bongo beats his drum: oil nationalism & expropriatory risk in gabon

this week, gabon has officially stated that it would like to expropriate assets of three international oil companies (IOCs), one of which include addax–a company that makes up approximately one-third of sinopec’s international acreage. the expropriated production field in dispute–obangue–represents about 3% of sinopec’s portfolio, and if addax’s other two fields are taken away–tsiengui and koula–it would be another deep cut to addax’s operations, as these two fields contribute roughly 2-3% of the company’s earnings. in total i estimate gabon to be 5-6% of sinopec’s portfolio.

while most people view this looming dispute as an equity story, gabon, which is one of the few countries in the region that posts budget surpluses but it also dealing with declining oil outputs, there’s also a fixed income narrative. gabon has a $1 billion dollar eurobond due in 2017 that has traditionally been a safe bet for those in the african sovereign bond space, as it generally tracks global oil market dynamics. the three fields in question produce 40,000 barrels of oil per day, which translates to 20% of gabon’s total oil output and 16% of its export earnings ($1.6 billion). however, the country has been late on some of its payments recently, and some of its bondholders with whom i’ve spoken have raised surprising questions on its creditworthiness.

so what does this all mean for investors with gabon exposure? i’ll answer three sets of questions.

Q1: what will the outcome of the court case be for addax? what does this mean for future chinese investment in to gabon?

Q2: will this impact upcoming offshore bid rounds in gabon?

Q3: how does the power struggle in the bongo family feed in to expropriatory risk?

A1: china is not likely to win its case against gabon, and will have to increasingly comply with resource nationalist demands from the government. many companies have undergone government-led audits of their contracts in the past year. while addax is arguably the most high-profile of these reviews, canadian natural resources, as well as france’s maurel & prom and perenco have also been looked at. perenco was able to mitigate their expropriatory risk by accepting more onerous fiscal terms on a license that was set to expire. while many observers of china-africa relations see african countries as being squarely on #teamchina or #teamUSA, ali bongo’s gabon has shown that it does not favor west, east, or south. as such, the claim that chinese companies were unfairly targeted will likely fall on deaf ears in an arbitration court. moreover, the gabonese government has also pursued similar action against cmec for failing to develop mining assets in a timely manner (see previous posts).

gabon’s government–which is undergoing a huge infrastructure buildout in efforts to achieve middle-income country status–claims that addax purchased its acreage at a substantial discount when oil prices were low. now, as gabon’s fiscal surplus which was 7.5% in 2012, looks to be halved and some to between 2-3% of gdp because of exponential increases in government spending, it will be looking to plug this gap as much as possible. gabon suggests that addax (before it was a subsidiary of sinopec) purchased the production fields at a $780 million discount when oil prices were around $70. it now demands that it make up for the difference. while to many western observers this is a clear example of seller’s remorse, i think international regulatory bodies–the world bank, imf, icc court of arbitration, et. al–are beginning to side with resource-rich african countries in cases like this. they believe that african countries who may have inked deals that might have not maximized state revenues to the fullest extent are entitled to take another look at contracts, especially if they were signed by leaders who were corrupt autocrats. a similar case is underway in guinea’s simandou iron ore mine, where it looks increasingly likely that vale will have to pay for bsgr’s sins.

A2: no, but small and medium-cap oil companies looking to invest onshore and in shallow offshore will have to compete with the government parastatal. after delaying offshore bid rounds due to environmental concerns in the aftermath of macondo, and failed attempts at closed auctions, gabon is planning a semi-open bid round for its offshore acreage sometime this summer. the deep offshore acreage up for grabs has pre-salt geology, which if developed properly, could be a boon for gabon’s lagging revenues. the government recognizes this, and if perenco is any historical indicator, companies with a proven track record of developing this geology (which tend to be the larger IOCs), will (a) be successful in winning bids and (b) not face expropriatory risk, so long as the contract penned with the government accurately reflects where oil prices will be going over the lifetime of the awarded field.

furthermore, there is a growing trend in west and central african resoruce-rich countries to force more established companies from onshore acreage that is technologically easy to develop for hydrocarbon parastatals. i’ve seen this in conocophillips’ divestment from nigeria for oando, as well as the emergence of angolan oil companies (read, shell companies) onshore. put simply, a state-owned oil company can develop onshore and shallow acreage, while deepwater pre-salt plays cannot. for gabon to chase out the few companies who have the expertise to jumpstart a lagging oil industry.

moreover, while the country still has yet to pass a new oil bill–some investors may question why a company may want to commit when it is clear that there will be a new regulatory framework–those who participate in the deepwater offshore licensing rounds will likely be immune to the slight increase in higher taxes and royalties, as well as forced government partnership and equity in some projects, because the government does not have the technological wherewithal to participate. it’s also increasingly likely that the government may not be able to finance some of its activity in the future event it does chose to form a partnership with iocs, especially if the government’s surplus continues to decline.

