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Currently in the final stage of my doctoral work on the political economy of national oil companies. Here you'll find some of my findings--as well as other musings on oil-related topics. All comments -- civil, civilized or barbarian -- are welcome

Angola: oil-dependent and debt-ridden, but on the brink of real change?

Angola: oil-dependent and debt-ridden, but on the brink of real change?

By breaking up Angola’s oil giant Sonangol, luring foreign investment and purging key members of the ruling class, is Angola’s new president actually pushing for real change?

September 2018

Scott C. McKnight

The past four years have been tough for Angola. The southwest African country’s oil production is dipping; investment has dried up; oil is still the country’s only real export despite a decade of bonanza-spending; its foreign debt—about half of which is owed to China—is growing and getting harder to pay back; and the political grip of the ruling MPLA is loosening. But João Lourenço, who became Angola’s president after his predecessor’s 38-year tenure, is making a virtue of necessity. Since coming to power in September 2017, he has pushed through some painful reforms, sacking several heavy-hitters of Angola’s infamously corrupt ruling class and most recently attempting to curb the power of state-owned oil giant Sonangol. But in a country that may best typify the ‘resource curse’—corrupt, mismanaged, indebted, authoritarian and appallingly unequal—we have to ask: is Angola really on the brink of change? This analysis argues that the basic structures of Angola’s problems—extreme dependence on oil production, growing indebtedness to China, endemic corruption centered around the one-party state and the Sonangol leviathan—all remain in place, even if the country's president has finally changed.

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A Tale of Two Angolas

There may be no more depressing cautionary tale about the negative side-effects of oil than Angola. And that’s saying something: Africa’s oil-rich states are paragons of inequality, corruption, authoritarianism, debt and mismanagement, and wasted opportunity. Some of this can be explained by the tragically cartoonish quality of Angola’s political economy: oil and diamonds are practically the country’s only exports. The rule of José Eduardo dos Santos lasted nearly four decades, was shamelessly kleptocratic from start to finish, and ended seemingly the only other way that dictators leave power: handpicking a successor (his minister of defense, João Lourenço), granting himself immunity from prosecution, and installing his progeny in key (and stunningly lucrative) positions of power (the daughter’s net worth is estimated at US$2.2 billion, making her Africa’s richest woman).

This extreme wealth coexists with the appalling socioeconomic reality of a banana republic: about one Angolan child in five die before the age of five, a rate higher than war-torn Afghanistan; although the per capita income (GDP divided by population) is US$3,110—twice the average for sub-Saharan Africa—two of three Angolans live on less than $US2 a day. Despite being Africa’s second-largest oil producer and having a modestly sized population of under 30 million, the Angolan masses have long learned to find a way to survive while the ultra-rich live off oil revenue.

Another part of Angola’s tragedy can be explained by the country’s uniquely gruesome modern history. Angolans emerged from nearly half a century of war—first against their Portuguese colonial overlords (roughly 1961-75) and later against one another in a particularly macabre civil war (1975-2002). Its infrastructure ravaged, landmines littering the countryside and its population traumatized, after 2002 Angola had the benefit of rising oil production timed with rising oil prices. The country also had the benefit of being young; since two-thirds of Angola's population is under twenty-five years-old, they have little memory of war. In the early 2000s then, Angola seemed poised to cash the peace dividend.

Toward Petro-Diamond Capitalism

One party has ruled Angola since independence. The People’s Movement for the Liberation of Angola (MPLA) was, as its name suggests, born to fight the Portuguese for independence and later to build a communist state among cassava shrubs. But, reading the writing on the wall at the end of the Cold War, the MPLA abandoned its Marxist ideology for what a veteran Angolan expert called ‘petro-diamond capitalism’. The MPLA successfully transitioned to become a well-organized party—by fragile democracy standards anyway—and has won parliamentary elections in 2008, 2012 and recently in 2018 (in Angola, the largest party in parliament chooses the president). The MPLA’s credentials as bringers-of-peace were bolstered by the oil boom: Angola’s gross domestic product (GDP) grew at over a 7% per year between 2003-15; it’s estimated that the country made $640 billion from oil and gas exports since 2002.

