Sunday, October 12, 2008

Global Credit Crisis’ Effect on Africa Oil Producers

The Guardian
Reuters Africa

The shockwaves of the global credit are being felt across all industries and the credit crisis may soon have a large effect on African oil companies. As the credit market continues to tighten up, many small to mid-size oil companies in Africa may find it difficult to raise the money necessary to expand production and exploration. The price of oil has also been dropping steadily ($80 a barrel on 10/10) due to a the expectation that the global credit crisis will lower demand. This drop in value further exasperates African oil companies’ plans to raise capital.

Some experts think that the limited ability to raise new capital combined with the loss in value due to lower oil prices will result in many new mergers and acquisitions between small African companies and large, established oil companies from around the world. Larger firms have the rare opportunity to purchase oil and gas assets at very low prices given the price of shares in many small African oil companies have been dropping.

Small private oil companies in African are not the only African players to feel the pinch of the global credit crisis. Nigeria’s state owned oil company, the Nigerian National Petroleum Corporation (NNPC), has also had trouble accessing credit to aid its exploration. The NNPC has long had a difficult time contributing its share of capital in its joint ventures with foreign oil firms. Leaders in Nigeria say they need to plug finance holes in the NNPC by opening it up to private investment. President Umaru Yar’Adua has proposed a plan to turn the NNPC into a profit-driven company that can raise funds through global capital markets.

This ambitious plan initially had foreign investors interested in the possibilities, but the credit crisis has cooled interest considerably. Nigeria is still considered a frontier market and a somewhat risky investment, especially considering the global credit climate. In the meantime, the NNPC continues to partner with large foreign companies to fund some of its production. For instance, Nigeria has signed $6 billion worth of “carry agreements” in May alone. Carry agreements are short term loans that Nigeria will eventually pay back in cash. Whatever the ultimate effects are, the global credit crisis is sure to have some impact on African producers in the near future.

1) Some experts are advising oil companies to postpone any large expansion until the credit market loosens up. Do you think this advice is practicable for small companies who need to expand or face going out of business? If these companies opt to expand, where will they get their capital?
2) Is it a good idea for a state-run oil company such as the NNPC to engage in private sector investment? As Nigeria relies heavily on oil revenues to fund its government, is there a danger that the NNPC may invest poorly and eventually harm Nigeria?:

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