A3: bongo’s extended family is powerful enough to create headaches for him and investors, but not strong enough to completely derail investment. that said, contracts penned with omar will be put under closer scrutiny. since coming in to power, ali bongo has surprised many by doing a clean sweep of his father’s corrupt business networks that have become deeply engrained in the country. as addax’s acquisition occurred in 2009–the time when ali came to power–addax’s targeting doesn’t come to a surprise for many gabon politics watchers who have seen ali increasingly cut the old patronage networks and create new links for him and his closest allies. the fact that the state parastatal has been operating in obangue, instead of the old direction générale des hydrocarbures (which houses many of the ancien regime) is a sign that ali, through his associates who run the parastatal, is slowly taking control of the oil sector.

this is not to say that ali has complete control over investment decision-making in gabon, as he continues to face backlash from his many half-siblings and extended family members who want a greater share of the pie, or a politically-important oil union (ONEP) which has been increasingly prone to strike as of late and briefly disturb global oil markets. ali’s extended family still pulls many political strings within the country–but not the majority of them–and could very well continue to make life difficult as the country tries to present a more transparent image of its oil industry that has long been thought of as a vehicle for corruption. they could flex their muscles by aggravating onep (which would lead to strikes, 1-2 day blips in global oil prices, as well as continuing to complicate gabon’s re-admittance to the EITI initiative. the latter would perpetuate the oil sector’s image as highly corrupt and discourage equity investment among those who are worried about american or european business corruption investigations, as seen in cobalt’s problems in angola and civil society backlash.

back after a hiatus

hi all,

back after nearly a year-long break. i’ve recognized there needs to be deeper, forward-looking analysis on contemporary african political economy (my focus of study @ Columbia in NYC) and its relation to investment issues. hopefully this blog will fill that gap for those who would like to learn how to play the emerging africa space, as well as take advantage of opportunities the region presents. thanks to all of you who read my previous posts.

will be playing around with formatting over the next few weeks, in terms of aesthetics and analytical content. work with me here — i am welcome to feedback. will try to integrate shorter, hard-hitting insight, as well as longer reflections. i frequently speak with portfolio investors with interest in africa, so i’m in tune to the africa beat on the street.

i’m also a huge consumer of contemporary african culture–music, visual art, and dance in particular (hence this blog’s namesake), and will occasionally post links to artists and trends with which i’m currently obsessed. this song, which has an azonto beat and house stylings, has been on repeat for me this week. fun fact about myself–i almost became an ethnomusicologist.

one thing is for certain though, i will be posting much more frequently.

follow me on twitter, @MheshimiwaJCF.

let’s get talking about africa!

karibuni sana,

-JCF

uganda:oklahoma::kenya:texas

tullow oil’s discovery in its first well in the south lokichar tertiary rift basin, kenya’s find could change the preexisting commercial dynamics of east africa’s emerging oil plays in a similar manner that texas crowded out oklahoma’s discoveries in the early twentieth century. so far tullow has downplayed its ngamia-1 well’s 20 meters of net oil discovery on block 10bb in turkana county, but has hinted that adjacent acreage in kenya, and also ethiopia, could be significant in the company’s africa expansion strategy. the block’s operators—tullow, africa oil corporation, and lundin—have estimated reserves to be from anywhere between 30 – 45 bbls of oil in miocene era sandstones. kenyan president mwai kibaki and energy minister kiraitu murungi have compared kenya’s light, waxy crude with ugandan varieties. tullow had long written off the rift valley basin in favor of the albertine rift basin (which is ten times larger than what is in kenya and ethiopia), but recent discoveries suggest that the company many change how it views its east africa portfolio–essentially shifting more of its eggs in to its kenyan basket.

previous drilling campaigns have only explored at intermediate depths (approximately 1,000 meters), and tullow plans to drill almost 2,000 meters deeper to see if it can replicate its previous success. successful onshore campaigns have piqued the interest of kenya’s offshore potential, which is looking to compete with the flurry of discoveries off the tanzanian and mozambican coasts. however, across the world, daily rig rental rates have been steadily increasing, and in east africa the price tag can be as high as $600,000. and although the oil services industry plans to construct approximately 50 new rig this year, those interested in exploring kenya’s (and also uganda’s) oil will face difficulties in securing a rig, critical for the development of kenyan oil. the fact that there are few rigs under contract in the region suggest that ships must travel longer, to an unknown area. kenya—which predicts it will need up to half a dozen rigs to complete its exploration targets—will have to compete with tullow’s planned expansion in uganda, which is planning to drill up to twenty wells. and while somali pirates have taken a break from their own “exploration,” an increase in maritime commercial activity closer to their borders could incentivize a new piracy campaign.

