How Sonangol is Fabricating its Profits

For many years Sonangol was the main support of the Angolan system – especially the ruling regime, prompting many authors to refer to it as “a state within the state”, the repository of real power. Recently, there have been reports questioning the financial soundness of Sonangol; other reports have referred to a possible presidential commission meant to come up with proposal for internal changes within the company.

In October 2015, the Angolan Ministry of Finance reported that income from oil exports had fallen by 44 percent in September of the same year. The figures presented by Sonangol need, therefore, to be taken seriously.  The present work resulted from an analysis of the Sonangol 2013 financial report. These raise many questions and call for a far-reaching restructuring of the company. The key question is whether the results are reliable and sustainable.

In 2013, Sonangol’s results were not based on its activities, but on two accounting factors: an evaluation of its assets (especially its oil exploration and international investments) as well as a reduction in its debts due to new legislation. This means that Sonangol is now basing its results on legal technicalities with the help of the state.

Let us look at the first case. By way of illustration, a said company had assets valued at 100; there is a reevaluation of this asset and then it is suddenly valued at 200. This is an operation involving paper work; in reality, nothing new has been created. This is why the auditing firm Ernst & Young, in its report of Sonangol’s accounts, expressed some reservations stating, “It was not possible to ascertain the value of the real estate pertaining to the center for maritime studies.”

The company also concluded that “ it was not possible to have all the documents relating to the fixed assets,” and “there was also not sufficient evidence gathered to confirm the existence of the said fixed assets.”  The auditing firm has not been able to confirm the accounts of Sonangol. One way of putting it is that the firm is saying that matters could be this way or the other.  The results of the company are also based on one other point – a tax reduction; in other words, the state has lowered the taxes that Sonangol has to pay.  It could be said as well that the state has given the company a subsidy. For example: where, in the past, the state would take 200 now it only takes 100. In this way, it will have given the company 100.  Sonangol is only able to present viable results after an accounting maneuver and a subsidy from the state.

The company concedes that its actual production has “ fallen by 10%, the medium exporting price has fallen by 4%, remuneration from agents fallen from 10% to 7%; the company registered sales of AKZ 4 billion which is 8% less than in 2012. According to the estimated objectives for 2013, all the blocks did not produce enough, resulting in a shortfall of 29.7% (cost at USD 41.2 billion, which is 8% less than in the similar period of 2012.”

Technically, there are various management shortcomings in the Sonangol business model.  Firstly, Sonangol is both the exclusive concession holder of oil and gas as well as the executor of the licensing bids for oil blocks in Angola. In 2013, it “ having the rights to crude oil, dealt with 223.8 million, a daily equivalent of 613.1 thousand barrels.” This means that it carries out the function of a state and not a business structure.

In fact, Sonangol being the institution that gives oil concessions in the country prevents it from trying to be an efficient and competitive company. The company does not have incentives to organize itself to be effective in order to outdo its competitors because it will always have a guaranteed income. A company with guaranteed incomes becomes lazy, slow and not given to innovation.  Also, since the institution has all these functions, the process of giving concessions becomes less transparent; everything is mixed up, and it becomes hard to know which part of the oil company is contributing to the national income.

Therefore, in the quest for efficiency in Sonangol, and for transparency in the receiving and allocation of oil income, the role of granting concessions has to be given to a ministry or an institution to whom this would be the sole duty.   Maka Angola will be publishing a series of new articles on the need to restructure Sonangol. These will be based on the company’s financial reports.