Alec Hogg: “Permanently lower” oil price threatens Nigerian growth – and SA’s Shale Gale

In this morning’s Rational Perspective, Alec Hogg considers the impact of the lower crude price on economic growth in oil-export dependent Africa and South Africa’s promised Shale Gale in the Karoo, already under threat through heavy handed intervention by politicians and the alternative of cheap gas from neighbouring Mozambique. Overnight news from China, which has the biggest shale gas reserves on earth, add to the sombre mood.

ALEC HOGG: Good morning. It’s Alec Hogg with The Rational Perspective.

The big news that comes out of Nigeria this morning is that the Finance Minister Ngozi Okonjo-Iweala – I had the pleasure of spending an hour with her in Davos some years ago – has come forward with a warning. It’s something, which we’ve been talking about a lot, on our CNBC Power Lunch show: that the oil price’s decline is going to have an impact on Africa in a much bigger way than anyone’s even thinking. We continuously get these guys coming into the studio to tell us how Africa’s going to grow enormously in the next few years. In fact, I had a guy from Deloitte who was there earlier this week. I asked ‘what is your assumption of the oil price’ and he said ‘the oil price doesn’t matter. It’s going to be consumer-driven’.

The oil price drop has been precipitous. Perhaps the recent high levels are the aberration.
The oil price drop has been precipitous. Perhaps the recent high levels are the aberration. If so, serious implications.

Well, let’s consider this one…and it’s exactly what Ngozi has been saying to her people in Nigeria. It’s a country, which generates 70 percent of its Government revenue from oil – 70 percent. Now, that has dropped by one-third already in U.S. Dollar terms. Clearly, that’s at the margin so when you start working that through, it is going to have an enormous impact on Nigeria’s ability to continue to grow at the six to seven percent growth rate that it’s been enjoying. Ngozi does say that the VAT rate there is only five percent. Indeed, it is, and what she didn’t say (and which everybody knows) is that there is massive corruption somewhere between where the oil is produced and what the Government actually receives. Their numbers are in the tens of billions of Dollars and if there can be a greater focus on that by Goodluck Jonathan’s regime then certainly, they can squeeze out a little bit of extra cash.

Even so, the declining oil price is going to hurt countries around the world, but none more than those on the African continent – something to bear in mind. There’s an implication of this as well, for South Africa. In South Africa, we’ve been getting terribly excited about the potential of the Shale gas in the Karoo, which would be amongst them. After I read Tony Twine’s report for Econometrix, which unpacked the potential of this country, which has the eighth largest Shale gas reserves in the world – according to the International Energy Agency of the United States. Well, the country with the largest reserves in the world is China and overnight, we have information coming out of China in a story written by Bloomberg, that the fracking revolution in China is ending before it’s even starting. The reason: the decline in the oil price. Remember, Shale gas is a direct competitor with crude oil, so crude at $80 or crude at $115 per barrel makes a very big difference to the economic viability of polling Shale gas out of the ground.

In the United States, they’ve perfected it and after many years, they’ve been able to get their Shale Gale going. They don’t have a problem until the oil price would fall below $60.00 per barrel but in South Africa, there’s still a huge investment that needs to be made in exploration, let alone bringing any of the gas to the surface. There’s also a different geology and this is what has stalled them in China: the geological issues, and the limited amount of exploration that’s been going on there, despite licenses being granted. They have another round of licenses that they are hoping to grant for exploration, but at this point in time, the Chinese Government continues to postpone it because they don’t see the demand from oil majors. Here in South Africa, what must be worrying everybody is that the politicians seem to think that they had a bonanza – a golden goose – that was going to lay many eggs and so, adjusted the legislation accordingly.

At the 11th hour, they decided to bring in very strong changes, including a 20 percent free carry, by Government. Now that’s not unusual, to have a free carry – 20 percent is. Fifteen percent is more than normal on the African continent. Secondly, that they would have an option to acquire the other 80 percent – in other words, the whole of the business – at an agreed price. Now, agreed by whom…not the market price. Apart from anything else, if you are in the private sector and you have the whole world to look at, why would you invest in a country where you have legislators who say they would like to grab back the asset if you happen to be successful?

Shell has postponed its drilling on the West Coast because of uncertainty on legislation. It has (to our knowledge, anyway) continued with its exploration in the Karoo or rather, it wants to go ahead with it. It’s going through the environmental surveys at the moment. It could start exploring in about two years’ time and that’s an investment of about $250m, so a big chunk invested there. It is time though, for the regulators, legislators, and anybody else who’s involved in the potential for bringing up the Shale gas in the Karoo, to get real. Look at what’s happening in China. They’re on the back foot now. It looks like they are going to be pulling in cheap gas inputs from their neighbours, particularly Russia. South Africa has the potential to pull in cheap gas from Mozambique, so why make it difficult for those who want to bring us a Shale Gale. That is of course, provided that the Shale gas is exploitable. We know it’s there, but how much of it is available to be brought to the surface, and at what price?

This is The Rational Perspective.

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