Artigos

Sonangol. Oil or energy company?

1- Introduction. Sonangol’s privatization and the oil market

On June 15, 2021, at 16.00, the sale price of Brent oil (which serves as a reference for Angola) was USD 73, 45[1] . A month and a half ago, the price was around USD 66.00, and in recent times there has been a sustained rise in the price, as we had predicted in a previous report[2]. If we notice, when we made this forecast (June 2020), the price of oil was situated at USD 36.6. In practice, in one year the price doubled.

However, the government has put forward more details on Sonangol’s partial privatization. The Minister of Mineral Resources, Oil and Gas, Diamantino Azevedo, repeated[3] his promise to approve the schedule for the sale of 30% of Sonangol’s capital on the stock exchange during the current presidential term, explaining that it will be a staggered process, and that there will be several available tranches: “stocks for Sonangol workers, stocks for Angolans who are interested and for strategic partners who later want to become partners”, a model that we defend in due course[4].

A third element to consider when analyzing Sonangol’s is the energy transition. In the United States and Western Europe, at least, this has become something of a recurring mantra forcing oil companies to modify their strategies so that they are less dependent on oil and contribute to a “green” economy. Sonangol finds itself at this crossroads between the need to recover its old aura, to be privatized, but not just relying on oil.

This report will analyze the possible solutions that the Angolan oil company has and point out some strategic paths.

2-The two determining forces in Sonangol’s strategy

There are two somewhat opposing forces regarding the strategy Sonangol may adopt in the future.

The first force “glues” the company to the oil price and aims to keep it as an oil company. In this view, what Sonangol must do is focus on its “core business” – oil – and then become efficient. Therefore, in this context, Sonangol’s restructuring is focused on achieving profits in the oil business, making profitable investments in the area and increasing as much as possible, at the lowest cost, in oil production. The essential measures taken by the current government with a view to reorganizing the company are in this direction. As Minister Azevedo said: “The first measure we took was to free (Sonangol) from the concessionary function, which could create conflicts of interest. We could not take a company with a concessionary, regulatory and business function to the stock exchange”, and another measure was create an “attractive” company that “encourages investment”, which involved reducing the number of subsidiaries and selling non-nuclear oil companies[5].

The other, somewhat opposite force is the energy transition (the green economy). Here it is argued that Sonangol should not be overly dependent on oil, and that Sonangol should become, as happens with other companies, for example, BP, Aramco or Galp, a global energy company and not an oil company. To this is added the potential of non-oil natural energy resources that the country has, such as sun, water, etc.

3-China, India and the OPEC gap

Contrary to what one might think in a Eurocentric analysis, the answer to Sonangol’s future characterization is not obvious. Much depends on the markets to which Sonangol wanted to allocate its production and on the country’s development needs. If you look at it, the recent rise in the price of oil was essentially “pulled” by China’s renewed oil appetite. According to the Bloomberg[6] financial agency, it was the strong demand for gasoline in China that boosted the need for crude oil. The truth is that China is among the biggest drivers of fluctuations in oil prices and China has been buying oil like there is no tomorrow, as a result, prices have gone up. The question is whether China will continue to drive this rise in the medium term in a way that allows for a sustainable oil strategy in relation to Sonangol.

There are two broad lines to consider in trying to anticipate China’s future behavior. The first is its economic level, while the second is its commitment to the energy transition.

China is not yet at an economic level that corresponds to a rich and developed country. According to data from the World Bank, in 2019, the Chinese GDP per capita is in the order of USD 10,000. For comparison, Portugal, one of the poorest of the rich countries, has a GDP per capita on the same date of USD 23,000 and the United States is at USD 65,000[7]. Countries with GDP per capita identical to the Chinese are Argentina, Lebanon, Bulgaria, Kazakhstan, Turkey or Equatorial Guinea. It is easy to see that China still has a long way to go and will need a lot of energy, especially oil.

