Angola and East Timor amongst petroleum producers with least time to diversify economy

18 August 2008

London, United Kingdom, 18 Aug – Angola and East Timor are among the oil producing countries which will have the least time to diversify their economies and sources of income, as production declines.

Angola is expected to reach its “peak” of oil production in 2010 – two million barrels per day – and will then enter into a transition period, according to the projections of John V. Mitchell and Paul Stevens in the report, “Ending Dependence: Hard Choices for Oil Exporting States,” recently published by the British Institute of International Affairs (Chatham House).

They add that this transition period could last as long as seven years, should new and significant reserves be discovered, or as little as two years.

The report, which looked at a total of 12 countries in Europe, Africa, the Middle East and Asia, puts Angola into the “Prematurely Dependent” group, along with East Timor, Azerbaijan and Kazakhstan.

“These four countries are relatively new in terms of large-scale oil wealth. However, their window of opportunity to resolve the diversification problem (…) is small, given that the increase in reserves will be limited,” say the authors.

For Mitchell and Stevens, these countries “face considerable barriers to diversification” and “so far there are few signs of a successful process [of diversification] beginning.” “They all suffer from a lack of infrastructure coupled with problems of inefficient spending and a general lack of administrative capacity within the government,” they say.

They add that in East Timor the dominance of the oil sector is complete, accounting for 95% of government revenue, 73% of GDP and virtually all exports.

“It has been estimated that when the Greater Sunshine field goes into production in 2010, the sector will account for 89% of GDP and 94% of government revenue. The rest of the economy is essentially subsistence agriculture,” says the report.

The Angolan economy is also “very dependent” on oil, accounting for 58 percent of GDP, 81 percent of government revenue and 96 percent of exports, according to projections in the Chatham House report.

Between 2001 and 2005, petroleum revenue contributed little to the country’s productive base and before that sustained a “highly skewed income distribution.”

“Angola faces not only a development challenge, but also a reconstruction task. Civil war destroyed infrastructures, leaving large parts of the country – rich in other natural resources – without power, communications, schools, hospitals and public order,” say the authors.

The non-oil sectors of the economy are currently dominated by agriculture, though between 1975 and 2003 the cropped area fell by 40 percent.

Angolan oil reserves, estimated by the authors, based on various statistical sources, to be 544 barrels per capita, among the lowest amongst the countries included in the report, in which the Kuwaitis came out best with over 39,000 barrels per inhabitant.

Along with Kuwait, Angola is the country most dependent on oil revenue to finance fiscal and current account deficit, sitting at the opposite extreme from countries which are less dependent such as Norway, Indonesia, Malaysia and Kazakhstan.

The report divides the 12 countries into three groups: “near sustainable”, “soon in transition” and “long-term depletion options.”

Also, a fall in oil prices from the current level of above US$100 per barrel down to US$60 could force countries like Angola to make “radical changes,” according to the report.

Among the solutions proposed is the deceleration of domestic energy consumption, investments and the expansion of reserves through exploration and new technologies.

“Depending on the countries, expansion of reserves (…) would prolong the peak of production and, therefore, exports by between two and seven years,” say the authors.

They point out, nevertheless, that until 2025 countries such as “Angola, Iran and Malaysia will need to have improved the fiscal balance of their non-petroleum sectors by 10 percent or more”.

As regards foreign investments, namely via sovereign wealth funds, “they are an essential strategic protection for the exporting countries against the uncertainties of future oil prices, reserves and above all the uncertainty of their non-petroleum economies to adapt to declining oil revenues.”

According to the authors, what is mainly at stake is the speed at which countries dependent on oil revenues can impelmenty their diversification process.

“Time, and not oil, is what is coming to an end. Several countries urgently need to speed up progress outside of the oil sector in order to survive a potential fall in oil and currency revenues,” the report says. (macauhub)