Political and economical considerations of oil companies investing in Angola

Investment in Angola: Sanawa Oil Company

Table of contents:

Brief Synopsis of the Issue

Recommendations

Background Information

Attractiveness of Angola for E&P Services

Analysis and Evaluation of Strategic Options for Sanawa Oil Limited

Implementation Plan

References

Brief Synopsis of the Issue

Sanawa Oil Company has experienced tremendous growth in the past few years. Under the leadership of Silvio De Binti, the company has succeeded to secure, explore and produce (E & P) contracts in the petroleum-producing developing countries. The firm has realized this growth despite the increasing prices of crude oil (Sousa, 2016). However, the business was alleged to be involved in some illegal transactions that forced Silvio to resign from being the chief executive officer. As per the allegations, this company enticed individual governments to use force against a community that protested against lack of development from oil revenues. The accusations claimed that at least eight innocent civilians died in the crisis (Sousa, 2016). The direct involvement in the loss of lives resulted in a loss of several billion dollars from Sanawa Oil Company. In light to this, the new CEO, Hazel Akua-Aba has an enormous task of restoring the company’s reputation. Precisely, the firm needs to make significant business decisions within a short period to take advantage of the rising E & P opportunities.

The rate of internal conflicts in African countries is widespread. In most cases, economically motivated actions and processes generate and sustain civil strife. A better understanding of the economically created conflict in the region is essential in helping to make important economic decisions (CSV, 2017). This study specifically explores the role of economic considerations in shaping the control and performance of parties to a conflict, resulting in a particular economic war. The results of the study will, therefore, give the management of the firm the basis of making important financial decisions that can improve the future performance of the company. The current CEO must have the ability to make viable economic decisions in countries where economically motivated benefits arise from a continued fight and the institutionalization of violence on a commercial level of concentration.

Recommendations

The current conflicts may have been a direct cause of political influence with the aim of tarnishing the reputation of Sanawa Oil Company. In regard to this, the impact of the short-term decisions made by the business will have a greater significance to the economic performance of this endeavour. Therefore, the current CEO must:

(a) Make financial decisions based on the current administration facts in Angola. For instance, the government increased the consumption tax over the petroleum products in 2016. Such a move will greatly assist to boost the revenue from the oil products. The issuance of the bond in Angola will also affect the level of revenue generated from the mining of oil. Therefore, Sanawa Oil Company should take into consideration these factors when making important decisions.

(b) Establish a mechanism that can help the company work together with the government, organizations and local communities with the aim of achieving a competitive advantage. The current political stability in Angola has created a suitable environment that allows investors to take advantage of the solid funding base, strong business connections and a domination of the media to win over consumers. Taking advantage of these factors can help Sanawa Ltd. to develop a strong market network suitable for promoting revenue generation.

(c) Make necessary operations and strategic decisions that will improve the current reputation of the firm. The Angolans are currently more assertive and have demonstrated the commitment to improving their economic prospectus. Therefore, the brand of every company is very important in determining its success in Angola. The government is also likely to make sanctions for firms that have a bad reputation.

Background Information

The Angolan economy has been slowing down in the last three years. The sum of value additions of products in Angola grew by approximately 2.8% in 2015 (Cuot, Plansky, & Caglar, 2017). This growth rate was an increment from 4.8% of 2014. In addition, the increase in the GDP has been a direct result of the global decline in the oil prices, leading to a substantial impact on the budget balances (Cuot, Plansky, & Caglar, 2017). The average price of Angolan oil was $104 during the 3rd quarter in 2014 (CSV, 2017). This price level declined to $85 in the 4th quarter (Dahl, 2015). The decrease in these prices continued to fall in the following year to an average of $52 (Dahl, 2015). In the 1st quarter of 2016, the oil prices further declined to $30. Also, it is essential to note that the E & P of the Angolan oil has been fluctuating around a figure of 1.7 million bps every day in the last five years (TWB, 2017). Between 2014 and 2015, the production of oil increased by 5.7% compared to a 2.6% decline in the previous year (TWB, 2017).

Over the last decade, the volume of imported oil in Angola has been on the decrease. The chart below shows that Angola experienced a slight increase in the amount of exported fuel between 2009 and 2011. However, the volume went down between 2014 and 2013. For the case of exported fuel, the volume has been on the rise between 2007 and 2012 (TWB, 2017). Between 2013 and 2014, the amount of fuel exported from Angola recorded a slight decline.

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Chart 1: Angolan Fuel Imports and Exports (TWB, 2017)

The amount of oil exported by Angola has remained significantly high throughout the decade. Therefore, this country has been exporting a substantial amount of fuel to the outside economies. Since Angola is an African country that produces oil, a large proportion of the exported fuel must be oil (Stevens, 2012).