the excitement around kenya’s oil discovery comes in the run-up to what will be hotly contested elections, which will likely be held in early 2013. while kenya’s embryonic oil story could share similarities with uganda’s drama with tullow and heritage surrounding payment on capital gains taxes (kenya does not have this on its books), the involvement of the controversial former foreign affairs minister moses wetangula adds a political dimension unlike what was seen in uganda. while uganda’s virtual one-party system ensures that politics stays out of commercial transactions, kenya’s vibrant, and at times violent, multipartyism means that business can be politicized.

although tullow oil and africa oil corporation have found themselves in favorable geological terrain, they could be sitting on questionable legal and political terrain, particularly if they decide to sell their blocks in the run-up to election season. the uganda oil rush has triggered a licensing rush in kenya’s tertiary rift basin, and the operators of 10bb were early to the game. a local subsidiary of canadian turkana energy stealthily emerged to sign a production sharing agreement before lundin, a current partner with the aforementioned two companies. two well-connected kenyans—amyn lakhani and wetangula—were the leading kenyan partners with turkana. turkana’s board agreed to a share-swap bid from africa oil in 2009, and eventually tullow purchased 50% of africa’s oil stake for about $34 million.

wetangula was appointed by president mwai kibaki, and has not been an anti-corruption crusader. an odinga victory looks increasingly likely in 2013, despite kibaki, kenyatta, and ruto attempts to reshape the “kkk” ethnic alliance that has for so long dominated contemporary kenyan politics in the wake of the icc indictments. an odinga win could see odm politicians target turkana and those companies who worked closely with them, if wetangula conspicuously contributes—in the same way that the ceos of ghana’s eo group, who contributed to the opposition npp during the 2008 elections, were targeted by the ruling ndc—to whomever becomes the pnu nominee for 2013.

who benefits from belinga?

in early february, rumors were circling that gabon was thinking about handing over the belinga iron ore project to bhp billiton after mines and oil minister alexandre barro chambrier met with bhp’s senior management in south africa. now it seems like this transfer may come to fruition, with a number of winners and losers.

in 2007, gabon gave the belinga project to the china national machinery & equipment import and export corporation (cmec) to develop it over a 25 years. cmec promised the government that it would begin mining belinga’s high grade iron ore reserves (64%) by 2011, at a rate of 30 million tons per year under a $3.5 billion investment program. the infrastructure plan included constructing a 500km railway, a hydropower dam and port. ever since china began to drag its feet on the 1 billion ton project, the gabonese government has become increasingly impatient with its suitors from the far east. bhp, who had long been waiting in the wing, had been courting the government in the event that china could not fulfill its obligations.

i am confident that the government will formally approve bhp’s acquisition of belinga, and that a number of winners and losers will emerge. bhp will have to manage expectations with the gabonese government on their ability to quickly build out enabling infrastructure. lower commodities prices have accelerated bhp’s slowdown in earnings growth so far this year, even though the company’s most recent interim earnings before interest and tax are expected to rise to $15.7 billion from $14.8 billion in 2011. the company’s full year earnings are forecast to drop by approximately 10%, but if one were to use spot commodity prices in calculating the company’s profitability, earnings would slump even further. given the company’s challenging financial situation, the question remains whether or not bhp will cut capital expenditure spending, and/or how it will prioritize investing in these new projects. in brief, bhp has to recover from its disastrous $20 billion shale gas plays, and belinga is one important piece of the puzzle.

although belinga is positive for gabon’s macroeconomic outlook, the country’s microeconomic outlook—employment and income distribution—will not improve because the quality of iron ore mined from belinga does not need to be beneficiated. in the absence of targeted social spending programs, gabon—which has a relatively low yielding, $1 billion eurobond—like nigeria, will continue to see growth without development. nevertheless, another indication as to why there is likely to be minimal governmental interference in bhp’s acquisition of belinga is that the australian giant’s investments squares nicely with president ali bongo’s desire to break the commercial ties of françafrique that marked his father’s administration. ali’s grip on the country is stronger than that of his father, as he has further personalized his family rule, divided the political opposition, and has skilfully walked the country’s ethnic tightrope by appointing a diverse group of individuals in his government. the centralization of political power in gabon allows for bongo to fast-track many of his preferred investor’s projects through the corresponding ministries.

belinga is one such project that bongo prioritizes given the profile of investors. bhp is partnering with indian abhijeet infrastructure ltd., who will link the project to the trans-gabon railway at booué. if the railway is quickly constructed, sundance resources, which is waiting for the cameroonian government to approve the terms of sale of its mbalam iron ore project to china’s hanlong mining investment, could choose to connect with the trans-gabon railway. although the cameroonian government recently declared the proposed land in rail corridor from mbalam to lolabé port for public utility, it is possible that hanlong (or sundance) could change its mind and decide that exporting iron ore through gabon. after all, the distance from mbalam to booué is about the same from mbalam to lolabé. in this scenario, whose likelihood increases in the event china abandons or brings in an outside partner to develop mbalam, gabon and cameroon would likely run in to the same squabbles as liberia and guinea are having over exporting iron ore from simandou. similarly, bhp could choose to connect export its iron ore through cameroon, especially given that sundance has recently signed a memorandum of understanding with equatorial resources to share iron ore infrastructure resources.

