The West Africa Question

Naira per USD


The political stakes are rising fast for West African production, and especially in the two major states, Angola and Nigeria. One story is essentially succession based around President dos Santos in Luanda, where he’s making sure his own daughter, Isabel dos Santos cover his political / corruption tracks in Angola.  The other, is whether President Buhari can pull back from the brink of political collapse in the Niger Delta without resorting to full blown military force. On both counts, we have few doubts that ‘iron political fists’ will notionally help to consolidate power, but it’s going to come with debilitating implications for long term production. ‘Tighter politics, shakier oil’.

The problems are very different in both capitals, even though the ‘Atlantic Basin’ outcome of stranded West African political assets will be the same. But let’s do each in turn. For Angola, this is all about the eventual Santos succession beyond the 37 year term of Jose Eduardo do Santos. The first big date in the diary is 17-20th August 2016 where the Party Congress will rubber stamp another Santos term, even though the President claims he’ll stand aside in 2018 rather than seeing through a full five year play to 2021. Our take is this remains pure short term politicking where Santos knows another term isn’t going to go down well, but he’ll continue to cling onto office long beyond his 2018 ‘expiry date’. That’s why any potential VP successor will be discussed, but not actually named at the Congress. This is all about thepromise of a post-Santos Angola, not the actual political facts. But where Santos is making sure he has another insurance policy up his sleeve just in case he ends up being squeezed out, is parachuting his own daughter, Isabel dos Santos as Chairwoman into Sonangol. As we’ve stated before forget all the gloss about efficiency gains and parastatal reforms; Isabel only has three real jobs to perform. The first is making sure 37 years of corruption doesn’t rebound on the family, if or when, the MPLA finally shift beyond Santos rule. The second is making sure they milk every last kwanza out of the company with endless spin offs, and especially some of Sonangol’s more profitable onshore assets where it’s P&P subsidiary has equity in almost every bloc. Much of the proceeds will obviously go directly in Santos pockets, with the rest feeding broader MPLA patronage networks where the ailing parastatal is already technically insolvent from all the endless Santos / MPLA business interests hanging off it. Just to give a ballpark estimate of the numbers involved, reported $50bn black holes in Sonangol accounts are likely to be far higher according to our country sources. Yet the third, and most vital move is to limit the overall power of any potential dos Santos successor to undermine Sonangol’s role as the key tool of presidential power and patronage in Angola. That’s precisely why two ‘oversight’ agencies are being set up – not to clean house – but to make sure Santos successors can’t exercise the same familial power over Angola’s only cash cow compared to the previous post-independence era. Control the rent, and you control the Casa Militar, the Political Bureau (aka military forces) alongside security organs and police cadre. That’s not a ‘five card trick’ the Santos clan want to leave to successors to lock down long term power threatening existing familial rents, hence the partial dismemberment of Sonangol to divide and rule whatever’s left.