China’s oil demand has nearly tripled over the past two decades, accounting on average for a third of global oil demand growth each year. From what we have just exposed, China will continue to lead the demand for oil in the coming decades. However, the pace of the country’s oil consumption will not grow as fast, although it will continue to grow. Over the past two decades, China’s oil consumption has grown by more than 9 million barrels per day (mb / d) from 4.7 mb / d in 2000 to 14.1 mb / d in 2019. China’s oil use should continue to grow, albeit at a slower pace, as China is also investing heavily in renewable energy.

China is the world leader in electricity production from renewable energy sources, with more than twice the generation of the second country, the United States. At the end of 2019, the country had a total capacity of 790 GW of renewable energy, mainly hydroelectric, solar and wind power. China’s renewable energy sector is growing faster than that of fossil fuels, as is its nuclear power capacity. China has pledged to achieve carbon neutrality before 2060 and peak emissions before 2030. By 2030, China aims to reduce carbon dioxide emissions per unit of GDP by more than 65% from the level of 2005, increase the share of non-fossil energy in primary energy use to about 25 percent, and bring the total installed capacity of wind and solar electricity to over 1200 GW. Furthermore, China sees renewable energies as a source of energy security and not just a means of reducing carbon emissions[8][9].

In India, another of the world’s great countries in a process of growth, the situation is as follows: trade relations between Angola and India amount to US$4 billion, of which US$3.7 million correspond to exports from Angola to the Asian country, being 90% related to oil. Angola is currently the third most important African exporter to India, when in 2005 it was not relevant. In 2017, the Ambassador of India issued a statement in which he highlighted: “Trade between Angola and India increased by 100% in 2017.” The thing to remember is that India is becoming a significant partner of Angola through its oil needs.

In terms of GDP per capita, India in 2019 was around USD 2000.00. It is easy to see that the growth that India expects is enormous, even if it does not have China’s ambitions of world leadership, just to reach its current level, it has to multiply its GDP by five. Obviously, this implies a growing need for oil. India was the world’s third largest crude oil importer in 2018, and has an estimated oil import dependency of 82%. India’s economic growth is closely related to its demand for energy, so the need for oil and gas is expected to grow even further, making the sector very investment-friendly. At the same time, India is one of the countries with a large production of energy from renewable sources. As of November 27, 2020, 38% of India’s installed electricity generation capacity came from renewable sources. In the Paris Agreement, India committed to a target of achieving 40% of its total electricity generation from non-fossil fuel sources by 2030. The country is aiming for an even more ambitious target of 57% of total electricity capacity from renewable sources by 2027.

Official data indicate that Angola’s oil production reached, in May 2021, only 34 million 887 thousand 890 barrels, less about one million compared to April. In that month, a daily average of one million 125 thousand 416 barrels of oil was obtained, when the forecast was one million 184 thousand 813. This means that Angola is below the target set by the Organization of Petroleum Exporting Countries (OPEC). ), which was 1 million 283 thousand barrels per day, in May, with subsequent increases.

4- Conclusion: Sonangol’s challenges

Considering all of the above, it is evident, first of all, that there is a large margin for Sonangol to continue to focus on oil, either because not even the quotas defined by OPEC for Angola are met, ie, Angola is producing less than it should in a tight market situation, either because the large potential oil futures markets such as China and India will need plentiful oil shipments.

To that extent, Sonangol should not make the mistake – as some oil companies are doing – of underestimating the potential for growth in the oil market. In the Western world with mature economies, the demand for oil may not feel as strong as in the past, but in fast-growing economies, more oil will be needed, albeit often not as exponentially as before.

There is space and market for Sonangol, as an oil company, to grow. Therefore, Sonangol’s ongoing strategic structuring should focus on producing more oil more efficiently, both in terms of costs and in terms of the environment.

However, this model focused on oil efficiency has to be matched with the enormous potential that is opening up in renewable energies and the company has to take advantage of energy synergies, as many of its counterparts are doing and also China and India.

At the present time, when the intention is to privatize Sonangol from a global perspective, it seems sensible to commit Sonangol to tasks in the area of ​​renewable energies. In fact, to be an attractive company for the international stock market, Sonangol must present itself as adopting the latest trends in oil companies, i.e., also following the needs of the energy transition.

