Oil Price Drop to Affect African State Budgets, Rystad
Africa’s projected production is set to decline for most of this decade and countries that are heavily dependent on energy for its revenue will be seriously affected, as top planned oil and gas projects were expecting sanctioning under an oil price assumption of between $55-$60 per barrel, according to energy intelligence firm Rystad Energy.
Rystad said on Thursday, March 26, 2020, that the top upcoming final investment decisions (FIDs) in Africa have a breakeven crude price of over $45 per barrel, with some even close to $60 per barrel which is far from the current oil price currently hovering well below $35 per barrel.
“The investments for major planned oil and gas projects will now see a timeline shift or even a spending cut altogether, which will ultimately impact production levels in this region”, Siva Prasad, senior upstream analyst at Rystad Energy, said.
The intelligence estimates that the timeline delays for these pre-FID projects in Africa could lead to a 200,000 barrels-per-day drop in expected liquids production on average between 2021 and 2025.
The impact could be much higher in the longer term, with liquids production set to drop on average by close to 1.185 million barrels per day over the years 2026 to 2030.
It is worth noting that the economies of the hydrocarbon-producing African nations are heavily reliant on their respective oil and gas output to meet both domestic energy needs and exports. For example, Nigeria based its 2020 capital budget on plans to produce 2.1 million barrels per day of oil this year at a crude price of $57 per barrel.
“An extended period of the current price scenario could, therefore, prove detrimental to the health of these economies,” added Prasad.
Rystad added that, although the OPEC+ members that were currently pumping millions of unneeded barrels of crude into the market were mainly seeking to undercut the US shale revolution, the collateral damage on African petroleum producers’ economies whose hydrocarbon projects were disrupted might be severe.
How will this affect Africa and what can be done?
The shortfall in crude price poses revenue shortfalls to the economies of oil producing nations which will in turn have an effect on their 2020 budget. This shortfall automatically causes a downward spiral slowing down economic activities as a result of the reduction in receipts from the crude sale. Considering its negative impact, governments will have to resort to other alternatives such as borrowing to manage the economy, causing more deficits to the economy and leading to a decline in the GDP growth and the growth rate of such economies falling.
Other alternative measures will be to increase taxes or reduce its expenditure.
Countries like Nigeria, whose 2020 budget was heavily dependent on oil receipts, would have to revisit its budget and find other means that are achievable and sustainable such as agriculture to run the economy.