public subsidies, promote services, impose new taxes and increase women’s role in the workforce.

The oil-dependent Saudi government is panicking as Brent crude is expected to fall further this year to average US$43.73/bbl after collapsing from over US$108 in 2013 to US$52.32 last year.

Oil revenues accounted for approximately 30% of Saudi Arabia’s GDP last year, down from 46% between 2010 and 2014, and from over 50% before 2010, explained the IMF.

After averaging 5.2% per year from 2010 - 2014, its economic growth is expected to slump to about a third of that rate over the next two years. Last year, Riyadh reported a record budget deficit of US$98 billion, prompting crisis warnings that the Saudi economy faces the risk of collapse over the next decade.

Saudi formulated a National Transformation Plan that includes the sale of shares in Saudi Aramco and other state assets, the creation of a US$2 trillion sovereign wealth fund, an increase in female employment, an expanded role for the services sector, and the introduction of new taxes and duties.

In May, Riyadh abruptly fired its once powerful Oil Minister, Ali Al Naimi, for failing to protect its global oil market share against growing competition from the US, Russia and Iran, as well as non-conventional and deepwater oil producers. As a result of the persistent oversupply, crude prices collapsed from mid 2014.

Vision 2030 has raised expectations of reforms and fears about Saudi’s political instability due to domestic opposition from rival princes and bureaucratic inertia. His vision to boost the kingdom’s non-oil revenue, from US$43.6 billion last year to US$160 billion by 2020 and to US$267 billion by 2030, has been met mostly by silence.

Nigeria

Nigeria is bracing for more domestic political turmoil from a projected surge in inflation with the 57% collapse of the naira, following the government’s 20 June decision to float the currency.

President Muhammadu Buhari buckled to months of pressure from the business community to free the naira from its official rate of 197 to the dollar. The peg had to go for Africa’s largest oil producing nation to avoid recession and stop the depletion of the nation’s foreign exchange reserves to defend the overvalued currency.

Trading at around 310 to the dollar in late July, the weakened naira will sharply boost the country’s import expenses. The government expects inflation for the rest of the year to surge past May’s 15.68% rate, the highest in seven six years.

Buhari has overseen a rapid deterioration in Nigeria’s political and economic conditions since taking office in May 2015. Buhari has blamed the policies of his predecessor, Goodluck Jonathan, and the collapse in oil prices since mid 2014 for the sharp downturn in Africa’s most populous country. Armed rebels and bandits are adding to the country’s problems with relentless attacks on infrastructure, particularly in the country’s main oil producing Niger Delta region.

The militia group, Niger Delta Avengers, has claimed responsibility for recent attacks that sent the country’s oil production plunging from over 2.3 million bpd to 1.5 million bpd.

According to the World Bank, Nigeria is dependent on oil for nearly 90% of its export earnings and 75% of its budgetary revenues.

Nigeria looks to China for investments

Nigeria is hoping to revive the fortunes of its battered oil industry after signing a Memorandum of Understating (MoU) with China to secure US$80 billion worth of energy investments.

The proposed deals are far from certain amid the escalating threats from militia groups to Nigeria’s main oil producing Niger Delta region and the oil market’s continued weakness after collapsing in mid 2014.

Nigeria’s Minister of State for Petroleum Resources, Ibe Kachikwu, announced the MoU signing between the two countries in June after a three day visit to Beijing, to promote energy investments in his country. Kachikwu, who is also General Managing Director of Nigerian National Petroleum Corporation (NNPC), said several Chinese companies are interested in investing in Nigeria’s pipelines, refineries, gas and power plants, and upstream projects.

However, Chinese firms will be hard pressed to justify making these huge investments in what was once Africa’s largest oil producing country.

The country’s worsening conflicts involving terrorists, local gangs and separatist groups are another source of concern as the violence has scared off investors and severely damaged infrastructure. Consequently, Nigeria’s crude production has fallen sharply, from 2.3 million bpd last year to less than 1.6 million bpd in recent weeks.

Production could fall further as western majors look to reduce their exposure after selling assets to escape the country’s worsening operating environment.

Angola

The IMF said it may return to Angola in October to resume discussions after the financially strapped government of President Jose Eduardo dos Santos rejected an offer of a loan bailout package. Dos Santos said his government did not want the proposed loan and was interested only in consultations following failed talks between the two sides in June.

Angola’s energy-dependent economy has been hard hit by the oil price collapse over the last two years. Its economy grew by 3% last year and is expected to slow to 2.5% in 2016, down from 6.8% in 2013 when Brent crude was still trading above US$100/bbl.

After a two week visit to meet Angolan officials, the IMF team issued a statement with a dismal outlook for Africa’s largest oil producer: “Inflation has accelerated and reached (year-on-year) 29.2% in May 2016, reflecting a weaker kwanza that has depreciated over 40% against the US dollar since September 2014, higher domestic fuel prices following the removal of fuel subsidies and loose monetary conditions.

At best, the fund said Angola’s economy might have a “modest recovery” in 2017 if it significantly improves trade figures and foreign exchange reserves. For a government that relies on oil for 70% of its revenues, this prospect looks unlikely while Brent crude continues to trade in the US$40 - US$50/bbl range.

According to Capital Economics, Angola’s foreign exchange reserves have plunged from more than US$36 billion in 2013 to around US$23 billion today, forcing the government to devalue the currency.

Angola became Africa’s largest crude oil producer in 2Q16 as it pumped out over 1.7 million bpd, overtaking Nigeria, which saw its output slump to less than 1.6 million bpd due to conflict in its main oil producing areas.

Read the article online at: https://www.worldpipelines.com/special-reports/29122016/preparing-for-a-turbulent-flow-part-2/