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Angola’s oil exploration takes a hit

Oil drilling in Angola came to an unprecedented halt in April, as plummeting prices caused major foreign companies to suspend production. The loss of revenues in Africa’s second-largest oil producer could thwart President Joao Lourenço’s plans to reduce severe poverty among the country’s 32 million people. Noah Browning and Libby George report.

The coronavirus pandemic has done in a handful of months what even a 27-year civil war did not: It has brought oil drilling to a halt in Angola, Africa’s second-largest oil producer. The consequences could be grave for a poor country that relies heavily on oil revenues and is saddled with debts that exceed its economic output.

President Joao Lourenço hopes to sell off parts of Sonangol, but will anyone buy them now?

President Joao Lourenço hopes to sell off parts of Sonangol, but will anyone buy them now?

The halt in oil exploration, which has not been previously reported, could represent a setback for one of the most ambitious economic reform drives on the continent, aimed at cleaning up corruption and attracting foreign money. It comes as Angola seeks buyers in its push to privatize state energy assets, which is central to the reform process.

Oil prices crashed to two-decade lows in April, prompting the five major international energy companies operating in Angola – Total, Chevron, ExxonMobil, BP and Eni – to idle or ditch their drilling rigs, according to company sources and industry experts.

“We have suspended all our drilling activities, like all other oil operators in Angola,” announced France’s Total, which is responsible for almost half the country’s oil output. The company said it would instead focus on current production.

Sarah McLean, senior analyst at IHS Markit, said it was the first time since its records began in 1984 that Angola had not had a single rig drilling. The London–based information provider had expected at least 10 rigs to be operating in the country by the end of 2020, the highest number for any African nation this year.

The Angolan finance ministry and president’s office did not respond to requests for comment, nor did state oil company, Sonangol, which works in partnership with the foreign oil majors.

Damaged, docked, dormant

Angola’s prospects looked bright going into 2020. Energy majors increased their exposure to Angola in the wake of reforms to investment laws by President João Lourenço, who took power after almost four decades of rule by Jose Eduardo dos Santos, and greater transparency at Sonangol.

They planned to operate more drilling ships in Angola than anywhere on the continent this year, to tap tantalizing new offshore discoveries.

Then COVID-19 struck.

As global demand fell off a cliff amid lockdowns, oil companies lopped billions from planned spending.

Angola, with its relatively high-cost offshore fields, was among the first on the chopping block. Reduced demand from the virus’s first victim, China – the top destination for Angolan oil – also hit the southern African country hard.

The Kaombo Norte floating oil platform off the coast of Angola in November 2018.

The Kaombo Norte floating oil platform off the coast of Angola in November 2018.

Total, in a bad portent, had already cancelled one drill ship after a March 7 technical problem. The vessel is now parked off the Canary Islands.

The French producer has since idled three other drill ships; the Transocean Skyros and the Maersk Voyager were sent to docks at the capital, Luanda, while the Seadrill West Gemini lies dormant at Walvis Bay in Namibia.

Total did not comment on specific ships, but said it hoped to restart gradually “as soon as the situation allows.”

The U.S. major Chevron cancelled its contract with rig supplier Valaris in late March, and parked the drill ship the Valaris 109 in Luanda’s port. A Chevron spokesman said it would continue “cost-managed production” at existing fields.

Meanwhile, two offshore discoveries which Italy’s Eni described as “significant” last year are now on ice, the company said.

American firm ExxonMobil and Britain’s BP, the other oil majors in Angola, have also cancelled planned drilling until at least 2021, according to industry sources.

Exxon and BP declined to comment.

Selling ‘the octopus’

Any time would be bad for Angola’s drilling to dry up. Yet the crisis comes at a key juncture for the country’s reform drive, which it is counting on to help improve living standards for the population of over 32 million. According to the Oxford Poverty and Human Development Initiative’s global poverty index, about a third of Angolans live in “severe poverty.”

The country is seeking to attract investors for a sweeping privatization program of state assets that include energy assets such as parts of Sonangol, as well as ports, banks, and telecom firms.

The program, launched last August, had already got off to a rocky start.

Angola has yet to sell any major assets of Sonangol, which its petroleum minister described as a sprawling “octopus.” Several assets scheduled for sale last year have yet to be tendered. The only announced purchases have been of a slaughterhouse firm and farm complex, which netted $35 million from local buyers in April.

Angola was aiming to shed smaller assets before privatizing 30% of the whole Sonangol group via an IPO in 2022. That time-line, always ambitious, now seems unlikely, according to Nick Branson, senior Africa analyst at Verisk Maplecroft.

“The idea of a Sonangol IPO just seems hopelessly optimistic,” he said.

“There are so many moving parts and such a lack of appetite for these sort of transactions anyway. Look at how long it took Saudi Aramco,” he added, citing the long struggle by Saudi Arabia to privatize its state oil firm amid flagging prices.

The head office of Angola’s state oil company, Sonangol, in Luanda.

The head office of Angola’s state oil company, Sonangol, in Luanda.

Despite its problems, Angola has announced the tendering of state-owned bank BCI and parts of Sonangol’s ports and logistics businesses in recent weeks.

Gonçalo Falcão, a Brazil-based partner in global law firm Mayer Brown, which advises potential buyers on aspects of the privatization drive, said the government would not settle for a fire sale.

“It’s still to be seen how many competitive bidders emerge,” he said, noting the state could postpone tenders if it deems offers too low.

“They’re trying to send a message that, okay, we’re struggling, but we will continue going forward with our plans because we’re a reliable country and we’ve made a huge effort to make our companies transparent and reduce corruption.”

Servicing huge debt

President Lourenço has been seeking to tackle a troubled legacy after Angola clawed its way out of the 1975-2002 civil war. The country is ranked as one of the world’s most corrupt, in 146th place on a list of 183 countries, according to Transparency International.

After he took power in 2017, Lourenço moved to remove dos Santos’s children from key roles. Dos Santos’s daughter, Isabel, had been running Sonangol, while his son, Jose Filomeno – now on trial – had run the sovereign wealth fund.

Despite Angola earning praise for its anti-corruption drive, the economy – which draws a third of state revenues from oil – was in a precarious position before the pandemic. The country received a record $3.7 billion loan from the International Monetary Fund last year. It also owes billions to China and holds the largest single bilateral debt burden in sub-Saharan Africa, where it is the third largest economy.

Its debt-to-GDP ratio has climbed to the highest in around two decades, above 100%, and servicing its borrowings eats up $9 billion a year.

“The Angolan state owns a major universe of companies – telecom companies, water companies, electricity,” said Falcão of Mayer Brown. “I wouldn’t say they are desperate, but keen to make revenue, and they think a good investment opportunity six months ago would still be a good investment today.”

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