What impact could the lifting of economic sanctions on Iran have on Africa's major oil exporters?

What impact could the lifting of economic sanctions on Iran have on Africa's major oil exporters?

As Iran ordered a ramping up of production by 500,000 on Monday, Persian tankers were already filling their hulls with millions of barrels of low-sulphur crude, destined mostly for European markets. Although there are some factors restricting the accessibility of Iranian crude to foreign markets, especially given that U.S. institutions are still barred from Iranian oil transactions, Iran will want to regain market share it has either lost, or never had access to. This will most likely translate to more supply of high-quality hydrocarbons and downside pressure on prices.

Iran has not had much in the way of investments into its oil infrastructure since the 1970s, and the lifting of sanctions will attract European investors to Iran, a country seen as relatively more stable, with lower production costs compared to African oil Exporting countries. This will take the shine off of a lot a potential African exploration projects, as well development in capacity-building and infrastructure. African oil exporting countries have already been squeezed out of the market, either by the collapse in prices, or via internal security or political issues. 

In the case of Nigeria, Africa’s largest producer in 2014, offshore oil developments are costly and infrastructure, even in the lower Niger Delta region, is inadequate and compromised by local militant groups. Iran’s entry into the market with its competitive high-grade hydrocarbons will take the already diminished shine out of investment in Nigeria and other African crude exporting countries.

For these countries, falling export revenues have already occurred and government coffers and, consequently, public expenditure, deficits, debt and borrowing costs have also suffered, and now oil-related investment is beginning to following suit. As late as mid-2015, for example, Mozambique and Tanzania attracted attention from investors interested in these countries’ enormous natural gas reserves.  Anadarko Petroleum made significant headway in developing Mozambique’s natural gas exporting capacity, however, amid tumbling share value thanks to speculations over a protracted rut in energy prices, Anadarko decided to postpone important gas field development decisions, fueling concerns over the LNG viability in Mozambique.

Mozambique is just one example of how the new developments in global energy markets could further exacerbate situations in African countries. As risks to the outlook of hydrocarbons remain heavily weighted on the downside, more companies will begin to scale back investment in Africa, making such developments more reliant on public money, which is harder to come by given the financial markets recent disdain for emerging market debt.

However, there is always a silver lining. Although many African countries are exporters of crude, refined petroleum is still imported, as is the case in Nigeria. Lower prices will give consumers and businesses a boost in these countries and could help with non-oil-related investment. Tanzania and Mozambique won’t come online as LNG exporters until after 2020, and it is difficult to say what the situation will be in five years, but natural gas’ advantage over dirtier fuels could cause its demand to increase beyond that of dirty fuels in the longer term.

Author: Robert Hill, Economist

Date: January 20, 2016


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