The Fuse

A Constitutional Appointment: Isabel dos Santos and the Battle for Angola’s Oil

by Zachary Waller | March 24, 2017

On December 22, 2016, the Supreme Court of Angola ruled that Isabel dos Santos, the president’s daughter, could stay on as Chief Executive Officer of Sonangol, the country’s state-owned national oil company (NOC). The ruling came in response to a suit seeking her removal on the grounds that her father, President José Eduardo dos Santos, engaged in nepotism and violated the country’s probity law when he appointed her CEO in June. Although dos Santos adamantly defends her appointment as head of Sonangol, the human rights lawyers who filed the suit say her appointment is illegal and violates the country’s constitution. The case is now headed to the Constitutional Court.

If the Constitutional Court accepts dos Santos’ appeal, lawyers may have a tougher time arguing the case. The only way the Constitutional Court can overturn a Supreme Court ruling is if they determine dos Santos’ appointment explicitly violates Angola’s constitution. While proving this will be difficult, the lawyers will likely rest their hopes on the fact the Constitutional Court is slightly more independent than the Supreme Court. In Angola, the president appoints all Supreme Court judges, but does not have the same power over the Constitutional Court, and only appoints four of the Court’s eleven judges—the other seven are chosen by the National Assembly, Supreme National Council, and by election. Even so, experts believe it unlikely lawyers will be able to prove the unconstitutionality of the younger dos Santos’ appointment.

The dos Santos court case is an important flashpoint that highlights issues of inherent institutional corruption and political influence in oil-producing countries.

The case is an important flashpoint that highlights issues of inherent institutional corruption and political influence in oil-producing countries. Although on the surface it appears to be an anti-nepotism case brought against President dos Santos, it is far from a simple one, and the outcome will have wide-ranging implications for one of Africa’s largest oil-producing nations.

Despite Isabel dos Santos’ impressive record (she is Africa’s first female billionaire), many find her appointment troubling. This is mainly because it follows a long pattern of behavior in which those close to President dos Santos become rich (he also appointed his son, José Filomeno dos Santos, to head the country’s sovereign wealth fund), while much of the rest of the country remains in poverty, not seeing oil profits that have flowed into the country. With President dos Santos recently announcing his plans to step down, some critics claim the appointment is an attempt to solidify power for those close to him after he is gone. Whatever the reason for Isabel dos Santos’ appointment, one thing is clear: Sonangol and, by extension, Angola, is in financial trouble due to low oil prices and needs help. If the Constitutional Court okays her appointment, she will need to work diligently to cut waste, make smart investment decisions, and bring down costs to a level where the company and the country can survive in a lower-price environment—not only to prove herself an effective leader and vindicate her appointment, but also to save Sonangol.

The oil production soars, then stagnates

After the success for a good part of the 2000s, Angola’s production has been in gradual decline for almost a decade.

Angola is Africa’s fifth-largest economy and largest oil producer. Oil output accelerated early last decade when the country’s civil war ended, and deepwater production became economically viable. This deepwater production led to an average annual production growth rate of 15 percent between 2002 and 2008, setting the stage for the country to reach peak production of 1.98 million barrels per day (mbd) in March and April 2010. Production has remained relatively steady since, although it has not yet reached the company’s oft-cited target of 2 mbd. In 2007, during the peak of its oil boom, Angola became a member of OPEC.

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After success for a good part of the 2000s, Angola’s production has been in gradual decline for almost a decade. In January 2017, output registered 1.7 mbd, with declines occurring even though internal turmoil and questions about constitutional propriety have not resulted in a major supply disruption. As Nigeria has had to shut-in significant volumes of production due to militant attacks in the Niger Delta, Angola has overtaken Nigeria as Africa’s largest oil producer, feeding new markets in Europe and China.

While Nigeria’s oil woes have been largely due to political pressures, Angola’s decline in output has been the result of low oil prices and technical inefficiency. The marginal production cost of offshore Angolan crude is approximately $40 per barrel, although the fiscal break-even price stands at $94. Most of the country’s reserves are located offshore, and most exploration has been done at depths of more than 1,200 meters, or 4,000 feet in the Lower Congo Basin with more activity starting in the Kwanza Basin. The current low-price environment has forced offshore producers to shut down rigs, keeping deepwater development slow and causing the country to miss targets frequently.

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While technical problems are the main cause of Angola’s production inefficiency, the country has significant onshore reserves that remain underexplored and underdeveloped due to security issues. Companies remain wary of investing in onshore and near-shore production in Cabinda, a tiny exclave that holds a desire for independence and represents over two-thirds of Angola’s oil revenues. Following Cabinda’s incorporation into newly independent Angola in 1975, the Front for the Liberation of the Enclave of Cabinda (FLEC) went to war with the government, not signing a ceasefire until 2006. But the negotiated peace has not been stable since the ceasefire, with FLEC splinter groups carrying out attacks on oil infrastructure and workers.

Striving for 2 mbd

Africa’s third largest holder of proved oil reserves, Sonangol is nevertheless pushing ahead with its ambitions to more profitably extract vast offshore resources, pursuing new joint ventures or production-sharing agreements with foreign companies to further capitalize on new opportunities. In 2011, Sonangol was involved in a deal with BP and Cobalt International Energy, part of which required BP and Cobalt to pay Sonangol $350 million for social projects, but the projects BP and Cobalt paid into reportedly do not exist.

Africa’s third largest holder of proved oil reserves, Sonangol is nevertheless pushing ahead with its ambitions to more profitably extract vast offshore resources.

Despite its problems, Angola is still optimistic it will be able to reach its 2 mbd goal. Yes, Sonangol is mired in controversy due to dos Santos’ nepotism charges, but many remain hopeful the successful businesswoman will be able to turn the company around by cutting waste and reducing inefficiency. With oil prices having recovered in the past year or so, the country appears to be in a slightly better financial position, but Angola’s industry has a long way to go before it can cover expensive marginal production costs and meet the country’s fiscal break-even price of $94 per barrel. Hopes of achieving its 2 mbd goal are set over the long term and will for now be tempered by the recent OPEC accord that freezes output at 1.7 mbd.

The myriad issues that Angola, similar to some other OPEC producers, is struggling with right now reflect the challenges ahead for Isabel dos Santos and the country’s oil industry. Current market conditions, with low prices and cartel members restricting supply, certainly don’t help but they create opportunities for reform that can benefit the Angolan economy for the longer term. Isabel dos Santos was selected for her position because of her business acumen, but there are economic forces related to long-term production declines and prices that are limiting Angola’s production potential that no one official can fully address.

 

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