Angola’s oil exploration evaporates as COVID-19 overshadows historic reforms

Angola is Africa’s second-largest oil producer, and was expected to have the continent’s largest number of offshore rigs drilling before the coronavirus affected demand, especially in China. (AFP)
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Updated 21 May 2020

Angola’s oil exploration evaporates as COVID-19 overshadows historic reforms

  • Oil price crash prompts majors to idle all drilling rigs

LONDON: The coronavirus pandemic has done in a handful of months what a 27-year civil war did not: Brought oil drilling to a halt in Angola, Africa’s second-largest oil producer.

The consequences could be grave for a poor country that relies heavily on oil revenues and is saddled with debts that exceed its economic output.

The halt in oil exploration, which has not been previously reported, could represent a setback for one of the most ambitious economic reform drives on the continent, aimed at cleaning up corruption and attracting foreign money. It comes as Angola seeks buyers in its push to privatise state energy assets, which is central to the reform process.

An oil price crash last month to two-decade lows has prompted all international energy majors operating in Angola — Total, Chevron, ExxonMobil, BP and Eni — to idle or ditch their drilling rigs, according to company sources, Refinitiv ship-tracking data and industry experts.

France’s Total, responsible for almost half of Angola’s oil output, told Reuters it would not drill for more oil for now due to the coronavirus crisis, instead focusing on current production.

“We have suspended all our drilling activities like all other operators in Angola,” it said.

Sarah McLean, senior analyst at IHS Markit, said it was the first time since its records began in 1984 that Angola had not had a single rig drilling. The London–based information provider had expected at least 10 rigs to be operating there by the end of 2020, the highest number for any African nation this year. The Angolan finance ministry and president’s office did not respond to Reuters requests for comment, nor did state oil giant Sonangol, which works in partnership with the foreign oil majors.

Angola’s prospects looked bright going into 2020.

Energy majors increased their exposure to Angola in the wake of reforms to investment laws by President João Lourenço, who took power after almost four decades of rule by Jose Eduardo dos Santos, and greater transparency at Sonangol.

They planned to operate more drilling ships in Angola than anywhere on the continent to tap tantalizing new offshore discoveries this year. Then COVID-19 struck.

As global demand fell off a cliff amid lockdowns, oil companies lopped billions from planned spending. Angola, with its relatively high-cost offshore fields, was among the first on the chopping block. Reduced demand from the virus’s first victim, China — the top destination for Angolan oil — also hit the country hard.

Total, in a bad portent, had already canceled one drill ship after a March 7 technical problem. The vessel is now parked off the Canary Islands, according to Refinitiv tracking data.

The French producer has since idled three other drill ships; Transocean Skyros and Maersk Voyager were sent to docks at the capital Luanda while Seadrill West Gemini lies dormant at Walvis Bay in Namibia, the tracking data shows.

Total did not comment on specific ships, but said it hoped to restart gradually “as soon as the situation allows.”

US major Chevron canceled its contract with rig supplier Valaris, in late March, and parked the drill ship, Valaris 109, in the capital. A Chevron spokesman said it would continue “cost-managed production” at existing fields.

Meanwhile, two offshore discoveries which Italy’s Eni described as “significant” last year are now on ice, the company told Reuters.

US firm ExxonMobil and the UK’s BP, the other oil majors in Angola, have also canceled planned drilling until at least 2021. Both declined to comment.

Any time would be bad for Angola’s drilling to dry up. Yet the crisis comes at a key juncture for its reform drive, which it is counting on to help improve living standards for the population of over 32 million. According to the Oxford Poverty and Human Development Initiative’s global poverty index, about a third of Angolans live in “severe poverty.”

The country is seeking to attract investors for a sweeping privatization program of state assets including energy assets like parts of Sonangol, but also ports, banks and telecoms firms. The program, launched last August, had already got off to a rocky start.

Angola has yet to sell any major assets of Sonangol, which its petroleum minister described as a sprawling “octopus.” Several assets scheduled for sale last year have yet to be tendered, while the only announced purchases have been of a slaughterhouse firm and farm complex which netted $35 million from local buyers in April.

Angola was aiming to shed smaller assets before privatising 30 percent of the whole Sonangol group via an IPO in 2022. That timeline, always ambitious, now seems unlikely, according to Nick Branson, senior Africa analyst at Verisk Maplecroft.

“The idea of a Sonangol IPO just seems hopelessly optimistic,” he said.

“There are so many moving parts and such a lack of appetite for these sort of transactions anyway. Look at how long it took Saudi Aramco,” he added, citing the long struggle by Saudi Arabia to privatise their state oil firm amid flagging prices.

