Reforming the oil and gas sector to attract investment and increase production has been a central priority of João Lourenço’s presidency. State oil and gas firm Sonangol boosted its earnings in 2018, fired by higher oil and gas export prices but serious problems face the company as it seeks to reverse production declines from maturing offshore assets.
Sonangol’s 2018 annual report, published on 19 July, said total pre-tax earnings for the year accelerated to Kz1.1trn ($3.18bn), a 76% increase from the Kz625.2bn posted in 2017. Higher earnings were linked to oil prices, with Angolan crudes selling for an average of $70.70/bbl last year, up from $54.15 in 2017.

Sonangol spent much of 2018 in a state of flux as sector reforms took shape. In August, the government approved a new organisational model stripping Sonangol of its upstream concessionaire role and creating a new National Agency of Petroleum, Gas and Biofuels (ANPG), though operationalising the new agency remains a work in progress (AE 375/20). Restructuring plans for the state oil company aim to focus Sonangol on its core activities and sell off non-core subsidiaries.

According to the annual report, signed by Saturnino’s replacement Sebastião Pai Querido Gaspar Martins, Angola’s total oil production slumped to an average of 1.48m b/d in 2018, down from 1.63m b/d the previous year to its lowest level in almost 12 years. It was a harsh reminder of how misplaced Sonangol’s optimism before the 2014 oil price drop was of overtaking Nigeria as Africa’s biggest producer and lifting its oil production to over 2m b/d.

Sonangol blamed the decline on maturity of reservoirs, low initial production from new developments, and a lack of drilling and well intervention work. Block 17 contributed the most to total production, followed by blocks 0, 15, 6/15 and 31. Between them, these blocks represent 84.5% of Angola’s crude oil production.

Production from Block 17 fell to 193.2m bbls in 2018, a drop of 12% from a year earlier, while production from ExxonMobil’s Block 15 fell 16% to 85.9m bbls. On Block 17, Total has committed to developing CLOV phase II, which is due on stream in 2020 adding 40,000 b/d, and Dalia Phase III, which will add 30,000 b/d from 2021.

Sonangol’s own share of production fell 3% to 86.45m bbls. Even oil sales to its two main clients China and India fell by 7% and 5% respectively. China received 128.4m barrels, or 65% of total exports, while India received 21m, or 10.7% of the total.

Downstream reforms

The government is also putting in place measures to improve the functioning of the downstream sector. On 1 July, a presidential decree enacted a significant new law covering several key downstream areas. Notably, the new legal regime provides for third party access for downstream infrastructure such as input terminals, storage facilities, discharge terminals and pipelines.

“This is a big change which can foster investment,” Citac consultant analyst Bernardo Costa told African Energy. “For example, new entrants to the petroleum product market in Angola might want to invest in a storage facility and lease spare capacities to other players, including Sonangol.”

Licensing has also changed in the new law, with the Regulatory Institute for Petroleum Products (IRDP) now clearly responsible for issuing downstream licences. Previously, there was a lot of uncertainty over which institution was responsible for this, with Sonangol, the Ministry of Petroleum and Mineral Resources and the Presidency all issuing licences on different occasions.

Perhaps most importantly, from May 2020, when current import tenders expire, imports are expected to be liberalised to allow private players to import petroleum products, ending a system whereby Sonangol tendered for the monopoly supply of each product. Again, IRDP will be responsible for issuing import licences to companies which meet the licensing criteria.

Import licensing reforms will coincide with the end of fuel subsidies at the pump. Although the government officially ended subsidies in 2016, nominal prices have not changed since then despite average consumer price inflation of 30%/yr in 2016-17 and 20% in 2018, according to the International Monetary Fund, and a significant fall in the value of the kwanza against the dollar. This has resulted in a loss for Sonangol as well as downstream distributors. The government has now said it plans to end the implicit subsidy in June 2020, when the liberalised import licensing is introduced.

A security stipulation has been introduced which requires that 30 days’ supply is held in reserve for gasoline, gasoil, jet fuel, and kerosene. This follows major fuel shortages in April-May which resulted in the entire Sonangol board being replaced, including chairman Carlos Saturnino (AE 392/1). Heavily indebted and with declining production and an obscure process for handling the foreign currency from oil exports, Sonangol has struggled to pay for imports.

“Sonangol has been synonymous with the state in Angola. Now the new administration is trying to make clear what is the responsibility of Sonangol, what of the government, what of the regulator, which is really what has been needed,” Costa said.