while bhp, gabon, and possibly cameroon could benefit from belinga, china certainly does not emerge a winner, as losing the mine is a further blow to its plan of diversifying its sources of iron ore. about 85% of china’s iron ore comes from australia, brazil, india, and south africa, and the government does not want to be too dependent on a handful of countries. the chinese government has embarked on a flurry of joint ventures and partnerships across west africa—in guinea (chinalco’s simandou), in sierra leone (shandong iron and steel group’s tonkolili), and in liberia (wisco’s bong mines)—with the intention of providing its own domestic steel producers with a stable and diverse supply of iron ore that would ultimately allow them to be self-sufficient. along with mbalam, belinga was to be completed owned by chinese interests (a first in its african iron ore expansion), giving it license to some of the world’s largest iron ore projects. ownership of projects with high-grade iron ore would permit it to skip the expensive process of beneficiation, which would allow it to bypass much of the local content pressures that would ultimately be demanded by host governments. further, direct access and control to some of the world’s best quality iron ore would allow china to challenge the oligopolistic pricing of iron ore by rio tinto, vale, and bhp. despite the shift from an annual to quarterly system that more accurately reflects global trends, china remains uncomfortable being at the whim of the big three. although west and central african iron ore projects will not be the catalyst for china to lead the change in the structure of global iron ore markets, the setback in gabon will certainly prompt it to look more aggressively for new sources of the strategically important resource.

the coup will be televised: randgold + mali

referred to as a “soldier of democracy” by many mali watchers, the coup against mali’s president, amadou toumani touré, was certainly a surprise, but not inconceivable. the demise of qaddafi, who arguably was as stablizing as he was destabilizing, created a security vacuum across much of the region. the fall of qaddafi meant that many of the separatist movements and insurgencies across the northern sahel no longer had financial support—thousands of tuaregs who served in qaddafi’s military and worked supporting the country’s hydrocarbon industries were suddenly out of work. in the context of mali, many tuaregs joined with the mouvement national de liberation de l’azawad (mnla), a separatist movement committed to carving out a new country in the far north of mali, which is rumored to be uranium rich. the insurgency had been growing in intensity for a few months now much to the disillusionment of the central malian government. and while the highly nimble and agile mnla seemed to had been gaining ground against the malian army, the army had been doing just enough to contain the violence to the far north.

amidst this backdrop, a storm was brewing. the widows of junior and mid-level soldiers had organized protests over the failure of the malian government to sufficiently arm their husbands in battle. one of the leading presidential candidates, ibrahim boubacar keïta, had been rising in popularity due to his hardline stance on the mnla rebellion in the north. the mnla had been winning strategic battles closer to the capital, bamako. and racial tensions were escalating to an alarming high, particularly in bamako, where black malians and lighter-skinned tuaregs were reported to have been violently clashing in certain neighborhoods across the city. these factors, compounded together, were early warning signals to mali’s political fragility.

and then the coup was televised:

investors don’t like uncertainty, and as was pointed out by beyondbrics, there is nothing more uncertain than a coup in a landlocked, relatively remote sub-saharan african country. nevertheless, the market reaction to news of a military coup in mali—africa’s third largest gold producer at 36,344kg—was less surprising than the actual coup itself. suffering the largest blow to its share price since 2008, randgold tanked from the news of the malian coup. despite the fact that randgold came out and said that the coup did not pose a physical security risk to operations, investors did not believe it. while a company’s official statements should always be taken with a grain of salt in times of crisis, rangold’s loulo and morila mines are 350 and 280 km due west of the capital, respectively. so what gives?

equity investors’ reaction to today’s events in mali sheds important insight on how traders respond to political risk, particularly across relatively shallow and unknown african markets. the principal point of reference among market participants was randgold’s experience in ivory coast, when it suspended operations during the dawn of the political standoff between gbagbo and ouattara in 2010/11. in my opinion, the risk perception for randgold was exaggerated today because of the faulty comparison between ivory coast and mali because many saw the two countries’ political economies as similar. in fact, they are different for three reasons.

