Skip to navigationSkip to content
GROWTH, INTERRUPTED

Covid could upend several African countries’ plans to fuel economic growth with oil and gas

A worker walks by an oil well at the Toma South oil field to Heglig, in Ruweng State
Jok Solomun/Reuters
Before coronavirus hit, South Sudan was on track to become the world’s fastest-growing economy on the strength of its oil exports to China.
Published Last updated This article is more than 2 years old.

When coronavirus forced the world into lockdown, it punched a hole in global oil demand and sent prices crashing to historic lows. The result was an overnight fiscal catastrophe for oil-dependent African economies like Nigeria that were accustomed to building their budgets on oil prices double what they are now.

But it also sent shockwaves through relative newcomers to the oil and gas game—including Senegal, Mozambique, Uganda, and others—that had pinned their economic aspirations on major drilling projects that were still in the works. Dozens of those plans are now up in the air, as the public health impacts of the virus present a massive unanticipated expense.

Fossil fuels have always been a dicey value proposition for countries with natural reserves. Oil and gas are some of the world’s most valuable commodities, capable of attracting billions of dollars in foreign investment. In theory, that money could translate to jobs, roads, airports, and other tangible signs of economic development for countries that are otherwise strapped for cash.

But more often, they’ve been a magnet for corruption and conflict, making a handful of elites fabulously wealthy and doing nothing—or worse—for everyone else. The so-called “resource curse” has plagued countries from the Democratic Republic of the Congo, where a wealth of gems and minerals has fueled decades of guerilla warfare, to Equatorial Guinea, where oil enabled the president’s son to live an infamously lavish lifestyle of sports cars and yachts. In both Angola and Nigeria, the continent’s top producers, which have relied almost exclusively on oil exports for decades, one-third of the population lives in extreme poverty, close to the bottom of the UN’s global development ranking.

Nevertheless, a number of African countries have focused on oil and gas over the last few years. Progress on offshore drilling projects made Ghana the world’s fastest-growing economy in 2018. Before the pandemic, South Sudan—despite being mired in a prolonged civil conflict—was on track to contend for that title on the strength of its oil exports to China. Mozambique, which barely registered on the oil and gas map a decade ago, was found in 2010 to have one of the world’s richest offshore gas reserves and is working hard to tap it.

“Most African economies either rely heavily on their hydrocarbon exports, or were looking to bring their hydrocarbon resources into production and export to global markets,” in the next few years, said Siva Prasad, senior Africa analyst for Rystad Energy. The pandemic “deals major blows to these plans.”

At least 30 major projects across the continent are either on hold or at risk of cancellation, according to Rystad. Most were planned assuming a price for Brent crude, the international benchmark, of at least $55 per barrel; Brent dipped to $20 in April, and is now back to around $40.

They include a BP-operated offshore gas project on the Senegal-Mauritania border; a oil project near Uganda’s Lake Albert by French major Total; and a massive offshore gas installation by Exxon in Mozambique. The Mozambique project was delayed indefinitely in April; during the company’s shareholder meeting in May, Exxon CEO Darren Woods cited it as an example of the company’s post-Covid strategy of “deferring less critical spend and prioritizing quick payout items.” Overall, during the next five years, oil and gas investment in Africa is expected to decline by $12 billion, Prasad said (renewables investment on the continent, meanwhile, is on the rise, up to $7.4 billion in 2018).

“The consequences will be drastic,” said Landry Signé, a senior fellow in the Africa Growth Initiative at the Brookings Institution. “Many countries, once they have anticipated revenue from oil and gas, will tend to increase their spending.”

Mozambique, for one, is already cleaning up a massive debt scandal, in which two state-owned companies arranged more than $1 billion in loans from Swiss and Russian banks for tuna fishing projects that were in reality convoluted fronts for distributing bribes. Michael Keller, a technical advisor in the country’s Ministry of Economy and Finance, said the tuna fiasco, which started in 2013 just a few years after the discovery of gas there, left politicians with a distaste for debt.

“The only thing we can hope is that Mozambique learned a lesson and that they won’t borrow against future gas money,” he said.

In addition to the price crash, the country’s gas projects face other threats. The northern province, home to most of the country’s gas operations, has been wracked by Islamic militants in attacks that have displaced up to 60,000 people since 2017 and, in February, forced Exxon and Total to ask the government for military protection. And an offshore gas rig operated by Total had to be temporarily shut down after it became the site of a Covid-19 outbreak in April.

Insecurity, more than anything, is the most likely reason a foreign gas company would back out of the country, Keller said, and if Exxon were to cancel altogether, that would have a “long-term detrimental impact” on Mozambique’s budget. Before the pandemic, the wait for returns was already going to be long, he said: Even if production started on schedule in 2024, the government’s contract with Exxon stipulates that major royalties wouldn’t kick in until 2030. According to Rystad, production is now more likely to begin in 2027.

Still, Keller said, the country is willing to wait. “I don’t see any reason for Mozambique to not say, ‘We have so much high-quality gas, why shouldn’t we exploit it and make the money work for our country’s development?’” he said.

For countries that can’t afford to wait, the impact may be severe enough for the World Bank to relax its 2017 decision to cut off funding for almost all oil and gas production projects, said Clare Jessica Murphy-McGreevey, a Bank spokesperson.

“Going forward, the World Bank Group may consider supporting upstream gas projects in low-income or fragile countries on an exceptional, case-by-case basis where there is significant potential for positive development impact; where there is a clear role for the WBG to play; and where the project fits within the countries’ Paris Agreement commitments,” she said.

The pandemic has also highlighted which countries in Africa have done a better job of managing their wealth of natural resources, Signé said—and showed that decades of experience aren’t necessarily beneficial. For countries like Angola, Nigeria, and Gabon, which have traditionally adopted a more hand-to-mouth approach to oil revenue, the evaporation of the oil market cut off income that was desperately needed for the response to Covid-19. Ghana, meanwhile, having learned from the mistakes of its neighbors, had adopted more stringent fiscal regulations for oil revenue and was able to break open the piggy bank.

“During the Covid-19 crisis, Ghana has been able to rely on accumulated oil savings (partly, in addition to other sources) to help it with the shortfall in revenue,” said Razia Khan, chief Africa economist at Standard Chartered Bank. Still, she said, “the resource ‘curse’ is still more prevalent than (recent) resource success stories.”

That’s a shame, Signé said, because if used well, oil money can be a useful stepping stone toward broader economic diversification. It remains to be seen what will happen once oil demand recovers from its coronavirus shock. On one hand, the sheer scale of the resources available in Mozambique and elsewhere suggests someone will develop them sooner or later. But if the pandemic has shown anything, he said, it’s that countries shouldn’t stake their fortunes on the spending power of oil companies.

“Once billions of dollars are delayed,” he said, “it’s very difficult to get them back.”