Recently, some countries with rich resources in Africa encountered political upheaval, so Africa is coming to a political fluctuation period, which would cause the uncertainty for Chinese enterprises’ investments. Wu Mouyuan, a specialist of oversea investment environment from Economy and Technology Institute of China National Petroleum Corporation, recently said in an interview that “The upheaval wouldn’t come to an end in short term, and its impact will further expand. The threat to foreign investors’ personal security and the strikes will bring down the investors’ confidence.”
As to the issue “Will the political upheaval in African countries affect Chinese energy assets and benefit in resources?”, Mr. Wu expressed that though Egypt and Algeria have rich oil and gas resources, the exploitation of oil and gas there is dominated by western countries, and Chinese companies only take a small share. Regarding from the volume and the money of China oil and gas enterprises oversea M&As in recent years, Africa is not the first choice. He introduced that 80% of the cases of oversea oil and gas asset M&As by Chinese enterprises were in the Americas, and the amount of money accounted as high of 90% in overall China oil and gas oversea M&As. However, he added, Africa will be a hotspot for Chinese energy enterprises’ oversea investments, so Chinese enterprises should be cautious of the political environment there.
Recent political upheaval in Africa may impact the term of oil supply to China. As Africa now is China’s second largest imported oil source, accounting for 34% of China import oil and gas, falling behind the Middle East (49%). The statistics reveals that China only sources 13% of African oil exports, while Europe and the United States take more than 30% respectively.
Risk of investment in Africa is soaring
Jasmine Revolution that rooted in Tunisia now starts a prairie fire in the middle-eastern Africa. In Tunis, social chaos from late last year now have turned into national antigovernment demonstrations, which eventually compelled Tunisian President Ben Ali to be exile abroad. As a result, one of the most influential countries in Africa, Egypt, also witnessed conflicts between mass protesters with the police.“Modern Pharaoh” Mubarak, a long standing politician in Egypt, transferred the power to the military. After Mubarak’s resign, the chain reaction caused by mass demonstrations in Egypt rapidly spreads, and reached Libya in northern Africa, where there was a fierce clash in the second city, Benghazi, between hundreds of anti-government protesters and pro- government personage at night of Feb 15th. Africa, with an unrest history, now seems to get into another period of chaos.
Wu said during the interview that, high prices and high unemployment rate and other issues related to people’s livelihood are the main causes for the chaos in Africa. High inflation is a problem suffering African countries all the time, and most resource countries have an inflation rate higher than GDP growth, such as Egypt, Sudan and Nigeria all have a CPI higher than 10 percent. Previously, Wu mentioned in his report that some African resource countries are facing the problems of security and political, which would increase uncertainties of investment environment.
Frequent religious conflicts and terrorist events in Nigeria and other oil-producing countries have slowed down the oil & gas investment activities there. In Nigeria, there are often events like kidnappings by rebels, damaging of oil facilities. Since 2006, nearly 300 foreigners were kidnapped in Nigeria, and numerous oil facilities were destroyed, badly disturbing the normal operation of oil companies. On February 1st 2010, the largest rebel force in Nigeria declared suspending of unilateral ceasefire, adding more uncertainty to future security. Meanwhile, Chad is not peaceful either. Since last year, there have been more than 200 events against international relief workers including attacks and kidnappings. In September 2010, there was a kidnapping against Chinese workers. The increasingly deteriorating security there has forced some non-governmental organizations to suspend local rescue and relief activities.
The armed coup in Niger darkens local investment environment. In February 2010, an armed coup occurred in Niger, and the direct cause was that former president Tandja insisted on amending the constitution for re-election indefinitely, which was fiercely criticized by domestic opposition, finally leading political crisis and military coup and government alternation. Although the interim government announced agreements by the former government remain effective basically, the unstable situation and uncertain future hardly hit foreign investors’ confidence.
Before Tunis “Jasmine Revolution”, the political events in Africa attracted most concerns should be the referendum in Sudan. The referendum in the South has completed by January 15th, and the southern part of Sudan may become the latest independent country as early in this July. “The uncertainty for Sudan’s future political security situation increases,”Wu forecasts, “The new regime may continue the openingup policy, with little possibility to abolish existing petroleum contract, but there is possibility of adjusting early contracts with favorable terms, to improve governmental income.”