first, whereas gbagbo and his political allies had spent ten years developing a strong web of patronage in the countries main revenue generating sectors of cocoa and oil, the malian putschists have not developed strong patronage networks around the country’s gold mining sector, and will thus not have access to similar nodes and levels of financing that enabled gbagbo and his allies to hold on to power for so long. second, the structure of cocoa futures contractually bound sellers and buyers to honoring delivery contracts, even when sanctions were slapped on the country. it’s not surprising that in april—right after the march delivery deadline—gbagbo soon collapsed because he was unable to pay the remaining soldiers still loyal to him. in mali, the mutineers don’t have control of the gold mines, and as it stands right now, will have difficulty financing themselves because they can’t manipulate the formal channels of country’s gold industry. finally, gbagbo had the quiet support from some key players in the region, specifically angola and ghana, which enabled him to profit from his supporters’ informal trade of certain commodities, specifically cocoa. the ghanaian government in practice refused to close its border with ivory coast, and as such, cocoa beans were be smuggled across the border, mixed in with the ghanaian crop, and sold on the international market. when ivorian banks shut down because the bceao shut them off in late january, angola provided a safehaven for gbagbo to stash his cocoa revenues. with mali’s borders closed and its neighbors condemning the coup, i see it highly unlikely for the mutineers to access even an illicit source of financing in a manner similar to gbagbo that will enable them to hold on for an extended period of time.

while the situation is fluid on the ground in mali, i do think that in the long-run, mining operations are safe with mali. during the 2010 coup in niger, and the series of coups in guinea following the death of lansana conté, uranium and bauxite production remained relatively constant. scenarios in which (1) the mutineers go away on their own volition in the short-term, (2) president amadou toumani touré (ATT) is forcefully reinstated by regional or international powers, or (3) hawkish politicians like keita and/or top-level officers were to adopt the mutineers cause to advance their own gains—are more likely than the “worse case.” a worse case scenario—similar to guinea— in which the young, inexperienced mutineers run the country and are corrupted by power, would probably see mining operations uninterrupted. while it’s very possible that the putschistes could gain broader public support, their attempts at holding on to power in mali will be short lived because they cannot finance themselves for long, drawn out battle.

my suspicion is that investors reaction to political risk today have caused randgold, and other companies with mali exposure like avion, rockgate capital, iamgold, cluff, and goldfields, have caused share prices to hit rock bottom. for bullish investors with a high-risk tolerance, this could be an interesting opportunity to buy, if you are willing to ride out the political turmoil within the country—but also are willing to bet on the markets’ misunderstanding of malian political economy.

from the marketplace to the supermarket: an african consumer retail strategy

on 9 march, south africa finally gave walmart the green light to acquire the third largest retailer in south africa, massmart, for $2.4 billion. the competition appeal court denied the government’s request to have the deal re-examined, but ruled that the 500 workers terminated before the deal be rehired. the transaction has given walmart instant access to massmart’s network of stores in 14 african countries, its regional supply chain, and a employees numbering 28,000 full- and part-time employees. some have feared that the prolonged legal battle has tarnished the investment image of south africa—and sub-saharan africa more broadly. although south africa’s labor is particularly vocal, it’s helpful to remember that india for example, have explicit restrictions on foreign investment in multi-brand retail.

i see a number of africa’s supermarkets—such as south africa’s shoprite, pick ‘n’ pay, or kenya’s uchumi and nakumatt—and indigenous fast-moving consumer goods (fmcg) companies as prime targets for mergers & acquisitions, as well as venture capital, on the back of the expansion of the continent’s middle class. along with financial performance, investors should closely examine four elements of growth strategies in evaluating whether or not a company is a good investment.

product development: despite the growing numbers of middle class households in sub-saharan africa, on a global scale, most of these consumers would be considered lower-middle class. product categories that are sold in developed and emerging market countries may not have a base among african consumers. market-entry strategies for fast-moving consumer goods (fmcg) companies should recognize that some product markets are non-existent among the african middle class. this is not to say that these products cannot be sold. a number of indian companies—like dabur india, marico, godrej, and emami—have already entered the african market, tapping in to diaspora links, as well as using their experience selling affordable products in more developed markets where western multinationals have competed with them. companies should commission extensive market data surveys and focus groups—which are notoriously underdeveloped in sub-saharan africa—in order to adequately understand and capture the needs of the african consumer.

marketing and branding: once a company conceptualizes a new product to be sold in the african market, it must devise an appropriate marketing and branding strategy to convince its audience to buy the good. the fact that the african middle class is overwhelmingly urban suggests that companies must use language in its product messaging that speaks to the cosmopolitan consumer. african urban life is constantly changing; it is highly aspirational (with influences from the conspicuously affluent west), yet traditional (many rural cultural practices are maintained in the city). the lingua franca among many urban youths—the fastest growing consumer group—mixes western languages with local ones. sheng, spoken in kenya, is one such example. the pervasive use of cell phones and the rise of the informal economy are bringing many products’ points of sale closer to the customer, which demands new forms of advertising beyond traditional forms of television and radio media.

