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Angola's National Oil Company Continues to Be the Government's Backbone

8 MINS READSep 2, 2014 | 09:00 GMT
Angola's National Oil Company Continues To Be The Government's Backbone
(ESTELLE MAUSSION/AFP/Getty Images)
Angolan President Jose Eduardo dos Santos holds a press conference on May 9.
Summary

Before Angola's independence in 1975, Portugal imposed a contentious and hastily thrown together power-sharing deal among Angola's three main ethnic groups: the Bakongo, Mbundu and Ovimbundu. This pact unraveled quickly after independence as Angola descended into a three-way civil war. Sonangol, Angola's state-owned oil company, emerged from this conflict, which ended with a victory for the ruling Mbundu-led Popular Movement for the Liberation of Angola. The party, which used Sonangol's revenues to finance its military during the civil war, now considers the company one of its pillars of strength.

After independence, the Popular Movement for the Liberation of Angola was founded with its power base among the Mbundu, who populated the greater Luanda region in and around the capital. The Mbundu made up the middle-class urban population that formed the Angolan elite during colonialism. Quickly after the disintegration of the agreement among Angola's ethnic groups, the Popular Movement for the Liberation of Angola, backed by the Soviet Union and Cuba, took control of Luanda. The movement then turned its attention to the north, where Angola's revenue-generating oil resources were located. The Mbundu defeated the Bakongo in the north, gaining control of Angola's oil production.

The largest remaining opposition ethnic group, the Ovimbundu, and its U.S.-supported National Union for the Total Independence of Angola had few resources in the countryside. By controlling Luanda and the oil fields, the Popular Movement for the Liberation of Angola could easily present itself as the legitimate Angolan government in dealings with Western oil companies such as Gulf Oil, which had been operating in Angola for decades.

 
The Popular Movement for the Liberation of Angola government understood that to win a long war against the numerically superior Ovimbundu, it needed a financial base that would enable it to build a capable military. At the time, Angola had two primary natural resources that could help the Mbundu's movement finance a war against the Ovimbundu's movement: diamonds and oil. The diamonds were largely controlled by Ovimbundu fighters and beyond the Mbundu's reach, but oil was under the government's firm control. However, Angola's oil production was only 200,000 barrels per day, leaving little room to risk any disruption in production.

Luanda recognized the difficulties in creating a domestic oil company that could produce oil reliably and understood that foreign expertise and participation were necessary. At the time, the Soviet Union, the ruling party's Cold War patron, was focused on its own domestic matters, forcing Sonangol to create a system capable of securing Western oil and natural gas companies' participation. The Mbundu empowered Sonangol to change its practices and acquire manpower and other resources to maximize its ability to raise revenues. This setup and the patronage that came with it gave Sonangol the freedom to pursue cash-generating liberal economic policies while the rest of the economy operated under the government's unprofitable Soviet-based economic policies.

Sonangol worked to establish key links and ensure Western oil companies that Angola was still open to and safe for their investments. These firms' interest in the country's oil fields never wavered, and Sonangol was able to fund the Popular Movement for the Liberation of Angola throughout the civil war and keep Angola's petroleum sector stable.

Sonangol as the Backbone of the State

Sonangol's main purpose is to serve as the financial engine of the Popular Movement for the Liberation of Angola and President Jose Eduardo dos Santos' political patronage network. While this close relationship signifies Sonangol's autonomy, if the company fails to remain loyal and accountable or to generate and maximize cash for the presidency, Sonangol's leaders will be replaced.

Still, Sonangol has been described as a parallel, shadow or informal government that complements and often replaces the functions of more formalized but failing Angolan government institutions. At times, Sonangol has directly managed arms deals or supported Luanda's education platforms. The Sonangol Group also controls many key subsidiaries, such as the national airline, telecommunications and real estate companies. In addition to formal financing mechanisms through revenue, Sonangol is used as an informal financing mechanism separate from the central bank to fund various projects around the country as well.

The state also uses Sonangol for support in its regional aspirations. Angola sees itself as a natural competitor for influence in Southern and Central Africa and for investment in hydrocarbon development, making South Africa and Nigeria its primary rivals. Because Sonangol helps finance infrastructure projects in the continent's heart, the company also helps Angola secure influence with its neighbors, Zambia and the Democratic Republic of the Congo, as well as vie for influence in Namibia.

