There are 100 million people living in extreme poverty in Nigeria and Angola. They had nothing to do with last week’s plunge in oil prices. But they will certainly be hit by the fallout, as the COVID-19 pandemic and OPEC+ family fight between Saudi Arabia and Russia upend the market. Crude prices drive everything in these economies, with oil accounting for more than 60 percent of government revenues and the overwhelming share of exports in both countries. When global prices fall, the many poor Angolans and Nigerians suffer the most, as the two oil-dependent economies contract and funding for social services dries up.
The governments of Angola, Nigeria and dozens of oil-dependent developing countries like them can’t control global prices. But their policies do have a dramatic impact on these countries’ resilience to shock.
One key is using times of high prices to plan for the future. Some big oil producers – including Norway and Colombia – have rainy-day funds that stash away money during booms to protect public spending when downturns come. But many other oil states have established no such systems – or worse, use them as slush funds to finance the whims of autocrats. This leaves their economies deeply vulnerable to the volatility of commodity markets. When prices fell between 2014 and 2016, the Nigerian government was forced to slash public spending virtually in half, and Angola cut expenditure by almost 60 percent. Other petro-states suffered similar shocks.
The ongoing chaos also draws attention to a particular risk facing oil states: the concentration of huge shares of national wealth – and accumulation of massive debts – in state-owned oil companies that are themselves highly exposed to market volatility. In Angola, Nigeria and many other oil-dependent countries, national oil companies collect the dominant share of the “people’s” oil revenue. And in many cases the majority of that money doesn’t make it to treasuries to fund public services; it is spent by the companies themselves.
Spending by national oil companies (NOCs) has often been fraught. Earlier this year a major investigation led by the International Consortium of Investigative Journalists revealed that the CEO of Angola’s Sonangol – herself the daughter of the country’s then-president – diverted more than a billion dollars in public revenues through the company to businesses that she controlled. Similar scandals have erupted with NOCs in Nigeria, Brazil, Russia and many other countries.
But even when NOCs invest significantly in forward-thinking strategy and corporate governance, the volatile nature of the market imposes significant risks on the economies that depend on them. The recent fate of shares of market-listed NOCs demonstrates these risks. The Natural Resource Governance Institute’s National Oil Company Database identifies 13 NOCs that trade some shares publicly:
Share price decline among NOCs with publicly traded shares
| Company | Home country | Change in share price, year to date | Change in share price since 7 March Saudi output hike announcement |
|---|---|---|---|
| CNOOC Ltd | China | -41% | -23% |
| Ecopetrol | Colombia | -55% | -45% |
| Equinor | Norway | -44% | -23% |
| Gazprom | Russia | -48% | -20% |
| ONGC | India | -50% | -28% |
| Petrobras | Brazil | -68% | -50% |
| PetroChina | China | -33% | -9% |
| PTT | Thailand | -36% | -23% |
| Rosneft | Russia | -49% | -35% |
| Saudi Aramco | Saudi Arabia | -15% | -9% |
| Sinopec Corp | China | -22% | -4% |
| TAQA | UAE | 26% | -13% |
| YPF | Argentina | -64% | -45% |
In one sense, these steep declines in value come as no surprise in light of current events; shares in international oil companies such as BP (52 percent decline since the beginning of the year), Shell (55 percent) and ExxonMobil (56 percent) dropped similarly. But because the majority of shares in these NOCs are owned by their governments, and because so many citizens depend so much on money that flows through NOCs, the risk exposure of these companies merits special attention.
On balance, the companies in the table above rank among the world’s most transparent and sophisticated NOCs. But for other, wholly state-owned NOCs (e.g., Mexico’s Pemex, the Nigerian National Petroleum Corporation, Sonangol), real-time information on the impact of volatility on the value of public assets is much harder to come by. It’s therefore hard to fully understand just how costly global shifts are for the companies’ home economies.
These companies’ debts pose urgent risks too. Colleagues and I found 18 NOCs worldwide with debts greater than five percent the size of their entire national economies, as measured by GDP. When the companies fail to achieve their goals, or to generate sufficient revenues to cover their payments, they can imperil economies, as was evidenced by last year’s $5 billion bailout of Pemex and the ongoing default of Venezuela’s PDVSA on billions worth of bonds.
Many of the loans that oil states take on are to be repaid with future oil production. Angola presents a dramatic case; in 2015 the country borrowed $15 billion, or about 13 percent of GDP, from Chinese lenders, to be repaid via oil flowing through Sonangol. When prices collapse, these resource-backed loans become increasingly hard to service, and the amount of oil money left over to fund the national budget can shrink dramatically. Even where NOC debts are not directly paid back in barrels, oil still represents the debtor’s overwhelming revenue source, and the risks of debt distress surge when prices are low. When prices dropped between 2014 and 2016, the average NOC transferred only half as much to its government as during the boom time.
The path of the coronavirus pandemic and the related drops in demand for oil are deeply uncertain. But regardless of the most recent chaos, the oil industry will likely look much different in the future as the world shifts away from fossil fuels. In short, it’s time for leaders in oil states to revisit their approach to NOCs. For decades, governments have counted on these companies to spend massively, plugging revenues right back into the oil sector in the name of “investing for the future.” Leaders must now consider risks and future market scenarios before allowing NOCs to continue the “drill-collect-borrow-spend” cycle that has dominated their strategies. They should also invest in corporate governance and transparency – including disclosure of the terms of oil-backed loans – to ensure that companies are managing public assets in the long-term interest of citizens.
Patrick Heller is an advisor at the Natural Resource Governance Institute and a senior visiting fellow at the Center for Law, Energy & Environment at U.C. Berkeley Law School.