Not abandoning or belittling oil, Sonangol must boldly explore the combined possibilities brought by renewable energies.

This exploration of renewable energies by Sonangol should not start from scratch, but rather seek some sustainability and economies of scale. One hypothesis, which we have already touched upon in a previous report[10], would be a strategic partnership with Galp for this purpose. As is known, Galp accelerated its energy transition process.

As this hypothesis was not adopted, Sonangol should review the rationality of its permanence at Galp. In fact, at this moment, the Angolan position in Galp is “sandwiched” between Isabel dos Santos and the Amorim family, corresponding to a mere financial investment. This doesn’t make much sense anymore. Either Galp becomes a strategic partner for Sonangol’s energy transition, or a position review becomes required.

The alternative would be for Sonangol to acquire a company that is minimally established in the field and develop its activities based on this new platform. At this time, partnerships have already been announced with ENI and TOTAL to develop projects in renewable energy that will be operational in 2022. Perhaps a strategic focus in this area is more interesting, which would translate into an internal commitment by Sonangol and, as mentioned above, it would go through the purchase or merger with a company operating in the renewable energy sector, to provide initial support for Sonangol.

In short, Sonangol must become a bi-focused company: on oil and renewable energies.


[1] https://www.ifcmarkets.com/pt/market-data/commodities-prices/brent

[2] https://www.cedesa.pt/2020/06/03/angola-petroleo-e-divida-oportunidades-renovadas-2/

[3] https://www.dw.com/pt-002/governo-angolano-admite-privatiza%C3%A7%C3%A3o-gradual-de-30-da-sonangol/a-57879593

[4] https://www.cedesa.pt/2020/01/29/um-modelo-de-privatizacao-da-sonangol/

[5] Idem note 3

[6] https://oilprice.com/Latest-Energy-News/World-News/Chinese-Gasoline-Demand-Is-Driving-Oil-Prices-Higher.html

[7] https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=US

8 Cfr. https://www.oxfordenergy.org/publications/chinas-oil-demand-in-the-wake-of-covid-19/ and

[9] Deng, Haifeng and Farah, Paolo Davide and Wang, Anna, China’s Role and Contribution in the Global Governance of Climate Change: Institutional Adjustments for Carbon Tax Introduction, Collection and Management in China (24 November 2015). Journal of World Energy Law and Business, Oxford University Press, Volume 8, Issue 6, December 2015.

[10] https://www.cedesa.pt/2021/02/10/sonangol-galp-que-futuro-conjunto/

Sonangol and the reinvention of the Angolan economy

This is a time of reinvention for Angola. Sonangol is no longer the engine of the Angolan economy and it is necessary to find a new driver. There are two reasons for the need to overcome the economic model based on a single product – oil.

The first reason is Sonangol itself. The results for 2019, presented by the Angolan oil company, are structurally discouraging. Although they show a profit, this profit derives from unrepeatable extraordinary results and the essential elements of the oil operation are stagnant: production does not increase, sales do not exceed the level of previous years. The company’s net income was USD 125 million. However, revenues remained stable compared to the previous year. Sonangol produced around 232 thousand barrels of crude oil per day, a number similar to the past and made sales of USD 10,231 million, which represents a 4% reduction compared to the 2018 financial year.

In short, oil exploration no longer adequately supports Sonangol. Not supporting Sonangol means not supporting the country.

In addition to this stagnation at Sonangol, there is the fact that oil is being increasingly viewed with skepticism, seeking to invest in alternative energies and moving away from the use of black gold. This is obviously not a short-term process, but it will have been accelerated with the Covid-19 pandemic. Oil will still have price rises, possibly peaks in higher demand, but everything indicates that the gluttonous years will be over, as other energy sources will emerge that will more or less gradually replace oil. Just note that in the last few months the price of the Brent barrel has fluctuated between USD 53 in October 2019, USD 60 in January 2020, USD 12.78 in April or USD 40.7 recently. However, he never returned to the 2014 figures where he was often above USD 100.

