AU summit in Kigali ends with new resolve to foster efficiency, self-reliance

Crude oil has been flowing from African wells, both on land and beneath the oceans, since the mid 1970s. Before then, Africa’s main source of revenue was agriculture.

International oil companies have been the most important source of investment capital needed to find and produce oil in African countries. The international oil companies have also provided the technology and expertise needed to keep African crude oil flowing to international markets. At the present time (2016), African nations produce approximately six million barrels of crude oil per day.

How do African governments and the international oil companies share the wealth coming from crude oil flows and export sales? In most African nations, oil companies and African governments have “production sharing agreements.” These agreements define what percentage of the wealth created by crude oil production and its marketing will go to each party – the oil companies and the African governments.

In the most common form of production sharing agreement in existence in Africa, the host government takes a percentage of the crude oil that is produced and does its own marketing for export. In order to perform as oil exporters and marketers, the majority of African oil-producing nations have established their own national oil companies.

A typical production sharing agreement in Africa awards between 30 and 40 percent of the crude oil produced in that nation’s territory to the government. In order to acquire, store and process the crude oil for marketing, the host government, in almost every case, establishes its own oil company that handles all aspects of its involvement in the hydrocarbon industry.

A good example is the national oil company of Angola, SONANGOL. This government-owned oil company is responsible for the awarding of blocks for exploration, for marketing Angola’s share of the crude oil produced by the international oil companies, and for processing the proceeds from its own international sales around the world.

As a major international oil company in its own right, SONANGOL, which is one hundred percent government-owned, does not appear to be accountable to any higher political authority, except for the Head of State. Thus, SONANGOL is free to act as if it were a private international oil trading firm that invests in different business ventures, both within and outside the oil sector. At the same time, the Angolan nation depends on oil revenues for about 70% of its overall governmental needs, especially public services.

Unfortunately, a significant percentage of SONANGOL’s earnings do not end up in the national treasury. Where the money goes is not transparently known. For this reason, despite oil export earnings from a production of about 2.5 million barrels a day for the past ten years, the people of Angola remain desperately poor. Very little of those earnings have been utilized for infrastructure development, agricultural modernization, education or health improvements. Recent studies have revealed that about $30 billion worth of oil earnings through SONANGOL have disappeared. The assumption is that this money has become “ill-gotten gains” on the part of senior political leaders.

The precipitous drop in the price of oil between 2014 and 2016 from $110 per barrel to between $40 and $50 per barrel has further exacerbated Angola’s financial predicament.

Angola is not alone in Africa to be suffering from the resource curse perpetrated by a national oil company. The Nigerian National Petroleum Company (NNPC), the National Oil Company (SNPC) of the Republic of the Congo, the Cameroonian National Oil Company, the Gabonese National Oil Company, and several others all operate in a similar manner to that of SONANGOL. The oil revenues flow into the national oil companies, but where the money goes after that is anybody’s guess.

The resource curse in Africa is alive and well.