pricing: companies should offer products that meet the consumer at their price points through less expensive packaging and alternative product formulation. the rising affluence of africa’s middle class means that more people will shop at supermarkets and purchased packaged foodstuff, such as breakfast cereals. however, commodity price swings in key ingredients for processed and manufactured foods translate in to variable end-prices for price-sensitive consumers, who may change their buying behavior and ultimately affect the company’s profitability. for example, nestlé is increasingly buying cocoa directly from farmers and manufacturing products in côte d’ivoire, rather than abroad, to keep prices as low as possible for their west african consumers. companies should help governments develop their manufacturing base, which would help host countries—with stronger labor lobbies—to create jobs. they should also lobby governments to enact legislation and policies to soften the impact of high commodity prices, break up agricultural cartels, as well as encourage governments to implement food programs that boost productivity and output.

distribution: in order to reach consumers outside of capital cities and commercial hubs, supermarkets should develop appropriate transportation networks—depending on the geography—using direct-distribution, wholesale and third-party methods to ensure goods reach consumers. marketing perishable goods and avoiding high stock turnover given infrastructure constraints is possible if companies work with governments to ensure a steady supply of electricity and water. multinationals should also look to model local companies—or pursue outright merger and acquisition deals—who have long-operated in the region and take advantage of their established distribution networks.

derailed: why vale isn’t on track in the west african iron ore scramble

simandou—estimated to contain 2.25 billion tons of high grade iron ore—could possibly be the largest integrated iron ore and infrastructure projects in africa. jp morgan recently estimated that vale-controlled blocks could produce 50 million tons of ore by 2020, a project which would put simandou on the same level of south africa’s kumba iron ore. jp’s optimism, however, overlooks a number of risks investors should consider when looking at vale’s position in simandou.

a brief historical overview. under the autocratic regime of lansana conté, rio tinto acquired all exploration licenses for simandou’s four blocks in 1997, and converted them in to mining concessions in 2006 while conté was still in power. right before conté died in 2008, former mines minister mahmoud thiam, announced that the northern portion of simandou (blocks 1 and 2) would be taken from rio tinto—accused of taking too long to develop the mine—and given to bsg resources ltd. (bsgr), a company whose biggest shareholder, beny steinmetz, has strong links to a number of politically-sensitive mining deals across africa. the military juntas in control of guinea between conté’s death and current president alpha condé’s election in december 2010 refused to grant bsgr complete legal rights to the concession. as a result, bsgr sold its majority stake in blocks 1 and 2 to vale up front for $500 million, with billions more payable as the project reached completion.

condé has brought relative stability to guinea since his election in 2010, and is beginning to overhaul the mining industry. condé has purged the ministry of all vestiges of thiam (who profited from bsgr’s sale to vale), weakened the power of the ministry, and has appointed a new coterie of advisers loyal to him. a new mining code was passed last fall, which states that upon issuance of a mining title, the state is automatically granted at no cost a 15%, non-dilutable interest in the share capital of the title holder, with an option to buy an extra 20% in to projects at market prices. while the new law does not change the ownership or validity of mining titles or agreements that were negotiated prior to the new code’s adoption, the government has closely scrutinized the largest and most lucrative deals opaquely signed during the 2008–2010 political transition. in order to wash their hands of any wrongdoing during the messy political transition, rio tinto paid a $700 million bonus payment to the government and negotiated a series of staged buy-in options over 20 years up to the 35% cap before the passage of the new code. vale pursued no such strategy on the eve of the new code’s passage. as such, vale’s tarnished  image—which the guinean government didn’t believe followed the law through its association with bsgr—in the eyes of the guinean government has put the company on the defensive.

the promise to invest in infrastructure—ports, railroads, and roads—is the variable that could change how the condé regime views rio tinto and vale. the global quest for iron ore has spurred renewed talks on refurbishing west africa’s decrepit rail system. rio tinto has pledged $1.1 billion to conduct feasibility studies to construct a 650 km railway (trans-guinean railway) from their part of the mine to the coast, as well as build four-berth port that could export approximately 100 million tons of ore a year. it has also proposed to begin transporting iron ore on a 900km road from simandou beginning in 2015, while it waits for the construction of a railway so as to honor delivery contracts. further, rio tinto is waiting for final regulatory approval for its joint venture with chinalco from the government, which when finalized, will trigger an earn-in payment of $1.35 billion. i believe this will likely be earmarked for railway construction. due to budget constraints in the government, it is likely that the government will not be able to pay for its proposed 51% stake in the railroad, and thus rio tinto could be forced to construct the line through a build, operate and transfer program.

