Angolan budgetary pressures rise on low oil prices

Angola faces a dilemma. If OPEC and non-OPEC producer cuts fail to deliver on price, the country faces not just a low-price environment but a curb on output.

For a state so dependent on oil revenue, this only leaves one source available to improve the state’s finances – the oil industry.

Figures vary, but Angola needs an oil price of roughly $85/barrel to balance its budget.

Prices have been well below this figure for three years, and, even with OPEC cutting production, Brent crude is only expected to average somewhere in the mid-$50s over 2017.

The US Energy Information Administration in April forecast Brent at an average $54/b this year, rising to $57/b in 2018.

The long slump has exposed the overall failure of Angola’s attempts to diversify its economy.

Billions of dollars have been – and are being – invested in infrastructure, such as ports and railways, but the role of private companies remains limited and development remains heavily concentrated on the capital. Those without official patronage face an uphill struggle.

Moreover, the boom that saw parts of Luanda acquire property prices on a par with London or New York is fading.

There is not much transparency in the government’s financial figures, but the available data paint a difficult picture.

Inflation remains worryingly high, at 36.5% in March, debt levels are rising quickly and foreign currency receipts, of which the oil industry provides 95%, fell by 44.5% in 2015 to $33.4 billion.

Per capita income may have risen from $350 in 2000 to $4,100 last year, but the economy remains hugely dependent on oil exports.

This will affect the government’s management of both the wider economy and the oil industry.

Luanda needs to squeeze as much revenue from the oil sector as possible, either by maximizing output, an option constrained by its membership of OPEC, or increasing its share of revenues.

In production terms, the Angolan oil industry is doing well. Some new projects are being brought on stream that were initiated before the extent of the price crash had become apparent.

Mafumeira Norte began producing oil and gas last October and is gradually ramping up to 150,000 b/d of oil and 350 million cu m/d of gas. Eni’s East Hub and West Hub schemes are also coming into production.

In addition, after an extended outage, Angola LNG came back on stream in fits and starts last year.

Oil output averaged 1.748 million b/d last year and production capacity should reach 1.9-2.0 million b/d by end-2017, although the government has promised to keep average output at 1.751 million b/d under the new OPEC quota regime.

The government is particularly keen to tap into the estimated 4 billion barrels of marginal reserves.

It passed new legislation to encourage their development last year, but there has been little response from the international oil companies (IOCs).

New projects are unlikely to be sanctioned until oil prices recover, leaving only one real target, the oil industry, capable of providing a short-term boost to the state’s finances, albeit with negative long-term consequences for investment.