The old Balkanisation refrain has been revived since the election of Félix Tshisekedi, brandished by a Congolese opposition that has no interest in peace in the DRC and which wishes to stir up hatred against Rwandans and Rwandan-speaking Congolese. A pure and simple sham.
Shale oil spells bad weather for African oil exporters
African oil producers are feeling the heat as supply outstrips demand. They are banking that Shale oil's rising capital expenditure costs will give them room to breath.
There is a price war unfolding in the US as pipeline operators discount rates to attract crude oil exporters.
A combination of excess capacity and the continued Shale boom will see the re-opening up of pipelines that are expected to transport at least another 1.6m barrels of oil per day (bpd) from West Texas to the Gulf Coast.
That isn’t all.
Production from the US’ Permian basin, topped 4.2m barrels in August. The flood of production from the US has already seen it surpass Saudi Arabia and Russia to become the biggest oil producer globally. The impact of this phenomenon is widespread.
Global oil prices (Brent crude) started 2019 on a high, reaching around $74 per barrel in April and then a low of $53 in August. The impact of historic key price drivers such as Middle East geopolitical risk or emerging market demand has been diluted by Shale.
- While the on-going US-China trade war has also weighed down on global demand, with the International Energy Agency (IEA) in August lowering its 2019 forecast, it would be myopic for Africa’s leading energy producers to underestimate the longer-term impact of Shale.
US Shale oil production which was almost next to nothing in 2010 has grown to an estimated 7m bpd in 2019 (IEA).
A key characteristic of Shale is its high sensitivity to price movements, with producers often able to fast-track drilling as prices rise. Typically, the ensuing supply glut pulls prices downwards, curbing drilling and forcing prices up back again, and then the cycle perpetuates itself, all things being equal.
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But not all producers are equal.
Low-cost US shale producers tend to continue to drill even through a low price environment, and the impact on global oil markets has been widespread.
- This has proven to be a headache for OPEC in its price targeting strategy.
- Late in 2018, OPEC undertook more production cuts, even striking a deal with Russia, a non-OPEC producer, to curb output by 1.2m bpd – both agreed in June this year to extend the deal by at least another 6 months.
- OPEC’s strategy may have been helped by recently renewed US sanctions on Iran, and geopolitical tensions in the Straits of Hormuz in July when Iran’s revolutionary guard captured a British-flagged ship after the British Navy had itself seized an Iranian ship in Gibraltar.
But steadily rising Shale oil production and the US-China trade ‘war’ have superseded events, and prices have not significantly rallied. Any short-term spikes in prices look unlikely to be sustained, and Shale is the reason.
- In addition, many OPEC member states need more and more revenue to meet their expanding budget commitments.
- Curtailing production to artificially manage global prices by limiting supply works for a while but eventually these same producers are going to need to start producing more to meet the expanding revenue requirements, especially if prices are unable to compensate substantially for much lower production volumes.
Closer to home, Africa’s producers face a double-edge sword.
Higher oil prices are always a boon for countries like Nigeria whose budgets are benchmarked to oil prices, even if such export-dependency is not a good thing.
On the other hand, domestic consumers of imported fuel often bear the cost of high prices, and attempts by governments to cushion the impact via subsidies often creating market distortions that undermine economic management and in some instances, impact the entire industries.
In the new Shale dispensation, clearing cargos of Nigeria, Angolan and light West African crude grades, which directly compete with Shale, is now a major challenge.
- In early September for instance, Sonangol state oil firm of Angola (where oil accounts for 95% of state revenues) had to lower its sale offer on its Dalia crude grade to attract buyers, as up to 15 cargoes of Angola’s crude remained unsold for October.
- Other African producers – Algerian, Gabon, and Congo – are feeling the heat too.
The competition has dampened demand for African oil in its traditional export markets, including among European refiners, and even comparatively newer markets in Asia, China and India.
Assuming the end goal is to achieve a balanced energy mix, a sustainable energy future for Africa has to involve the creation of local and regional markets in order for the continent to weather global oil market changes.
Infrastructure will be critical to the attainment of this goal.
For instance, gas infrastructure investment alone in Africa will require close to $100bn annually to create the level of demand that will spur industrialization on the continent.
- The conversion and adoption of existing infrastructure to distribute and transport gas is a possibility, as this would limit investments to only centralized production facilities.
Natural gas production is likely to equal oil’s share of total energy produced in Africa by 2040 (Africa50), and its uptake will become necessary as the global economy diversifies.
- It may be necessary to go as far as importing gas initially in the form of Liquefied Natural Gas (LNG) to help create demand on the continent.
However, even the addition of new refining capacity in Africa, such as Dangote’s planned 650,000 bpd Nigeria refinery, may not be enough to absorb production without the global or regional export of spare capacity.
More production inevitable?
US Shale oil has been responsible for the vast majority of oil supply increases for the past several years.
But is there good reason to believe that the trend of the past years, where Shale oil production added 1 million barrels per day each year, will continue?
The trajectory of production costs could potentially derail production hikes, especially given diminishing production returns from low prices.
- Many global energy companies were forced to liquidate assets to pay for the rising cost of drilling for new reserves, because cash flow from production was not sufficient to pay for it.
- The increased production from new unconventional sources like Shale has also only been possible because oil prices tripled at the turn of the 21st century, peaking at around $147 per bbl in mid-2008.
Since 2011, however, while the industry’s capital expenditure has risen, prices have remained flattish.
In short, the Shale production boom today is related to high oil prices in the early 2000s. That’s roughly a 10-year gap. With sluggish oil prices today, the longer-term forecasts for Shale production may not be as robust, even though we may not know this for another few years.
It may not all be bad news for Africa.
- Technology developed for Shale is now being extended to expand conventional oil drilling in frontier and mature energy markets in the North Sea and offshore Africa.
- Furthermore, investment in unconventional drilling (the driving force behind Shale) has been made at a time of record low interest rates in real terms; at least in the West.
- If the divergence between price and costs continues — and especially if interest rates rise back to normal levels — investors could get cold feet and Shale supply growth could still falter.
Africa’s oil and gas producers shouldn’t hold their breath though.
Ultimately, the structural shift in global oil and gas markets as a result of the Shale boom, should force a re-think among Africa’s policy makers on how to develop and monetize natural resources locally or at best, regionally.
Employing enabling policies to back the private sector, the US has successfully built a network of pipeline operators and producers, who can easily access capital in a low-interest rate environment.
This ecosystem, underpinned by a strategic infrastructure network of pipelines and transportation has accelerated this Shale revolution and made the US the top global oil producer.
Bottom Line: Africa’s policy makers can, and should, take a leaf from that book.