in order to change how the condé administration views vale, the brazilian mining conglomerate needs to invest much more in infrastructure projects than they already have. an increasingly bullish iron ore market for 2012 that favors larger miners is positive, but rising operational costs and an unresolved commercial dispute with china over the company’s valemaxes, suggests to me that vale’s financial will to invest billions long-term in infrastructure projects in guinea is waning. outside of sharing infrastructure with rio, the most cost-effective way for the company to show its commitment on infrastructure development will be to export their portion of iron ore from simandou through liberia. vale will need to work with bhp billiton (which is eyeing mt. nimba iron ore on the guinea-liberia border) to construct a 15 kilometer spur line to yekepa, liberia, and then rehabilitate the old liberian-american-swedish minerals company, a 275 kilometer railway between yekepa and buchanan. the construction of this line is all contingent on whether the guinean government can  agree with liberia over how much would be lost in taxes and transport fees if a railway runs through liberia. recent negotiations in paris have shown that the guinean government is more open to this idea than previously hinted.

in the event that vale pulls out of simandou—as it has suggested it could possibly do by the end of this year—chinese companies could decide to bid for the vale’s majority stake. china hasn’t been entirely successful in the west african iron ore scramble as evidenced in gabon’s belinga deposit. bsgr was very close to selling vale’s present stake in simandou to chinalco when it was initially on the market, and it is very likely that if vale were to relinquish (or lose) its position, chinalco or another company (such as baosteel or wuhan, already operating in liberia) could easily pick up vale’s pieces. china has already committed to funding four-fifths of guinea’s largest power project (the kaleta dam), in a move that possibly foreshadows a new resource-for-infrastructure deal between guinea and china.

the once and always king? dos santos, sonangol, and pre-salt

there’s no doubt that josé eduardo dos santos and the ruling movimento popular de libertação de angola (mpla) will win its legislative elections slated for sometime this year. but recent movements at sonangol reflect dos santos’ waning confidence in his ability to hold on to executive power and to secure his wealth inside and out of angola. manuel vicente, the widely-respected ceo of state oil parastatal sonangol was moved to the ministry of economic coordination on 30 january, an important bureau that was abolished in october 2010. as one of dos santos’ closest confidants, vicente’s appointment brings him closer to formal political decision-making, and positions him well to succeed dos santos when he steps down (most likely late this year).

sonangol’s new chief executive—francisco de lemos josé maria—previously served as the company’s financial director. lemos was most likely chosen to improve the financial transparency of sonangol, after human rights watch (hrw) declared that $32 billion dollars had been unaccounted. the imf quickly rebuffed hrw’s accusation, calling it “erroneous,” and that the funds went missing in a simple accounting residual on big-ticket infrastructure projects, like housing and railway refurbishments undertaken by sonangol. this report was a public relations nightmare for sonangol, as they look to grow millenium bcp, portugal’s largest bank by assets, and change the international perception that sonangol is not just another corrupt african parastatal. already sidelined with the other economic policy ministers within the government including abraão pio dos santos gourgel and josé de lima massano, finance minister carlos alberto lopes and minister of state carlos feijó—who is the true face of the finance ministry, but has been accused of corruption—could be sacked some time this year, if not see their informal roles drastically diminished. as oil is the country’s largest foreign exchange earner, sonangol essentially functioned as the de facto treasury; now that vicente has moved, it is likely that the ministry of economic coordination will play this role.

while dos santos djs and angola’s elites play musical chairs, angola—africa’s second largest oil producer—looks to outpace nigerian oil production in the short-term by developing its pre-salt basin. cobalt and maersk announced their first discoveries on blocks 21 and 23 in january, raising the profile for angolan deep-water. there is almost perfect geological similarity between brazillian pre-salt elements, including reservoirs and rocks, seals and traps, that makes the angolan play attractive. asymetric rifting, however, has created significant differences between brazil and angola’s potential reserves; brazil’s margin is characterized by lacustrine black to light oil in its pre-salt sequences, while angola’s margin most likely has a higher amount of light oil and wet gas/condensate (making angolan lng a potential global game changer—more on this in the coming weeks). a number of companies are well positioned to take advantage of the pre-salt play, such as cobalt energy and conoco phillips, while the ishares s&p global energy etf, with seven stocks with deep exposure to angolan pre-salt, looks particularly attractive.

further, unlike in brazil where pre-salt discoveries have only been found offshore, angolan pre-salt extends onshore. dos santos is positioning politically-well connected juniors to develop this acreage, who could possibly be lured by being exempt from signing bonuses or lower tax rates than their foreign competitors. angola’s banking sector (and south africa’s standard bank) is likely to benefit from the rush of new activity—although it has much ramping up to do to prepare for the newer, larger transactions—after dos santos passed a law mandating all transactions for services and equipment must be done through angolan banks.