These two reasons mean that the Angolan economy has to reinvent itself, and more quickly than it thinks. It is not just a matter of restructuring Sonangol and focusing it on the oil business. It is not enough, because this business is stagnant. It is the economy itself that needs restructuring, which in the official jargon of the Angolan government is called diversification.

The problem is that diversification implies the creation of a new offer in the Angolan economy, of the production of goods and services that did not exist in the recent past. And for production to exist, investment is necessary. Investment requires, obviously, the contribution of capital.

And here we face another issue that affects the Angolan economy, which is the lack of capital and the recessive policies that intensify this scarcity. Following the parameters chosen by the International Monetary Fund (IMF) and the neoclassical orthodoxy of the economy, a program to contain / reduce public debt and reduce the deficit is being imposed on Angola.

We have many doubts as to whether such a program is justified in the case of the Angolan economy, especially considering the doctrinal contributions in Modern Monetary Theory, but the fact is that such a program to cut spending and increase taxes is being followed. However, the pursuit of such a policy ends up limiting the availability of capital for investment, whether public or private. Therefore, it prevents the so-called diversification that is so necessary to overcome Sonangol’s stagnation.

Thus, the outlook facing the Angolan economy at the moment is difficult. On the one hand, its engine – Sonangol – is stalled, on the other, the creation of capital to mobilize productive investment to diversify the economy is being strangled due to the recessionary policies adopted. This has obvious repercussions on the economy’s figures. GDP growth is negative – 3.6%. Unemployment assumes a staggering number of 32.7% and inflation of 22.8% (similar in August 2020). None of these numbers are encouraging.

The Angolan economy needs political courage to reverse this state of affairs.

Sonangol has to be restructured, but as an energy company and not merely an oil company. In reality, it is not enough to focus on oil, you will have to present yourself with a modern renewable energy company, taking advantage, for example, of the sun. If the United Kingdom recently announced that it wants to become Saudi Arabia by the wind, Angola may be Saudi Arabia by the sun. Therefore, an imaginative restructuring of Sonangol is necessary.

At the same time, recessionary economic policy must be abandoned. Although there should be budgetary discipline and not paying works twice or paying wages to phantom employees, as well as not contracting public debt to feed private pockets, the fact is that the policy of financial rigor must be complemented by a policy of fiscal stimulus that allows building a sufficient capital base to carry out the necessary reproductive investment. A public and private pro-investment tax policy is fundamental in reinventing the Angolan economy.

Angola: Oil and Debt. Renewed opportunities

Abstract:

Although Angola is suffering several economic shocks due to Covid-19 and the drop in oil prices, in addition to the nominal increase in public external debt, the truth is that the situation does not present the seriousness indicated in some studies.

Oil: The country is well prepared to benefit from the recovery that is already taking place in the oil price, and which is likely to accelerate with the global unlockdown.

Debt: The debt problem results essentially from the depreciation of the currency and its solution lies in a political negotiation with China, which holds about half of the external public debt.

Diversification: The present difficulties are a real incentive, and not merely rhetorical, for the beginning of the diversification of the economy, made possible by the liberalization measures of the economy.


In recent times, a lot has been written about the Angolan oil crisis, presenting catastrophic forecasts for the country’s economy and the evolution of oil exploration. To the pressure of oil, it has been added strain on public debt, all in the Covid-19 packaging.

The situation being serious, it is not desperate, and several data must be considered analytically with sufficient distance.

The public debt

The issue of public debt, which we have already addressed in a previous report with regard to China (https://www.cedesa.pt/2020/05/05/porque-a-china-deve-reduza-a-divida-de -angola /), does not have the danger that is attributed considering only a formal analysis of the numbers.

If we look at the most recent data from the BNA[1], Angola’s big creditors are China, Great Britain and International Organizations.

The sum of these creditors equals approximately US $ 39.4 million and is equivalent to almost 80% of the external public debt.

Figure No. 1-Stock of Angola’s public external debt by countries. Source: BNA (bna.ao)

Obviously, the debt to China is eminently political and cannot be seen as an ordinary debt. It should be noted that the Angolan Foreign Minister is already in talks with his Chinese counterpart on the subject[2]. Therefore, there is an effective development in this area.

