AFK FOREX Report
Geopolitics: Challenges Of East Africa’s Oil And Gas Boom, Part 1
Initially there was a lot of exuberance over the big oil and gas finds in East Africa, but now the reality is setting in, along with the challenges of how to get from discovery to production to export to developmental impact.
The oil and gas finds are prompting construction of a network of roads, railways and pipelines linking the countries of East Africa. But landownership and environmental impact are increasingly part of the equation. We’ll explore the challenges of East Africa’s oil and gas boom in part 1 of a two-part AFKInsider series.
East African countries have been drawing attention from the oil and gas industry, causing the regional economy to grow significantly as money has started to flow in from infrastructure investors.
“We see investors being attracted to the region, basically because it’s easier now to do business,” said Mwangi Kimenyi, senior fellow and director of the Brookings Institute Africa Growth Initiative, in an AFKInsider interview.
The size of the East Africa market, emerging discovery of natural resources and ongoing market integration contributes to the region becoming an attractive investment destination, Ernst & Young reported in “The East Africa Boom: Don’t Be Left Behind.”
“I think it’s good to take note that the Africans have realized that a country approach to development is OK, but given the type of market, they are not going to go very far just focusing on their own country’s approach,” Kimenyi said.“So the regional approach is taking root. And if you compare all the various blocks in Africa, the eastern community seems to be on a fast track and moving fairly fast in terms of integration.”
The East Africa region, which includes Kenya, Uganda, Rwanda, Tanzania, Ethiopia and Mozambique, has emerged as one of the most promising sites for oil and gas exploration in the world. In fact, more oil and gas has been discovered in East Africa in the last few years than in any other region in the world, according to the consultancy firm Deloitte. And this boom is expected to continue for the next five years, especially since exploration licenses in East Africa are relatively cheap.
The International Monetary Fund forecasts that average real gross domestic product growth for the Eastern African region will be 6.3 percent per year over the next five years, with Kenya’s economy expected to expand by 6.3 percent this year, Tanzania by 7.2 percent, Uganda by 6.4 percent and Rwanda 7.5 percent.
Ugandan and Kenyan oil discoveries in 2006 and 2012 respectively sparked a rush to explore other countries along the Rift Valley. New gas finds off the coast of Tanzania and Mozambique are among the largest in the world – enough to make some of the countries net exporters.
Uganda is expected to begin commercial oil production by 2017, while Kenya and Ethiopia should see production of their oil deposits begin over the next few years. Mozambique and Tanzania’s natural gas projects are expected to come online in 2019.
But there remain challenges.
“I think initially there was a lot of exuberance over the big finds, particularly in Mozambique and Tanzania,” said Jennifer Cooke, director of the Africa program at the Center for Strategic and International Studies, in an AFKInsider interview. “I think reality is setting in a little for companies and for some governments alike in terms of the difficulty of getting from discovery to production to export to developmental impact.”
Most major oil and natural gas companies like ExxonMobil locate the majority of their production in low-risk countries while Italy’s Eni and France’s Total lead the companies willing to work in higher-risk countries, according to an analysis by Evaluate Energy. The analysis found ExxonMobil based 86 percent of its production in countries that are members of the Organization for Economic Cooperation and Development, which are considered to be less risky.
In fact, ExxonMobil abandoned plans with Total in April to jointly explore parts of a 46,000-square-mile block in South Sudan due to the ongoing civil war.
“It is very similar to why Tullow is pulling out of Uganda,” said Peter Veit, acting director of World Resources Institute’s Governance Center and project manager of the Land and Resources Rights initiative, in an AFKInsider interview. “There is a re-emphasis from the majors to concentrate efforts back into the very stable countries. They just realize that the risk is too high.”
Booming Infrastructure Investments
While East Africa discoveries may seem modest in global production terms, they’re important regionally for having the potential to hasten economic growth through investments in road, rail and other infrastructure. The governments of Kenya, Uganda and Tanzania are particularly hopeful to entice investors to major infrastructure to further exploit their oil and natural gas.