Despite its problems, Angola has announced the tendering of state-owned bank BCI and parts of Sonangol’s ports and logistics businesses in recent weeks.

Gonçalo Falcão, a Brazil-based partner in UK-based law firm Mayer Brown, which advises potential buyers on aspects of the privatization drive, said the government would not settle for a fire sale.

“It’s still to be seen how many competitive bidders emerge,” he said, noting the state could postpone tenders if it deems offers too low.

“They’re trying to send a message that, okay, we’re struggling, but we will continue going forward with our plans because we’re a reliable country and we’ve made a huge effort to make our companies transparent and reduce corruption.”

President Lourenço has been seeking to tackle a troubled legacy after Angola clawed its way out of a 1975-2002 civil war, one of the world’s longest. The country is ranked as one of the world’s most corrupt, in 146th place on a list of 183 countries, according to Transparency International.

After he took power in 2017, he moved to remove dos Santos’s children from key roles. Dos Santos’s daughter, Isabel, had been running Sonangol, while his son, Jose Filomeno — now on trial — had run the sovereign wealth fund.

Despite Angola earning praise for its anti-corruption drive, the economy — which draws a third of state revenues from oil — was in a precarious position before the pandemic.

The country received a record $3.7 billion loan from the International Monetary Fund last year. It also owes billions to China and holds the largest single bilateral debt burden in sub-Saharan Africa, where it is the number 3 economy.

Its debt-to-GDP ratio has climbed to the highest in around two decades, above 100 percent, and servicing its borrowings eat up $9 billion a year.

“The Angolan state owns a major universe of companies — telecom companies, water companies, electricity,” said Falcão of Mayer Brown. “I wouldn’t say they are desperate, but keen to make revenue, and they think a good investment opportunity six months ago would still be a good investment today.”


INTERVIEW: Real estate exec Fabrice Susini confident Saudi Arabia’s coronavirus-hit mortgage demand will return

Updated 31 May 2020

INTERVIEW: Real estate exec Fabrice Susini confident Saudi Arabia’s coronavirus-hit mortgage demand will return

  • "There seems little prospect of a cascade of mortgage defaults as long as the current policy of government support continues," Saudi Real Estate Refinance Company CEO Fabrice Susini tells Arab News

What a difference a pandemic makes. At the turn of 2020, Fabrice Susini, CEO of Saudi Real Estate Refinance Company (SRC), could look back on two years of significant progress toward the provision of affordable home ownership for the Kingdom’s aspirational young population.

Increased property ownership was one of the main aims of the plan to diversify the Saudi economy away from oil dependency, setting a target of 70 percent home ownership by 2030.

It was all going to plan. New mortgage issuance had been “staggering,” Susini said, and SRC had reached its target of facilitating 60 percent home ownership with months to spare.

“It was a very positive story,” he said, allowing him to work on the next phase of Saudi Arabia’s move toward being a home-owning economy — buying more mortgage portfolios from banks and other mortgage originators, injecting more liquidity into the housing market via domestic and international sukuk issuance, and offering new long-term fixed-rate mortgages to potential and actual home owners.

The economic lockdown that took increasing effect from March has changed the figures on which those plans were based. New mortgage applications, which has been running between SR20 million ($5.3 million) to SR50 million per week, dropped into single-digit millions as potential buyers were forced to stay at home rather than go viewing properties and took stock of their spending plans in light of the economic downturn that followed the pandemic outbreak.

“We expect to report a sharp drop for April and May. I would be surprised if the numbers remain the same,” Susini said. “But the fundamentals remain the same. It is still an underserved market, compared with the demands and needs of the young, dynamic population aspiring to home ownership. The process may be slowed by a couple of months, but the demographic is still there. There will be a slowdown but I’m sure a catch-up is coming and the forward movement will resume.”

One reason for his optimism is the action taken by the financial authorities to support the economy in its hour of need, especially the stimulus packages unveiled by the Saudi Arabian Monetary Authority (SAMA) and the Finance Ministry.

“There has been a lot of support coming through for small to medium businesses and private companies, and that will balance and smooth out the process. I don’t see a big hit coming,” he said.

Effective monitoring and control of SAMA liquidity injections would ensure they reached the SME and private sector organizations they are mainly intended to help, he added.

“I’d be very surprised if any significant proportion was not properly channeled to the private sector and SMEs,” he said.