In some ways, the same is true for International Organizations. It is public that International Organizations, led by the International Monetary Fund, are proposing several relief measures regarding the debt burden of the most fragile economies and emerging markets[3].

However, there is still Britain’s debt. Part of this debt comes from companies based in London, but with privileged relations with Angola and which have a long-term perspective, as is the case with Gemcorp[4], so here too we will have to handle with some caution the overly general statements about the severity of the weight of the Angolan debt.

Furthermore, the International Monetary Fund itself recognized in December 2019 that about four-fifths of the nominal increase in Angolan debt was due to the depreciation of the kwanza and not to new liabilities[5]. Hence, any analysis of the Angolan public external debt that does not disaggregate its elements is wrong.

Clearly the external public debt is concentrated in a few creditors that have several considerations to take apart from those strictly financial, and depends a lot on the attitude of China.

In short, unless an additional extraordinary event occurs, the issue of Angolan foreign public debt is not as serious as it might appear to be a mere nominal observation, and should not become an obstacle to development. The key is in talks with China on the topic. And obviously, China will not want to appear as a negative agent in Angola.

Oil

The same analytical exaggeration has occurred with regard to oil and Angola. Obviously, Angola has an excessive dependence on oil, and that, at this moment, the price of crude is subject to two negative pressures: the fall in demand due to Covid-19 and an apparent secular tendency to decrease oil consumption, replacing it by alternative sources.

Two of the most renowned analysts of these issues in relation to Angola, Agostinho Pereira de Miranda and Jaime Nogueira Pinto[6], have, however, devalued the excess of anguish in relation to this issue in what concerns Angola. We tend to subscribe to this position.

The shock of oil in the Angolan economy has persisted since 2014 (see fig. No. 2) and is a problem for which the government since 2018, has taken several measures that focus on two strategies: i) modernization and opening of the oil sector and ii) promoting the diversification of the economy.

Regarding the first element, it is worth mentioning, among others, the creation of a regulatory agency different from Sonangol, allowing this company to focus on its core business, the privatization of Sonangol’s secondary subsidiaries and the signing of agreements with several foreign companies to increase investment. In fact, the big companies, including Total, Exxon, Chevron, BP, ENI, planned to operate more drilling vessels in Angola than anywhere in the continent to explore new discoveries. In relation to diversification, there has been more rhetoric than practice, but the need, as we will see below, will force it to be put into practice, provided that the government effectively liberalizes the economy.

Meanwhile, Covid-19 made oil prices dip and foreign companies stopped their activity in Angola[7]. However, despite the immediate bad news, the situation will tend to stabilize at a higher level. Moody´s at the end of May announced that it foresaw a future generic level between USD 45-65. It is not a question of relying on the accuracy of these figures, but only of noting that there will be an upward trend.

Consider the price of Brent. At the moment, it stands at USD 36.6 (May 22nd, 2020[8]). Therefore, it has already risen from the minimum number reached on April 21, 2020, USD 19.33. The value of USD 36, 6 is already above several levels reached after the abrupt fall in 2014. For instance, in the beginning of 2016, the value ranged between USD 29 to 32. This means that the price of oil seems to enter, at the present moment, again in some normality, besides that since 2014, the country is already used to dealing with a great oscillation in the markets.

Figure No. 2- Brent USD Peak / Barrel Price Peaks and Lows (Nasdaq and Oilprice.com source)

Figure no. 3 – Price evolution of Brent 2020 (Sources in fig. No. 2)

It also should be pointed out that a good part of Angolan contracting is reversed in long-term contracts, so price fluctuations do not necessarily affect public treasury immediately.

In addition, very soon, there will be a time when economies close when the demand for oil has decreased substantially, to a relaunch of economies. Whether this recovery in V, U, W or another letter, the truth is that it will imply an increase in the demand for oil, which will probably increase the price of oil as long as the “wars” between Russia or Saudi Arabia do not restart. or other similar events.