The Eastern block countries are taking a regional approach.
“It’s unlikely that each of these countries would deal with the infrastructure part just individually,” Kimenyi of the Brookings Institute told AFKInsider. “The rational approach to a lot of the exploitation of natural resources in terms of infrastructure, it seems, is that you have to go as a regional project and they have started doing that.”
One example is the $23-billion LAPSETT project launched in 2012, which includes construction of a network of roads, railways and pipelines linking Kenya, Ethiopia and South Sudan. The development will be “a new transport corridor from the new port of Lamu through Garissa, Isiolo, Mararal, Lodwar and Lokichoggio to branch at Isiolo to Ethiopia and Southern Sudan.”
There are other projects in the works.
Uganda has signed a memo of understanding with Britain’s Tullow Oil, France’s Total and state-owned China National Offshore Oil Corporation(CNOOC) to develop oil fields in the Albertine Rift basin near Uganda’s Congo border, as well as a pipeline linking Uganda’s oil fields to the coastal port of Lamu in Kenya for export.
Uganda is also considering bids from companies including Japan’s Marubeni Corp. and a group of investors led by China Petroleum Pipeline Bureau to build a 60,000-barrel-per-day refinery and expects to select a company by December, according to Uganda’s Energy Ministry.
Kenya expects to increase its spending on infrastructure by 15 percent to $2.9 billion in 2014-2015 from a year earlier and the Kenyan Finance Ministry noted in its 2014 budget policy statement that the government wants to fast-track building a pipeline to export the crude.
With a loan from the Export-Import Bank of China, Tanzania hopes to complete construction in 2014 of the $1.2-billion Mtwara gas-pipeline project stretching to Dar es Salaam on the coast. Norway-based Statoil and London-based BG Group are also considering a liquefied natural gas (LNG) export plant on the Tanzanian coast.
While individual countries pursue the own developments, the plan for the East African region as a whole is to better integrate its economies across borders to enable investor companies to compete and export these natural resources, since there is such a geographic overlap of both the resource deposits and infrastructure projects in the region.
But this overlap compounds other challenges common in poorer regions where land ownership maps are sketchy, according to World Resources Institute’s Veit.
“It has gotten into sort of geopolitics,” Veit told AFKInsider. “I actually briefed the current U.S. ambassador in Uganda on oil before he went out about a year and a half ago and his interest seemed mainly in the geopolitics of it all.”
As efforts to send their oil reserves to Kenya’s coast for export is duplicated by other landlocked nations, these cross-border land issues have the potential to slow progress and discourage investors.
“Companies don’t want contested land, obviously,” Veit said.
Another example Veit cites is the ecologically sensitive areas where resource exploration could take place. Total is drilling wells inside Uganda’s largest national park, while CNOOC and Tullow are operating along the shores of Lake Albert. But Veit says there is a possibility that Total will divest it’s holdings in Uganda that overlap into the national park.
“It’s a high reputational risk for them by drilling in a fully protected national park – which by Uganda law is illegal,” Veit said.
East African governments are becoming more sensitive to recognizing the challenges they face in drawing investors and what those investors really want.
“I think oil companies want consistency and oil companies want stability both in terms of the legal framework, but also just in terms of peace and security,” said Veit at World Resources Institute.“But I don’t think there’s any hope that the East African countries are likely to have consistent policies on land or on hydrocarbons broadly.”
“And so all these countries have to be working in tandem to work these issues out, and the history there has not been great in the past,” said Cooke at the Center for Strategic and International Studies.
Part 2 of this AFKInsider series will explore regional integration and the role played by transparency, good governance of revenue use by individual countries, and collaboration with the civic organizations, the private sector and local communities.
Sign up for the AFKInsider newsletter — the most compelling business news you need to know from Africa and the African diaspora, delivered straight to your inbox.