Peter Roberts, Head of Orrick's Global Oil & Gas practice, authored an article for African Business Review on how Angola is coping with the current slump in oil prices through reforms designed to attract new investors.
As West Africa battles to contend with the long-term slump in oil prices, one nation in particular is seeking to make the best of a bad situation.
With production levels second only to Nigeria in the long-term ranking of African oil producers, Angola is one of Africa's most oil dependent nations. Daily production of crude oil in the country is around 1.6 million barrels, and last year oil accounted for more than 95 percent of its export income.
As a result, the sustained downturn in oil prices has had a predictable effect on Angola's economy, with a serious shortfall in expected income for the government leading to difficulties for the domestic economy. In April 2016, Angola requested a significant bailout from the IMF to help cope with the economic fallout (although it called off talks with the IMF three months later), on the back of a $650 million rescue package from the World Bank in 2015.
However, the Angolan government has not been content to rely solely on supra-national financial aid. Instead, it has taken a highly proactive approach to finding domestic solutions to its oil market woes.
Aside from a wider commitment to diversifying Angola's economy away from its overwhelming dependence on oil in the longer term, and introducing cuts in government spending, the government has also undertaken an ambitious programme of regulatory reforms. These reforms, designed to renew international appetite for investment into Angola's upstream sector, are underpinned by the twin imperatives of implementing crucial organisational reforms and improving fiscal terms for would-be investors.
A particular hallmark of this plan is the recognition that international oil companies have also suffered from low oil prices, with reduced budgets for exploration and production investment. The government has therefore sought to attract scarce petro-dollars into the country through announcing reforms that are intended to make the sector more attractive to embattled oil companies in need of a lifeline.
Over the years, some commentators have suggested that the Angolan upstream regime suffered from a damaging lack of transparency, with the state oil company ( Sonangol E.P.) exercising a de facto regulatory role and also being engaged in a number of competing activities. This changed with Presidential Decree 109/16, which imposed a model for the reorganisation of the Angolan petroleum sector reflecting two important features.
The first of these was the reiteration of Sonangol E.P.'s role as the grantor of concessions for petroleum exploration and production, but with the removal of Sonangol E.P.'s ability to be involved in petroleum exploration, production and operational activities. The second was the creation of a new inter-ministerial petroleum sector agency with responsibility for general petroleum sector coordination, the preparation of licensing rounds and the resolution of disputes between different stakeholders in the sector.
Although the creation of a new regulatory agency and the rationalisation of Sonangol E.P.'s role had been trialled as far back as 2011 (when the Angolan government published its National Energy Security Policy and Strategy (NESPS)), it took a financial crisis and an oil price collapse to propel the idea from concept to reality.
In respect of the revision of fiscal terms to make for a more attractive investment landscape for international oil companies, two sets of regulations were recently published which could have far-reaching effects.
First, new rules were enacted in Presidential Decree 211/15 in December 2015, intended to promote the development of new commercial discoveries within existing concession areas by helping companies to recover their exploration costs faster. But the most noteworthy regulatory development was the introduction of Presidential Decree 2/16 in June 2016.
This Decree went one step further by providing for the adjustment of contractual and fiscal terms in existing concessions in order to better promote the development of marginal fields. Perhaps inspired by Nigeria's marginal fields licensing round of 2013, Decree 2/16 recognised that a number of exploration companies had previously made discoveries that they regarded as marginal (that is to say, not viable for economically efficient development under current fiscal terms). It therefore provided that if a discovery qualified as 'marginal' for the purposes of Decree 2/16, then certain tax and fiscal incentives could be agreed which could render the marginal discovery an economically recoverable prospect.
It may seem paradoxical that the Angolan government has undertaken significant reforms to attract new investments, at the same time as declaring an intention to diversify away from an over-reliance on the petroleum sector. However, this paradox recognises that Rome was not built in a day. The Angolan government is trying to manage immediate and longer-term sector reforms simultaneously, for which it deserves credit.
As with any programme of regulatory reform, the proof will be in the outcome. Existing concession-holders and prospective new entrants will be keen to see how the new Sonangol E.P. and the new regulatory agency function, and how the two new Presidential Decrees are negotiated to apply in practice. Cynics will say that change was long overdue in Angola, and that the changes that have taken place were the product of dire economic necessity. The fact remains that change has nevertheless come. Other oil and gas producing economies across Africa's Atlantic margin will be watching carefully to see how well Angola makes the transition from theory to practice.
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