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The MPLA put a good chunk of this wealth into infrastructure—paved roads, railways to span vast countryside, and shiny buildings, especially in the capital Luanda. This infrastructure push was helped by China, itself searching abroad for ways to feed its oil-hungry economy. Given what each side had to offer then, it wasn’t long before China became Angola’s biggest trading partner, creditor, and diplomatic partner, swapping its expertise in infrastructure-development and abundance of credit for Angola’s growing oil exports. Reuters reported in 2015 that there were fifty Chinese state companies and 400 private businesses operating in Angola. Angola became a frequently-cited case in the cottage industry of China’s supposed resource-based ‘neo-colonialism’ of the developing world. Several visits to Luanda by Chinese presidents, premiers and foreign ministers only seemed to confirm this trend. These oil-backed loans (OBLs) grew to become a template of China’s engagement with oil-rich but infrastructure-starved countries, especially after the financial crisis (2008-09) snapped shut other, mostly Western sources of credit.

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Chinese president Xi Jinping with now former president José Eduardo dos Santos on a state visit to Beijing in 2015

Since the two established diplomatic relations in 1983, China has loaned Angola more than US$60bn—virtually all of it done within the last two decades. At the end of 2017, Angola owed China US$21.5bn; that’s about half of Angola’s foreign debt. For over a decade, nearly two of every five barrels of Angolan oil ended up in Chinese refineries—about 750,000 barrels of Angola’s peak production of 1.9m barrels per day, making Angola one of China’s most important sources of crude oil.

Chinese crude oil imports by country, millions of b/d

Source: China General Administrations of Customs, via Bloomberg and EIA

Source: China General Administrations of Customs, via Bloomberg and EIA

... to Bust

This massive oil-driven investment program yielded numerous white elephant project, a thick net of subsidies, numerous loss-making but politically useful state-owned enterprises, but no competitive businesses unconnected to oil largesse. More importantly, the average Angolan’s life hasn’t gotten better. When oil prices sunk in mid-2014 and then collapsed promptly afterward, the MPLA didn’t have the resources to pay off the constituencies needed to keep the peace; a ‘winter of discontent’, as one prominent Angolan journalist put it, set in during late 2015. The MPLA turned to its vast security apparatus (Angola spends more on security than Nigeria and South Africa combined), which then intimidated opponents, jailed critics, and tightened its grip on the media.

The oil boom masked the extent of inefficiency, mismanagement and thievery pervading the Angolan economy. The amount of squandered wealth is truly astonishing. Whatever the exact sum and its exact end-points, the Angolan government cannot account for billions of dollars of public funds of the past decade. The terms of mammoth oil-for-infrastructure contracts were hidden from public view; the terms of China’s OBLs in particular were Angolan state secrets. Some details leaked out from another authoritarian party-state, perennially sensitive to corruption—China—where an extensive anti-corruption drive resulted in the targeting and arrests of dozens of managers of China’s national oil companies who had ties to Angola—often to ex-president dos Santos’s inner circle. No wonder that any attempt at transparency—including an independent audit, what the opposition and even some MPLA insiders want—has been vehemently resisted.

We can get a sense of the plundered funds by the crushing debt left behind. Angola’s debt is estimated to be about 65% of GDP—and rising. One Angolan economist estimates the cost of servicing alone has increased nearly six-fold since 2014. There are several things to blame: oil production has declined, from a peak of 1.9 million barrels/day (b/d) in 2008, to 1.72m b/d in 2016; 1.6m b/d is expected to be the average production for 2018. Although some of this decline can be blamed on OPEC-mandated cuts, the real reason is lack of investment. Dour forecasts now predict production falling to 1.3m b/d by 2023 if new investment—in oil exploration and recovery of maturing fields—isn’t forthcoming. A major impediment to further investment has been the fall in crude prices, which dampened international oil company interest while putting Angola’s government finances into a vise—hence the growing debt.

Another reason for this financial quagmire is the nature of Angola’s deals with China. Loan repayments to China are made in oil, a practice China has done in other countries, like Venezuela. Likewise, repayment is believed to be done at market prices of the time of negotiation. These two things together mean that, not only does Angola have significantly less oil to sell on world markets—a key source of foreign exchange and a big reason for the country’s current liquidity crisis; it also means Angola needs to sell China more oil at these lower prices just to keep up.