Needless to say that all refracts back into the succession debate, given the ‘Sonangol play’ pushes towards the longer term conclusion that Santos doesn’t think he’ll be able to push Isabel, or indeed her brother Jose Filomeno dos Santos currently running Angola’s $5bn sovereign wealth fund, into presidential office when the time comes. Key names to watch for instead remain current VP, Manuel Vicente as a partial ‘reformer’ (albeit without military backing) vs. Minister of Defence, Joao Lourenco as a security establishment candidate. All fascinating stuff I hear you say, but ‘so what’ for competitive supply threats? We see three angles worthy of note here. The first is whoever comes out of the eventual post Santos wash, will be inheriting a very poisoned Sonangol well. The ailing parastatal won’t be in a fit state to execute any serious volumes gains, with significant policy uncertainty for any international investors on royalties, terms and acreage until the political dust settles out to 2021. If anything, current 1.8mb/d production will become increasingly difficult to maintain. Two; while the succession games rumble on, Angola will continue to see severe economic deterioration where the Kwanza’s already collapsed, and foreign reserves are down to a dangerously low $20bn, with Luanda still reliant on oil for 75% of export revenue and 50% of GDP. Not great news when Cabinda is already seeing a return to secession based energy attacks through the Front for the Liberation of the Enclave of Cabinda (FLEC-FAC), interspersed with criminally motivated activity on the back of depressed benchmark prices. To keep all these wheels moving, that ultimately comes down to the third, and final factor here; how Angola intends to deal with China? Like most petro-states, Angola has got itself into a very difficult position with Beijing, where the Chinese are lifting massive amounts of equity crude (around 1.2mb/d of medium-sweet to offset depleting Daqing production). That’s leaving Angola very short on cash and far too long on Chinese equity debt. Rest assured, if the Chinese show any leniency on terms with other producers such as Venezuela, Angola will urgently be looking for Beijing to cut them some slack. Right now, the $20bn China’s pumped into the country since 2002 is all that’s keeping Angola going, with another $6bn tranche brokered in November 2015. Luanda has already agreed to allow the Rmb to be used as official currency, while state owned Chinese bank ICBC International even supported Angola’s first Eurobond sale in October 2015. But even that kind of largesse is coming with far more Chinese strings attached these days. Beijing’s getting much smarter when it comes to owning ‘Angola’, and not just the Santos clan. Corruption concerns are been taken into account on the back of Sinopec scandals in country, while most of the new lending is all infrastructure linked rather than traditional cash injections. Bluntly put, China is happy to keep Angola on political life support above and beyond Santos interests, but it’s not going to throw good money after bad on Angola for cosmetic surgery. From here, it’s very tough love, and very little progress as far as overall Angolan supply is concerned.

Despite recent $6bn investments and so called ‘panda bond’ issuance, China features much less prominently in Nigeria. That’s mainly because Beijing’s always taken the view Abuja politics are too corrupt, too pernicious and too divisive to touch, with President Buhari doing a perfect job of demonstrating all of those qualities right now. Despite timid discussions with the Niger Delta Avengers to strike an interim peace agreement, our core expectation is that Buhari will merely use this as political cover to ramp up military attacks when agreements collapse unless the economy collapses in hyperinflation.Naira per USD A near certainty when government talks aren’t matched with sufficient rent related payments for the NDA, or indeed for competing MEND factions in the Delta. The result will see far more energy infrastructure attacks, and especially given Delta dynamics are already directly overlapping with mainstream Nigerian politics. As the very high (and accurate) hit rate attests, the previous PDP government under Goodluck Jonathan is basically working in cahoots with NDA factions to cover three political bases. The first, is trying to claw back their own security related contracts in the South where PDP connections lost out from APC electoral gains. The second is using the threat of more NDA linked attacks to forestall further corruption investigations into PDP / Goodluck cadres that’s become a key tenet of Buhari’s political tenure. Right now, former petroleum minister, Diezani Aliso Madueke is under fraud investigation from APC inspired attacks as a residual threat PDP apparatchiks take very seriously. Yet the third, and most important factor here is discrediting the Buhari regime out to 2019. The further things spin out of control in the Delta, the more Southern secession will start creeping into mainstream political debate. That’s not because Rivers State, Akwa Ibron and the Delta would ever be able to go their own separate ways beyond a stretched Nigerian military struggling with Boko Haram in the North / Middle Belt, but more because it gives the PDP a credible shot at winning the next national elections. Meanwhile for the NDA, this comes down to old fashioned rent seeking. Like it or not, they can ramp up energy related attacks whenever they want, with a far higher frequency of attacks likely into 2017-18 to help extract a much better deal out of the next government. Some of that might be infrastructure related, but the real prize remains direct cash payments. Hence for all President Buhari’s 2015-16 military bluster, all he’s really done is hard-baked Delta instability into 2017-19 Nigerian politics. Expect Nigerian production to hover much closer to 1mb/d than it is to 2mb/d output over the next few years as a result. Exactly the same as Angola, the West African Question has no easy political answers in Nigeria, but the tighter the politics are turned, the shakier oil supplies will assuredly come.

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