Greed and grievances in Angola are common during the initiation and intensification of major wars in the country. The table below shows the four periods of initiation and escalation of the conflict in Angola (Sousa, 2016). The first period of these conflicts began in February 1961 with the initiation of the independence war against the colonial war.

From the table below, greed and grievances for natural resources increase for the four periods (Sousa, 2016). The level of social cohesion increased for the four stages. For the case of political repression, the degree of change was insignificant. The proportion of the capital used by the government to fund the war also reduced. This change shows that the government of Angola plays a significant role in inhibiting the development of political unrest in the country.

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Table 1: greed and grievances in Angola during the war times (Sousa, 2016)

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Chart 2: The greed and grievance in Angola during the war Times

The growth rate of greed and grievance for some significant factors in Angola is noticeably low. For instance, the rate for natural resources remains considerably below 1% (Sousa, 2016). However, a successful economic model in Angola must rely on a transaction between industrious and appropriative financial performance during the times of crisis. Usually, a country’s engagement in a conflict is a direct result of economic opportunity costs. Consequently, it is important for any firm involving in E&P activities to study the political atmosphere in the country.

Attractiveness of Angola for E&P Services

African oil and gas hotspots have continued to gain interest from global investors and E&P companies. For many years, the abundant natural resources in Africa have played a crucial role in the economic development of the producing nations. Explorations by the global oil and gas sector have resulted in the discovery of both offshore and onshore oil wells. According to CSV (2017), discovery of oil wells in the Subsaharan countries has been on the rise. As a result, development of the offshore oil production facilities has increased. Countries such as Nigeria are currently facing intensified competition from the well-developed nations like Angola and Ghana. Therefore, these new comers in the field have a potential to increase the level of oil production.

Political stability in most of the oil-producing African countries presents a conduisive environment for oil production. Angola, Ghana and Ivory Coast stand as examples of increased strength, trade and industry productivity for the African Nations. Since 1998, Angola has not faced civil wars; hence,the nation has managed to enjoy a long period of sustained peace and economic growth. Over the last twenty years, this country has slowly, but persistently climbed in the importance of oil & gas exploration and production. Silva & Frazao (2016) notes that Angola has risen to become an Africa's producer of crude oil. The political instability in Nigeria has also created an excellent opportunity for Angola to become a major oil producer in the continent.

Angola has not fully exploited oil and gas resources available due to its economic viability. Currently, oil prices are meager, a fact that has locked Angola from utilizing the available natural resources fully. Silva & Frazao (2016) note that Angola's economic capability to maintain oil production in the current market has raised questions among investors. The high production costs linked to both technical factors and regulatory aspects raises questions about the long-term interests, for instance, increased costs resulting from the strict local content and other requirements. As a result, most of E&P companies lack confidence to invest in Ghana. However, this might not be a long-term problem in Ghana since the government is making intentions to rethink and restructure the country’s regulatory model. Cuot, Plansky, & Caglar (2017) notes that the Angolan government established a commission that was responsible for the reorganization of its petroleum sector in October of 2016. The primary goal of this committee was to draw up an integrated strategy and organizational model that can promote efficiency in the industry of oil. This is as a result of the forced change, reaction and diverse opportunities brought about by the dynamic market of the oil industry (Inkpen & Moffett, 2011). The findings from this commission will play a significant role in mitigating the impact of oil prices on the economy, which will become a beginning of a new era in the petroleum industry of this country. The progress of this commission is pleasing since it has resulted in the development of oil reform statutory. The current operations of the commission, together with prior results will help to address the organizational issues of the petroleum sector and improve the terms and conditions for exploring and producing oil and gas. Angola is becoming an attractive oil provider in the current hard economic times. Therefore, there exists a chance for the Sawana oil company to start investing in Ghana’s oil (Stevens, 2012).

Analysis and Evaluation of Strategic Options for Sanawa Oil Limited

Angola relies on the oil exports strongly, which amounts to 97% of the total exports (TWB, 2017). Oil also accounts for approximately 70% of inland revenue and 45% of the total GDP of Angola (Daniel, Keen, & McPherson, 2013). Currently, the country is among the world's largest oil-producing nation with a daily rate of production of 1.8 million barrels (Daniel, Keen, & McPherson, 2013). The priority for the Angolan government is to rehabilitate and expand the current devastated infrastructure. The government also aims at using the surplus resources from the oil industry to improve the living standards of its citizens. Some of the social amenities that the government plans to fund include water and hygiene, transport networks and energy projects. For instance, the government intends to build 1,500 bridges and 15,000 kilometers of the road by the end of 2017 from the revenue generated from oil (Stevens, 2012). Therefore, this strategy is likely to decrease any conflict for not using the funds to progress their living conditions.

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