IEA: Currency impact on African spending plans

20 September 2016, Week 37, Issue 657

The International Energy Agency (IEA) released its first ever investment report on September 14, noting that global spending on energy had fallen by 8% in 2015, from 2014, to US$1.8 trillion. Oil and gas remained the largest component, at 45%, although spending on electricity systems, at a record US$690 billion, represented more than 37% of the total. 

Of particular note to investments in sub-Saharan Africa were fluctuations in local currencies. These have weakened against the US dollar, making the cost of locally source materials and service cheaper. In particular, the IEA noted the weakening of the currencies of Russia, Kazakhstan, Angola and Brazil. While these fluctuations have helped protect Russia’s oil industry, making US dollars go further, Angola has suffered, it noted. 

“In Angola, several projects are under scrutiny [owing] to depreciation of the local currency against the US dollar, making imported components expensive and keeping costs high,” it said. 

Sub-Saharan Africa saw a “strong upswing” in investments since the early 2000s, it said, driven by “rising prices, growing domestic demand and technological progress that has rendered offshore developments technically and commercially viable”. 

The slowdown in spending since 2014 has led to a “wave of cuts” in Nigeria and Angola, with a number of projects in the pre-final investment decision (FID) stage suffering. In particular, the report noted Royal Dutch Shell’s decision to defer its Bonga South West project earlier this year as part of the super-major’s focus on cost cuts. The US$12 billion project may be approved by the company in 2018, it suggested. 

The IEA went on to note plans for East African developments had also suffered as a result of the global slowdown. LNG projects are on the drawing board in Tanzania and Mozambique but these have been largely deferred as a result of the low price environment. 

Onshore projects have seen costs fall faster than offshore, it said, although this varies from region to region. Offshore developments have longer lead times, requiring “significant upfront capital” and with “investment decisions [being] heavily influenced by expectations on commodity prices”.

The conclusion that may be drawn from the IEA’s take on Angola’s import needs is that the country has failed to achieve its ambitious local content aspirations – although given the country’s broad state of import reliance this touches on a broader economic issue for Luanda, rather than being a specific hydrocarbon industry problem. Angola is hindered by its reliance on technologically advanced production from the deepwater. Nigeria, on the other hand, at least has a degree of onshore production that may be more easily supported through local content strictures.