BIO

BORN: Rome, 1964

EDUCATION: 

  • Law degree, Paris X Nanterre University, France
  • Banking and finance degree, Sciences Po, Paris
  • Master’s degree, finance, Dauphine University, Paris
  • MBA, London Business School

CAREER

  • Relationship manager, Societe Generale
  • Analyst, Bayerische Landesbank
  • Global head of securitization, BNP
  • CEO, Saudi Real Estate Refinance Company

The mortgage industry in Saudi Arabia enjoys significant subsidies from the government for its products, and while some of these have been changed in recent week, reducing subsidies to mortgages for military and some civilian personnel, he does not see this as the beginning of a trend to remove subsidies for mortgages in the broader scope of SRC’s business.

“There is no danger to mortgage subsidies that I am aware of. The budget has been carried out, the resources are there. But of course we want to make sure that every riyal of subsidy is used to its most effective extent,” Susini said.

“When we saw the situation was becoming more challenging, the SAMA package was a great help by injecting liquidity into the financial system, but we also wanted to be more proactive ourselves in the relationship we have with our borrowers and our partners. We didn’t just want to wait until people were actually in difficulties before we acted,” he added.

The result was the “forbearance” plan for borrowers, by which SRC asked its mortgage partners to offer a three-month mortgage holiday to those who felt the need, and many took up the offer. “A big majority has gone for it. We see ourselves as a ‘citizen’ company and we do not just want to rely on the authorities. We asked ourselves what we can do in terms of citizenship and public policy initiatives,” Susini said.

There seems little prospect of a cascade of mortgage defaults as long as the current policy of government support continues, and SRC and mortgage originators persist with the policy of showing patience and understanding in difficult economic circumstances.

Nonetheless, prospective home owners are facing big challenges. Not only has the lockdown made the market mechanics of home-buying more difficult, with viewings almost impossible in the light of curfews and travel restrictions, but there is also the question of whether people will hesitate over such a life-changing decision. Will they want to buy a house or apartment while the pandemic continues to rage?

Susini thinks customers will learn to prioritize their financial decisions more carefully. “You might defer the purchase of a new car, but still want to buy a home. You would direct your choice toward those things you regard as more important. Home ownership is probably regarded as more essential,” he said.

The appetite of Saudi citizens for house purchase in the new circumstances will be better judged when SAMA and other financial bodies publish official figures in the near future, he said.

With regard to the overall health of the real estate market, Susini said that he has not seen a significant fall in property prices, but underlines the fact that SRC caters mainly for the affordable segment of the market, where big falls in value are less likely. He noted that apartments have been holding their value “quite well” in comparison with bigger units like townhouses and villas.

In an era when global interest rates are falling toward zero in many parts of the world, there could be an incentive for customers to go for the long-term fixed-rate deals SRC is offering.

“We’re seeing the need for more awareness of the benefits of fixed rates. Borrowers can grasp the benefit of remortgaging at rates that are significantly lower now than they were before. It is a choice for the borrower really. They can either own their home more quickly than before, or maintain their payments on more sensible terms. It can be beneficial for them whether rates are subsidized or not,” he said.

SRC reduced its lending rates for long-term fixed mortgages last month, is first cut this year following two rate reductions in 2019. Borrowers could now take advantage of a 5 percent rate on a 25-year mortgage, Susini said.

SRC is also working hard on the digital space, with online facilitators becoming more crucial to home purchase. The company is in the early stages of a study on fintech and digital mortgage origination, and some initiative could be forthcoming by the summer, he said.

“If you can talk of a silver lining from the current situation, it is that it is accelerating the digitization of financial processes. The payment processes are already quite well developed, but the sale of processes presents more of a challenge. The health ministry has organized some innovative processes around the digital market place, and the justice ministry has done good work on the digital origination of contracts.”

The strategy of including mortgage originators in the SRC set-up will continue, and Susini is holding talks with financial and corporate firms to bring more products under its portfolio. 

SRC is owned by the Public Investment Fund, the Kingdom’s $325 billion sovereign wealth fund, so it has access to finance at the highest level. But under Susini’s stewardship there has also been a willingness to raise money in local markets via domestic sukuk issues. Two have already been launched, and a third is lined up to take place in the summer.

After that, the company will be work on an international bond offering toward the end of the year, though he declined to say how much would be raised.

“We want to ensure we can continue to finance mortgages, to have sufficient tools and channels so that no bank or finance company is stopped from offering mortgages because of issues to do with capital ratios of liquidity,” Susini said.

He viewed recent downgrades by ratings agencies of banks’ creditworthiness or prospects as a “gray cloud” over liquidity.

“We want to be ready so that primary originators of mortgages have all the tools necessary to keep operating regardless of the problems they might face,” he added.