Angola: Growing Chinese debt leaves country with little spare oil

Angola has found itself with a dwindling amount of crude to sell as more of its oil flows to China for debt repayment, leaving little revenue for anything from oil sector development to health care in one of Africa's largest oil exporting nations.

Following a trend also seen in Iraq, Kazakhstan, Russia and Venezuela, Angola has tied up more of its output in pre-financed deals to bridge a drop in income due to the 70 percent fall in oil prices in the past 18 months.

The price slump means the Western oil majors which manage the fields and platforms that help Angola export 1.8 million barrels per day are also taking more oil in return for their investment and services.

Countries with oil often use it as collateral for loans, and during a previous oil price collapse, in 2008, the process helped to tide many over until better times. But this time most experts say the rout will continue until at least next year.

As recently as five years ago, just over half of Angola's 50-60 monthly cargoes went toward paying oil majors, with as few as four to five cargoes going to pay back prefinanced deals, leaving the country's state oil company, Sonangol, with as many as two dozen to sell on the market or to term buyers with ongoing contracts.
Through a series of conversations with at least six oil traders, Reuters found the number had been cut by more than half, to fewer than 10.

Part of that was because more has been going to Western oil majors such as Total, Chevron and BP due to the price fall.
No one foresaw the price collapse when the contracts were written, said Readul Islam, analyst with Rystad Energy. "There were no clauses in the contract about what happens to the profit sharing when prices dropped so low."

But another drain on Angola's oil was a fresh round of prefinancing from China that more than doubled the number of cargoes sailing east as repayment from February. The deal, struck with China's state-run Sinochem Group in December, involved as many as six cargoes per month, on top of three to five already earmarked for fellow Chinese firm Unipec.

The deals with China by the MPLA party that has ruled Angola for almost four decades financed infrastructure and also helped secure an important new outlet to make up for declining U.S. demand due to the shale revolution.

But its oil-backed debts are now estimated to have ballooned to $25 billion.

The December agreement was shrouded in secrecy; traders said it involved at least $5 billion in advance financing to be repaid with oil, while some said it could have aimed at restructuring older debt.
Roderick Bruce, principal energy analyst for West Africa with IHS, said in principle the lower the oil price, the more crude it costs to service debt.

"That's an increasing amount of crude that can't be sold to directly fill government coffers," Bruce said.

LITTLE FREE OIL

Existing contracts meant Angola had only one cargo to sell on the spot market in February, traders said, crimping its ability to generate cash when needed and ability to set prices for its term buyers.
A source close to Sonangol said it still had some flexibility to sell oil directly on the market.

It could get other loans, or refinance deals to limit the amount of crude paid to lenders, the source said, and had already dropped some contracts with term buyers who had not prefinanced them to keep back three to six cargoes each month.

In March, it got two or three and in April six, but some of that may reflect delays in meeting commitments under continuing contracts which it will have to make up for later in the year.

Traders and analysts said between Sonangol's preexisting problems and the precipitous drop in oil prices, the situation looked difficult.

"They should be hearing alarm bells," Islam said.

The company did not respond to a request for official comment. Last month it said its net debt to foreign oil companies had risen 41 percent year-on-year in 2015 to $7.8 billion and it expected this year to be "very difficult".

President Jose Eduardo dos Santos, who has ruled Angola for 36 years since shortly after independence from Portugal, asked China for a debt repayment freeze late last year, as the debt-to-gross domestic product ratio hit around 46 percent.

The finance ministry is negotiating a new loan with the World Bank, but spending is already 40 percent lower than two years ago and cuts to rubbish collection and water sanitation have spread disease in a country six places from the bottom of the World Bank's index of inequality.

The government forecasts a budget deficit of around 5.5 percent of gross domestic product in 2016, based on oil prices of $45 per barrel; Brent crude this year has thus far peaked at $41.48 and analysts say it could be subdued all year.

Last week, ratings agency Moody's placed the country's credit rating under review, threatening a downgrade further into junk territory.

Angola's oil woes are not unique: Iraq has built up debts of over $2 billion to oil majors after it said budget needs meant it could not hand over increasing volumes of crude; Venezuela has billions of dollars in oil-backed Chinese loans while Russia and Kazakhstan borrowed heavily from oil traders Vitol and Glencore.

With a limited amount of other assets to leverage, there is little room for manoeuvre.

"Probably, there is no way out of this dilemma for many countries," one source familiar with the situation said, adding they would have to learn to live with less oil to sell.