In addition, the low value of oil will be an incentive for its use in an economic recovery phase in which concerns about clean but more expensive energies will, in the short term, be replaced by the need to put companies to work and people with a job.

Even if concerns about the climate emergency persists in Europe, it is difficult to see that the major engines of the world economy, such as the United States, China and India, do not prefer a cheap source of energy that quickly gets plants up and running.

Angola has already started to anticipate and still in the week of 25-29 May, the National Agency of Petroleum, Gas and Biofuels (NAPGB) made available, a data package for oil exploration of the terrestrial basins of the lower Congo and Kwanza, for nationals and internationals companies. These are the blocks CON1, CON5, CON6, KON5, KON6, KON8, KON9, KON17 and KON20, whose official announcement, for the start of new bids, will be made in the coming days.

In a nutshell, the organizational reforms, of rationalization and increase of the oil market underway in Angola, combined with the gradual recovery of oil prices, in the context of the relaunch of the world economy in the post-Covid-19 period, allow us to believe that the oil sector in Angola has good conditions for recovery, and remove the most pessimistic scenarios.

Opportunity for diversification

A final note on the diversification policy that has been proclaimed constantly by Angolan leaders, but without success.

There are now two clear incentives to make it a reality. On the one hand, oil is no longer the reliable source of revenue that the state can rely on, on the other, there are measures to liberalize the economy and break the previous oligopolies. Still shy, but there are.

These two facts should make entrepreneurs feel more free and obliged to look for new areas of investment. These areas should not be civil construction, but others linked to natural resources, such as natural gas; agribusiness (Angola’s soils are some of the most fertile in Africa and its climate is manifestly conducive to agriculture. In the past, Angola was almost self-sufficient in agricultural terms, with wheat being the only exception); the forest economy (forests cover almost 18.4% of the country’s total area and form one of the country’s most critical natural resources), high-quality minerals (iron ore, manganese and tin) and solar energy, among others.

In this crisis, Angola’s great challenge is to seize the opportunity to transform itself, benefiting from its diversified wealth.


[1] BNA, External Debt by countries (stock): 2012-2019. Available online at: https://www.bna.ao/Conteudos/Artigos/lista_artigos_medias.aspx?idc=15419&idsc=16458&idl=1

[2] http://www.novojornal.co.ao/politica/interior/mirex-telefona-a-homologo-chines-com-foco-na-divida-e-em-investimentos-em-angola-87980.html

[3] https://www.imf.org/en/News/Articles/2020/05/28/sp052820-opening-remarks-at-un-event-on-financing-for-development-in-the-era-of-covid-19 

[4] Deeply involved in the construction of the new refinery in Cabinda, for example: https://www.africaoilandpower.com/2020/01/21/sonangol-gemcorp-sign-cabinda-partnership-deal/

[5] https://www.imf.org/en/Publications/CR/Issues/2019/12/18/Angola-Second-Review-of-the-Extended-Arrangement-Under-the-Extended-Fund-Facility-Requests-48887

[6] Cfr. Agostinho Pereira de Miranda, Setor petrolífero angolano está bem preparado para sair da crise – advogado. Available online:https://www.angonoticias.com/Artigos/item/64817/setor-petrolifero-angolano-esta-bem-preparado-para-sair-da-crise-advogado and Jaime Nogueira Pinto, Considerações sobre a crise petrolífera. Available online:  https://observador.pt/opiniao/consideracoes-sobre-a-crise-petrolifera/

[7] Noah Browning et al. Angola’s oil exploration evaporates as COVID-19 overshadows historic reforms. Available online:  https://www.reuters.com/article/us-global-oil-angola-insight-idUSKBN22W0OZ

[8] NASDAQ-Brent Crude (BZ: NMX). Available online at https://www.nasdaq.com/market-activity/commodities/bz%3anmx. See also https://oilprice.com/oil-price-charts/46. Note that these elements are merely informative of trends and do not necessarily reflect the exact price of Angolan oil transactions. However, they give an approximation to possible developments and perspectives.