this is all not to say that dos santos’ carefully managed succession and oil boom could run smoothly. in the same way that vicente and dos santos have developed an extremely close relationship, lemos and the head of the casa militar, general manuel hélder vieira dias júnior, (known as kopelipa) share a similar rapport that could challenge dos santos’ political primacy and seek to place their mark on the country’s oil and banking sectors. one of the reasons the mpla party conference has been delayed is because the inability for the party to come to a consensus over who will rule after dos santos steps down. while it is very clear that dos santos wants vicente to succeed him, many of the top military brass believe vicente has not paid his dues, in the liberation “struggle.” this rhetoric is not unique to angola; other southern african countries’ succession debates, like those in zimbabwe, south africa, and mozambique, are often framed in this manner. while the probability is still low, the lemos-kopelipa bloc could very well upend dos santos’ plan for vicente.

will nigeria’s demand for fuel change after end of subsidies?

president jonathan ambitiously tackled fuel subsidy reform in early january. in doing so, some oil traders were curious to know if fuel consumption patterns would change in nigeria. they wondered that any change in domestic demand could either add or take highly-prized (light + sweet) nigerian crude varieties off the global market. my answer was no, and this paper was helpful in providing evidence for this answer.

modeling gasoline demand with structural breaks: new evidence from nigeria

wading in: presidential elections in senegal

if the number of youtube views from senegalese musicians could predict the outcome of the senegalese presidential elections, the 26 february contest would be a foregone conclusion. youssou n’dour—whose biggest hit “7 seconds” has 2 million + views (more than the number of senegalese who voted for wade in the 2007 campagin)—would easily beat abdoulaye wade, who has enlisted senegalese pop star demba dia to campaign on his behalf.

unfortunately, the surprise decision by the senegalese constitutional court on 27 january banning n’dour’s candidacy has, for many analysts, confirmed a wade victory. nevertheless, many have failed to explain the importance of the interim period between the constitutional court’s ruling and the actual presidential election, especially for holders of the ’21 eurbond. yields for the ’21 have been as high as 9.162%, and social unrest in the interim could send them quickly creeping up again, as investors sell off their holdings as they react to headline risk that is certain to emerge from the country over the next few weeks. markets seem to think that senegal’s eurobond “overstates” senegal’s credit risk, short-term electioneering weigh heavily on the country, which could ultimately affect the country’s ability to repay its debts in the medium-term. i think investors are slowly realizing the risk in senegal, as demand for the bond (see below yield history) has slowly declined since mid-january.

although it is common for spending to increase during election season across sub-saharan africa, as incumbent governments draw from government funds to finance their elections, senegal will face the dual pressure of keeping the lights on in the run-up to voting and after to maintain political stability. chronic power cuts across dakar and other urban areas framed the june 2011 riots, and wade is keen not to repeat that scenario. karim wade, who serves as energy minister, introduced the billion dollar plus plan takkal, or “let there be light” in wolof, scheme to create more power. this plan—whose namesake eponymously mirrors the wildly inflated ego of the wade administration—is an emergency attempt to correct the projected 256mw production deficit the country will face in 2013 and senelec’s mounting debt. in the past days, karim has desperately looked for more sources of finance to ensure 35 days worth of supply and an 80mw power surplus, instead of working with a 64mw deficit it is currently running, during this month’s voting. the cost for wade to remain in power is much higher than that of his peers in côte d’ivoire, as buying off senegalese urban voters with promises of infrastructure investment (power, roads, highways, etc.) is much more expensive than buying seeds, trees, fertilizers, and bags for cocoa and coffee farmers.

if the lights stay on for voting and the politically-important marabouts do not come out stronger against the president, wade will win ugly in late february. he remains strong in the face of a divided opposition because of many challengers’ big egos and historical baggage of serving in wade’s administration. on 1 december, benno siggil senegaal or “united to boost senegal” formed an electoral alliance to fight wade’s parti démocratique sénégalais. they nominated moustapha niasse to the anger of ousmane dieng, the leader of the parti socialiste which ruled senegal between 1960 and 2000. further, younger opposition figures, such as idrissa seck and macky sall were former prime ministers and close to wade. yet both sall and seck both fell out of favor with wade. sall confronted his karim wade over shading accounting for the organization of the islamic conference in 2008, while seck has been accused of embezzling $34 million dollars from the thiès road project.

wade has been extremely shrewd in projecting divisions among the opposition to the wider senegalese populace, particularly among the y’en a marre opposition movement that is made up of local rappers that broadly appeal to the youth population. much has been made of an n’dour victory because of his broad appeal, but this argument ignores the fact that many senegalese youth find the style of n’dour’s music—mbalax—as antiquated and are more connected to hip-hop. recognizing this social trend, the state security services (divisions des investigations criminelles) will probably move forward in arresting one of the leading rappers (fou malade) of y’en a marre for attacking another rapper (gaston), an action that will surely expose weaknesses among the group that many think could significantly affect political change. these high-profile, politically-charged arrests will likely continue, as wade strategically sees the benefit in muzzling opposition figures that have the possibility of uniting the dissonant opposition voices.