Breaking up the Oil Giant

Corruption is Angola’s Achilles’ heel. Transparency International, a corruption watchdog, ranks Angola 168th of out 180 countries—or the 13th most corrupt country in the world. The opaque, cash-generating core of this is Sonangol, the national oil company that wears all hats in Angola’s oil industry—operator in less challenging fields, negotiator with and partner to the several mostly Western oil companies that operate in Angola's offshore, and sector regulator in general. This fusion of roles appalls any regulation-minded scholar who sees a church-and-state separation between operator and regulator as necessary to avoid conflicts-of-interest, level the playing field while providing some degree of transparency. In other words, Sonangol’s leviathan status, being the country’s wealthiest and most important ‘company’, is part of Angola’s corruption problem.

That makes sense why Lourenço has vowed to root out corruption—a task that means standing up to the same elite and party that promoted him to the presidency. In August, his administration announced the creation of an entity (National Oil and Gas Agency, or ANPG) to manage and sell oil and gas licenses. This is part of Lourenço’s broader push for comprehensive oil sector reform. This move, which gradually strips Sonangol of its regulator duties, is believed to help increase transparency in the sector, curtail Sonangol’s power, and cut red tape to facilitate foreign investment in Angola’s offshore. Angola badly needs all three. These reforms are part of a wide-ranging review of the oil and gas sector started in late 2017. A wide range of topics came under discussion, including the speed of approvals, terms for marginal fields, exploration and decommissioning liabilities, and so on.

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But dismantling this web of licenses and regulations, which generates incredible wealth for those with power to grant or waive them, means taking on a particularly predatory segment of Angola’s ruling class. This has meant uprooting members of the dos Santos clan from positions of wealth and power. Lourenço sacked the ex-president’s daughter Isabel, then Sonangol’s head, and his son José Filomeno, then head of Angola’s largest sovereign wealth fund. José Jr who now faces fraud charges over an alleged attempt to transfer US$500m from the fund through an account in London. Lourenço also defenestrated two other key dos Santos allies: the chief of staff of the omnipotent armed forces and the country’s top spy.

It still isn’t enough. Elites talk—excitedly or worriedly, depending on where one stands—of an Angolan ‘car wash’ (lava jato), referring to the multi-year investigation into corruption at Brazil’s national oil company Petrobras that has entangled dozens of executives and politicians (including an incarcerated ex-president). The juicy details of this investigation, daily fodder of Brazilian media, get broadcast in Portuguese—the language virtually all Angolans speak—into the TVs and radios of regular Angolans. For an investigation of that type to occur in Angola, however overdue and necessary, would require an independent judiciary and president with political will to go to war with the system of which Lourenço himself is a product.

How far will this reform go?

For decades, Sonangol seemed to serve exactly the purpose that dos Santos and the Angolan elite desired—for the company to generate enough cash through oil production or licensing of blocks to feed the expansive MPLA patronage machine. As such, the MPLA party-state concentrated the many roles of the oil industry—operator, partner, negotiator, regulator—in Sonangol, entrusting the company to be a faithful instrument of an isolated and often venal elite. In time, the company grew to become a force unto itself—a ‘state within a state’—serving its political masters but also dragging its feet to change, opening, and competition.

Now Sonangol’s new head, Carlos Saturnino—appointed by Lourenço to replace the ex-president’s daughter—is openly calling Sonangol ‘sick’. He claims the company is overly reliant on costly consultants and deep conflicts-of-interest. He's not wrong. The company’s debt is a problem, too. Though it fell from a staggering $US14 billion in 2015 to around US$5bn in 2017, in reality it has benefited from the upturn in oil prices but even more so from the government injecting about $US10 billion into the company during those years. Saturnino also said that just under $2 billion of the company’s $5 billion in debt is with China, namely the China Development Bank (CDB) and the Bank of China. This was against Sonangol's net profit of US$224 million in 2017; it netted just $81 million the previous year. 

Breaking up Sonangol’s dominance by creating a regulator is a start; it adds some degree of transparency and predictability to the process. Another good sign is Sonangol shedding dozens of companies that live off its flesh (it recently submitted to the government a list of 54 subsidiaries it wants privatized). But proposals to check Sonangol’s power and limit it to ‘core’ oil functions are really nothing new. Angola is still a frustratingly difficult—and expensive—place to do business. The World Bank currently rates Angola as a harder place to do business than Syria. Luanda, the country’s capital, was recently voted the world’s most expensive city for expatriates. Lowering tax rates for oil and gas production—both approved by Lourenço—is a start to revive what is effectively Angola’s only industry. Understandably, one can doubt just how serious this president is about reform, given that virtually all the structures that created this mess are still intact around him.

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