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Wednesday, July 12, 2006

Equatorial Guinea economy: Oil rush


Equatorial Guinea is one of a number of small African states to discover substantial hydrocarbons reserves. Such oil wealth has not always had a purely beneficial effect--indeed, in Africa particularly rich resource bases are often associated with economic underperformance--but Equatorial Guinea is in theory well-placed to avoid the pitfalls of the resource curse economy. Its offshore hydrocarbons wealth is supplemented by substantial forestry resources, a favourable climate for agriculture and exploitable mineral deposits. Proven oil reserves are 1.28bn barrels, with oil and gas production increasing from 5,000 barrels/day in the early 1990s to 400,000 b/d of oil equivalent at present. And while production is due to peak in 2008, it is forecast to last at least until 2030.

Current policy focuses on developing mid-stream and downstream activities starting with the building of a major liquefied natural gas (LNG) plant due to start operating next year and with an eventual capacity of 3.4m tonnes/year. The port of Malabo is being revitalised and a deepwater port being built at Luba. There are plans for a joint venture led by the state-owned GEPetrol to create an “Autonomous Free Zone” as a hub and service centre for regional hydrocarbon activities.

Meanwhile flared gas is being used to generate gas power; a consortium led by US oil group Marathon has established a methanol plant and the government hopes to build an oil refinery. There is considerable scope to develop the LNG sector over the medium term. Equatorial Guinea is well-placed to import inputs from the region, especially Cameroon and Nigeria, and process LNG before exporting it to the US. On the downside--in line with what looks to be a growing trend worldwide--the country's 2004 investment law stipulates 35% state ownership of all ventures in the hydrocarbons sector; this is deterring some multinationals.

Structural transformation of the economy over the past decade has been dramatic, reflecting annual GDP growth of 33% in the 1995-2000 period and of 26% pa over the past five years. In the earlier period the petroleum sector grew by 80% a year, although this has slowed markedly to 30% annually since 2000. Nonetheless, petroleum's share of GDP more than quadrupled from 19% ten years ago to 84% in 2000 and 93% last year. Agriculture and forestry account for just over 2%, manufacturing for 1.7% and services the remainder.

Oil production is set to peak in 2008 at 508,000 b/d and then start to decline, as a result of which GDP growth for the entire economy is expected to turn negative in 2009-10. Although the importance of the non-oil sector has declined dramatically it is still growing rapidly, with output up an average of more than 10% a year since 1995. However, cash crop production has fallen in recent years as people seek jobs in the energy sector, where wages are twice as high for skilled personnel and 150% higher for unskilled workers.

With the petroleum sector accounting for some 93% of total government revenue, fiscal policy will determine the country's future business model. The requirements are straightforward enough. Resource-rich countries need to convert the revenue flows from their “natural capital” (whether oil, gas, minerals or forests) into a combination of “produced” capital (that is, infrastructure, plant, equipment and machinery) and “intangible” capital in the form of education, health, skills, technology and expertise.

Accordingly, it is not just about taxing oil companies more, as advocated by Venezuela's president, Hugo Chavez, at the July African Union summit in Gambia. Rather, it is about ensuring that the money accruing from natural resources is spent wisely, not salted away into foreign bank accounts, or stockmarket and real estate investments as in the case of Nigeria's oil surpluses.

The key areas for such public spending are human capital development (education, training, skills development and health), physical infrastructure (ports, roads and electricity supply) and trade liberalisation. The difficult part-- as all African countries have found-- is developing the strong institutions and good governance necessary to ensure that oil wealth is reinvested efficiently. It is the potential for implementation failure that is the main downside risk for Equatorial Guinea's economy.

Source: ViewsWire Africa
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