Major oilfields in Sudan are located near the north-south boundary. According to the Comprehensive Peace Agreement signed in 2005, the north and the south will equally share oil revenues. When the southern part declared of independence, the two sides will need a long time negotiation on oil resource data, oil transportation cost and transit expenses. So, Wu expects there would not be time for the both sides to have conversations with foreign investors. However, there is one thing that Chinese enterprises cannot ignore. “The southern is composed of many independent tribe regimes, which can’t be changed fundamentally. So the southern government has a limited power, and security will be one of the biggest challenges for oil companies. Disturbance of oilfield normal operation and threats to employees’ safety by local and tribal armed forces are likely to increase.” Wu Mouyuan said, “Western oil companies will also enter Sudan’s oil market, bringing fierce competition to Chinese companies.”
Governmental intervention in oil and gas investments will increase
As to the influences on Chinese investments by African political upheaval, Yue Laiqun, an expert from the Oil and Gas Resources Strategic Research Center of the Ministry of Land and Resources, expressed his concerns about the future to our reporter. He estimated Africa has two possible directions for the future. On one hand, African countries are westernized, with the United States has a growing influence, setting Chinese investments competition into an unfavorable environment. In recent years, the U.S. energy officials frequently visited Africa, to make Africa a key Africa an important base for its oil import diversification strategy.
Africa has rich reserves of oil and gas resources, with low recovery percentage and high potential of production increases. Africa has a reserve of oil resources totaled 41.06 billion tons, accounting for 8.1% of total reserve; the reserve of natural gas is totaled 31 trillion cubic meters, accounting for 6.3% of the whole. These resources are concentrated in North and West Africa: Nigeria, Algeria, Libya, Angola and Egypt share 85% of the oil reserve, and Algeria, Libya, Egypt and Nigeria share 73% of natural gas resources in Africa. In recent years, the United States, the European Union and other major economic powers and economic organizations continuously strengthen the aid and cooperation with Africa countries, meaning Africa now has become a platform for major political powers to rival.
On the other hand, fundamentalism can be the dominant, the consciousness of national-ownership gets popular, and an investment policy like Saudi Arabia and the United Arab Emirates is adopted, meaning prohibiting foreign investors from entering the upstream of oil and gas development. This will not only contain from western investments, but also those from China.
The investment trends in recent years in Africa show that some resource countries are having more resources nationalized. According to Wu Mouyuan, some African resource countries strengthen the protection of domestic resources and adopt much stricter standards for joint venture and cooperation, and the governments even directly interfere in important transactions of assets, leading to failure of or de- lay in the transactions. Early in 2010, to participate in the development of Jubilee oilfield, Ghanaian government prevent the shareholders of the oilfield from selling shares to Exxon Corporation, on the grounds of the right of preemption by the government, which resulted in failure of this deal with an amount of nearly 4 billion US dollars. To gain the benefits of oil premium, Ugandan government levied a heavy tax of 435 million US dollars to an asset transaction of 14.5 billion US dollars. The asset sellers refused to pay, leaving the deal longing for an approval from the Ugandan government.
In addition, for the development of domestic petroleum industry, some countries may carry out opening-up policies with additional conditions. For example, to boost the technical development of oil industry, Algeria plans to lift the barrier for cooperation, and make technology transfer a necessity of opening petroleum and natural gas resources market to foreign companies.
Opening is still the dominant trend in the future
Those major resource countries in Africa on one hand raise barriers for joint venture and cooperation, while on the other actively deepen the opening to the outside world, to attract foreign investors for maximum development of domestic industries with external forces, while seek to maximize the profits.
The data from Research Institute of Economics and Technology of China National Petroleum Corporation reveals that the opening up Africa now is one of the regions with most bid-invites. As oil prices rise gradually, major resource countries will attract investors’ attention again. Since 2010, the number of countries that invite bids and bidding blocks significantly increased. According to the statistics, during the first ten months in 2010, there were eight African countries that hosted or planned to hold bidding activities, involving more than 150 blocks gathering in north and west Africa.
As to the possible change in African investment policies, Wu is optimistic about the future. He pointed out that replacing former investment policies with nationalization does no good to resource countries’ economic development. Africa needs foreign capital, to provide more positions and lower the high unemployment. There is possibility for new governments to carry out more preferential policies for overseas investors. In comparison with political risks, he said, security is the thing most concerned in Africa. Enterprises should intensify employee safety education and training, and improve local security measures.
In order to cope with possible investment risks, Wu suggests, enterprises should rightly deal with the relation with local governments and people to gain their support. Chinese companies should insist on the idea of mutual benefits and winwin, and contribute to local development. To African resource countries, resource is vital to their economic development, and also the foundation for social stability. Oil companies have to consider how to pay back local communities with part of the earnings from resource development, boosting regional economic and social development and benefiting local people.
(Author: from China Economic Herald)