Trend Assessment: Gabon faces bleak economic outlook as investors leave

Introduction

The central African country of Gabon was plunged into a political crisis last August after presidential elections which the runner-up, Jean Ping, refused to recognise as legitimate. On 28 February, President Ali Bongo Ondimba, whose dynasty has run Gabon since the 1960s, announced the start of a three-week national dialogue to seek a political agreement to the impasse. The country’s economic direction is one likely ground for dispute.

External shocks to oil-dependency

The oil-dependent economy – Africa’s fifth largest crude oil producer – is struggling with a global slump in oil prices and maturing domestic oil reserves. On 27 February, French energy group Total S.A. announced it was selling its entire stake in its subsidiary, Total Participations Petrolières Gabon, to a smaller Anglo-French extractive firm, Perenco. Another subsidiary of the oil major, Total Gabon, announced that it was selling its interests in five oilfields and upstream infrastructure, such as the Rabi-Coucal-Cap Lopez pipeline network in west Gabon. All oil activities, both onshore and offshore, are located in the west of the country, in and around the western Ogooué-Maritime province which includes the second-largest city, Port-Gentil. Together, the deals would be worth USD350 million.

The announcement came a little over a month after multinational oil and gas conglomerate Royal Dutch Shell, headquartered in the Netherlands, announced that it would sell its Gabonese assets to U.S.-based private equity firm Carlyle Group for some USD700 million. Shell said the sale is part of a wider USD30 billion divestment programme which the group deemed necessary after the acquisition of U.K.-based oil and gas consortium BG Group plc in January 2016.

Gabon’s longest-operating and largest oil and gas companies are gradually leaving the country

Fearing job cuts, Shell’s 400 Gabonese employees, represented by the national oil union, Organisation nationale des employés du pétrole (Onep), went on strike in early January. The workers resumed work on 23 February after reaching an agreement with the company that their jobs would be protected. A similar industrial dispute also affected French energy group Maurel & Prom S.A. at the end of February. The company had announced last August that it was selling off almost a quarter of its assets in Gabon to Indonesian state-owned firm Pertamina Persero. This is significant, considering the centrality of Gabon to Maurel & Prom’s operations.

Gabon’s changing oil industry

Put simply, Gabon’s longest-operating and largest oil and gas companies are gradually leaving the country. Total entered Gabon in 1928 and Shell in 1960, but Shell’s production in Gabon reached its peak of 365,000 barrels per day in 1996 and has since declined to just over 47,000bpd. At the same time, oil prices are struggling to recover from a 40 per cent fall from over USD115 in June 2014.

Despite this, Gabon’s light, sweet crude remains attractive to smaller players. It requires simpler refining techniques, provides larger yields and allows producers to offer a wider product line of petroleum products, including gasoline, kerosene, and liquefied petroleum gas. Gabon’s sole refinery, operated by the state-owned company Société gabonaise de raffinage (Sogara), only has the capacity to refine 21,000 bdp, less than ten per cent of Gabon’s daily production, meaning that most of the country’s oil needs to be refined elsewhere.

In 2014 and 2015 the ministries of economy and of mines, petroleum and hydrocarbons launched bidding rounds for deep offshore oil exploration concessions. Companies such as Perenco and Malaysia’s state-owned energy firm Petroliam Nasional Berhad (better known as Petronas) were awarded exploration permits in 2014. The 2015 bidding round had to be postponed several times due to a lack of offers. That was not necessarily due to a poor investment climate in Gabon, but due to the stubbornly low global oil prices.

What the bidding rounds do indicate, however, is that Gabon’s oil sector is evolving, as new actors enter the market, and traditional players seek better margins elsewhere. This is destabilising for an economy that depends on oil export revenue as much as Gabon. The World Bank says that oil accounted for 80 per cent of exports, 45 per cent of GDP, and 60 per cent of budget revenue in Gabon in 2015. Rehabilitating an oil-dependent economy.

Bongo’s government is well aware of its oil dependence and has sought to diversify the economy in recent years. It outlined its strategy in ‘Gabon Emérgent: Vision 2025’ – a national development plan launched in 2012. The plan identifies key sectors for investment and aims to exploit the country’s vast natural resources, such as developing its agricultural and logging sectors, as well as eco-tourism. A key aim in 2012 was for the country to become Africa’s largest palm oil producer by 2020 and for palm oil production activities to increase from 1 per cent of GDP, to over 15 per cent of GDP by 2020. The global market for palm oil accounts for over one third of the world’s vegetable oil trade, mainly thanks to its low production costs and high oil yields per hectare, and it is projected to reach USD88bn by 2020, according to a 2015 study by U.S.-based market research firm Grand View Research, Inc.

Gabon’s eco-tourism sector is hardly developed but has the potential to grow immensely due to its vast areas of untouched forests, some of which are over 2 million years old. The east African country of Rwanda, which only has about 600 mountain gorillas, has developed a vibrant eco-tourism industry that brings in about USD300m per year. While it is likely that Rwanda is riding the wave of the Hollywood drama of 1988 Gorillas in the mist – based on the work of U.S. activist Diane Fossey with mountain gorillas in Rwanda – Gabon’s eco-tourism sector looks minimal. In comparison, Gabon has over 30,000 gorillas, as well as significant populations of chimpanzees, giraffes, mandrills and (though swiftly declining) numbers of forest elephants. In sum, eco-tourism in Gabon has huge potential to attract foreign investors, but just over 15 years after the president established 13 national parks by decree, Gabon’s eco-tourism sector remains underdeveloped. Taking this into account, it is unlikely that Gabon will be able to compete with the likes of Rwanda in the next five-year period.

Environmentalist concerns hamper diversification drive

Hopes that Gabon would benefit from the huge potential of its developing palm oil production capability were recently thwarted. In mid-February, Olam Palm Gabon, the local subsidiary of the world’s largest commodity trader, Singapore-based agribusiness group Olam International, agreed to a one-year moratorium on forest clearance for its future palm oil plantations in-country. The decision came after mounting pressure from environmentalist groups; specifically, in December 2016, the U.S.-based campaigning organisation Mighty published a report into Olam’s forest clearance operations in Gabon, alleging unsustainable practices by the company’s third-party contractors. A key concern was the way Olam sources its palm oil, which the report argued facilitated unsustainable forest clearance activities as most of Olam’s palm oil comes from undisclosed third-party sources. Olam has also agreed to develop industry guidelines and best practices for agribusinesses operating in densely forested countries like Gabon and to start disclosing the identity of its third-party suppliers.

However, the one-year moratorium is unlikely to have resulted merely from pressure exerted by Mighty and the Gabonese non-governmental organisation Brainforest. Instead, the move comes amid a wider trend among fast-moving consumer goods (FMCG) firms, such as Switzerland’s Nestlé, the U.S.’s Kraft Heinz Company and PepsiCo Inc., which are increasingly concerned about consumers’ growing demands for higher production standards that respect the environment.

ASSESSMENT

As international oil majors are leaving the country and environmentalist concerns have blocked forest clearances for one year, it is clear that Gabon will miss a critical source of revenue in the coming year to hedge against declining oil revenue. The urgency is made more apparent in the face of low, and possibly declining, oil prices at just above USD50 per barrel of Brent crude, despite oil production caps imposed by the Organization of the Petroleum Exporting Countries, which Gabon re-joined on 1 July 2016 after a 22-year absence.

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