Furthermore, the company acts as the government's arm in the oil and natural gas sector. Ministerial institutions in Angola historically have been weak, and the Popular Movement for the Liberation of Angola needed a strong institution to protect its economic lifeline. Thus, many of the functions that in most countries would be carried out by an energy department or petroleum ministry are carried out directly by Sonangol. This includes formulating the country's energy policy, issuing and negotiating concessions with international companies and regulating the sector. This highly centralized structure avoided the rampant corruption and lengthy delays that plagued other decentralized management structures of sub-Saharan African countries, such as the larger bureaucracies of Nigeria, although similar corruption also exists in Angola.

Finally, Sonangol's pragmatism, work and reliable reputation with foreign firms for nearly 40 years does not mean that Angola has not tried to cultivate its own domestic oil and natural gas technical capabilities. The Sonangol Group does include exploration and production companies as well as several oil field service company subsidiaries. Although it is abandoning its efforts in Iraq because of security concerns, Sonangol operates several domestic shallow offshore blocks as well as a few in Brazil and West Africa. Angola has also pushed for local-content regulations to support a domestic manufacturing or industrial base with the aim of transforming either into a more robust sector distinct from Sonangol investments.

Future Challenges for Sonangol

Sonangol provided the Popular Movement for the Liberation of Angola with funds that enabled the party to win the civil war and enable dos Santos to rule Angola securely. However, the company will face challenges in the future.

At some point, Angola will have to undergo its first presidential transition since 1979. Dos Santos, now 71, could retire because of alleged health concerns. Opposition parties and other players do not have the strong economic and financial support that Sonangol gives the government and thus pose no credible threat to the Popular Movement for the Liberation of Angola. Any political difficulties Sonangol will have to deal with likely will come from internal strife among factions within the ruling party.

In a move that exemplifies the strength of the political ties between the oil firm and dos Santos, former Sonangol CEO Manuel Vicente was moved to the vice presidency in 2012. Vicente's management of Sonangol between 2000 and 2012 saw Sonangol transform Angola from a middle-tier oil producer to one that rivals Nigeria as Africa's largest oil producer. Vicente gives international partners assurance that the relationship between Sonangol and the presidency will remain strong during the transition. However, Vicente could lack the domestic support base that other senior non-Sonangol members of the party possess. Furthermore, while Vicente has been considered as a potential successor, so have other Angolan politicians, many of whom were taken out of consideration as dos Santos' preferences changed.

Moreover, dos Santos could be maneuvering for the presidency to stay within his family. In 2012, dos Santos' son, Jose Filomeno de Sousa dos Santos, was put in charge of Angola's $5 billion sovereign wealth fund, though he lacks experience with Sonangol and those in the formal and informal political structures. Prior to this move, he was not the president's most prominent child; his half sister, Isabella dos Santos, has amassed a large personal fortune through diamonds, real estate and other business ventures. While she likely cannot run for office herself (Angola remains a patriarchal society), her financial backing and ties to the existing political elite could enable her to outmaneuver her brother.

In addition to any potential succession crisis, Sonangol must manage its oil and natural gas resources to sustain production and fund the Popular Movement for the Liberation of Angola. Angola and the ruling party, aware of their dependence on oil revenue, are trying to develop other economic sectors, including subsistence farming and diamond mining. However, it will be decades before other sectors can achieve the same scale and income of the oil and natural gas sector. This means that sustaining production, often by opting for careful reservoir management, is key, since a sudden drop or decline in oil production could weaken the patronage network and therefore weaken the Popular Movement for the Liberation of Angola's grip on the country.

However, even if Sonangol's revenue declines in absolute terms, the company is far more economically powerful than any other entity in Angola. The countries' opposition parties are divided and dysfunctional. Even a slight decline in absolute revenue would not hamper the Popular Movement for the Liberation of Angola's ability to raise and spend money. Still, Angola is already going into deep-water and pre-salt oil and natural gas fields to expand production. Such resources are more expensive to produce, and thus the profit margins for Sonangol and the political patronage network it finances will eventually decline.

Finally, one of Sonangol's strengths has been its centralized structure and relative ease at cutting through bureaucracy. However, the aforementioned push for local content and the use of Angolan oil field service companies or subcontractors may threaten this. Many of these companies have been set up by Popular Movement for the Liberation of Angola officials seeking to supplement or amass their personal fortunes. Not only is the competence of these firms questionable, but this practice could also lead Angola's petroleum sector to devolve into a structure with greater bureaucracy and corruption, limiting the adaptability that has helped Sonangol become strong.

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