Avoiding the Resource Curse in East Africa’s Oil and Natural Gas BoomFebruary 14, 2013 By Jill Shankleman
This year, Texas-based Anadarko and Italian partner ENI are due to make the final investment decision on whether to construct one of the largest liquefied natural gas facilities in the world in Mozambique. The complex would allow them to tap into deep off-shore gas fields that could rival Australia and Qatar as the largest liquefied natural gas reserves in the world.
The Anadarko and ENI complex may be the first of a stream of large oil and gas projects in East Africa and questions have been raised about whether these new developments can bring sustainable development to the region or inflict the “resource curse” that has plagued other African countries. The conventional arrangements under which international oil and gas companies operate are not suited to the development of energy resources for use within developing countries. In places like Nigeria, this has resulted in much of the benefits of oil and gas production (namely energy and jobs) skipping over local populations and government wealth being squandered in large-scale corruption.
But with this latest round of oil and gas finds, politics and policies at national and local levels are changing, and there is hope that previous mistakes can be avoided.
A Development Opportunity
East Africa, which has hitherto not figured on the global energy map other than as a cash-strapped importer of oil, could soon come to rival West Africa as a world class producer of oil and gas.Politics and policies at national and local levels are changing, and there is hope that previous mistakes can be avoided
Besides Mozambique’s estimated 35 to 65 trillion cubic feet of natural gas, in Tanzania, two European companies (BG and Statoil) have each found smaller amounts in their off-shore exploration areas, and they and others are still exploring for more. In Uganda, large oil resources have been found south of Lake Albert, and the field divided between three companies (Tullow, Total, and CNOOC). In Kenya, there is exploration for oil underway and the initial signs are promising. On the fringe of the region is South Sudan, which suspended oil production after independence because of disputes with Sudan, but could restart and may have significant additional, untapped potential.
Each of these countries have emerged over the course of the last 50 or so years from centrally controlled economies producing tea, coffee, cashews, and other agricultural products for export towards more diversified economies with more open markets and international investment. Mozambique and Tanzania have seen for the first time the advent of extractive industries, through the recent development of large-scale coal (Mozambique) and gold (Tanzania) mining. But results have been very mixed, and economic activity and human potential in East Africa remains thwarted by very limited access to electricity, cooking fuels other than firewood and charcoal, and poor quality education.
Only 16 percent of Kenyans have access to electricity and 9 percent of Ugandans, according to the latest World Bank data. In Kenya, Tanzania, and Uganda, over 70 percent of schools have no electricity; in Mozambique and Tanzania, 40 percent have no water supply. Per capita agricultural outputs are falling in Uganda and Tanzania, and rising by just one to two percent in Kenya and Mozambique.
Some Lessons Learned
Politicians and policymakers, civil society, donors, and the media are paying close attention to these large oil and gas finds. There is awareness of the problems with corruption and limited benefits that other countries, notably Nigeria, have experienced despite being major oil exporters.
A set of interrelated core issues are being explored, to varying degrees, by different stakeholders:
- Government revenues from oil, gas, and mining: Is the government getting a fair share, as compared to the international companies who have developed the oil and gas fields? Is information publicly available on what revenues the government is getting? How are government revenues being used, what are the development impacts, and how will “Dutch disease” be avoided?
- Environmental and social impacts: How will the extractive industries be developed without damaging valuable ecosystems and causing pollution to resources that people depend on? How will companies secure the “local license to operate” from communities?
- Economic benefits: How will communities and the wider citizenry benefit from the extraction of non-renewable resources? Who will benefit from jobs and business opportunities? Will oil and gas finds result in more and cheaper domestic energy? What direct and indirect employment benefits will be created?
Built on the lessons learned from failed oil-based development elsewhere, some progress is being made on two of these issues. Mozambique and Tanzania are fully signed on to the Extractive Industries Transparency Initiative, which could help control corruption and foster public policy debate by making public the payments made to governments and payments received by governments.
In terms of securing long-terms benefits for the population from the exploitation of non-renewable resources once the resources themselves are depleted, Mozambique is considering whether to follow the Norwegian model and set up a sovereign wealth fund; Tanzania’s President has announced a decision to do so; and Uganda has drafted legislation for a similar fund within the central bank. Uganda has already been beset with charges of corruption and mismanagement around the new industry, so caution is necessary, but the fact that the legislation has been offered demonstrates awareness of the need to control and monitor the revenue streams that should start to flow late in this decade.
On the social and environmental impact front, oil companies are far more alert to the importance of understanding and avoiding environmental damage, impacts on communities, and accidents than in the early days of the industry in West Africa. The large international oil companies that are active in East Africa follow the social and environmental standards of the International Finance Corporation – the World Bank’s private sector arm – which are wider in scope and more stringent than many national environmental laws.
It is the third issue – economic benefits – that is proving exceptionally challenging, and where oil companies and governments are struggling to find new development models.
Where Are the Jobs? Where Is the Power?
Up to now, oil companies and governments in developing countries have worked on a narrow model of economic benefit. Oil companies produce oil (and gas) for export. The government gets a hefty share of the profit in the form of taxes and product. To a greater or (often) lesser degree, efforts are then made to open up employment and supply chain opportunities locally.
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Where this model applies in West Africa, it is typical to find huge, state-of-the-art oil and gas export facilities sitting alongside communities where people live in houses without electricity. People like me who are involved in community consultations always hear the same thing when we speak with locals: “Where are the jobs? And why are we living in darkness next to this place which is stealing our oil?”
Here at the start of a new round of development in East Africa, governments are contesting the assumption that the oil and gas found in their territory should be exported rather than used domestically, and people in resource-rich areas are challenging the right of the government to extract resources from “their” areas without providing them with power first.
Thus in Uganda there are currently disputes over how much oil is refined into products for sale within the region and who pays for refineries and pipelines, which are blocking development of the Albertine Graben oil fields. Uganda wants to use its oil to become a regional supplier of gasoline and other fuels, while the international oil companies are looking to produce crude for international use, or in the case of China’s CNOOC, their domestic market.
Structural Industry Problems
East African countries may arguably be better equipped to deal with the coming wave of development than their West African counterparts were, but vulnerability to the resource curse also stems from some fundamental tenets of how international oil and gas companies currently operate.Large international oil companies are not in the business of developing local energy supplies, especially in developing countries
International oil companies face issues of currency, costs, and capabilities. The equipment and highly skilled people needed to find oil and gas – especially in deep off-shore basins – and build processing plants comes from overseas and must be paid for in dollars. Local currency sales of gasoline and electricity will not provide for this.
Secondly, while there is a demonstrable need for energy across East Africa, especially in rural areas, there is not yet strong commercial demand. Many of those who lack access to energy also lack the wherewithal to pay for it, and institutional arrangements – for example the below-production-cost price under which Tanzania’s electricity utility has to provide power – deter investment. Yet oil companies cannot spend the billions of dollars now needed to explore and produce without a certainty of recouping costs and making a profit. (This is not just a problem for Western companies – see China’s CNPC and the government of Chad at loggerheads in 2012 over the prices paid for products from the local refinery that CNPC built. )
The third important factor is that large international oil companies are not in the business of developing local energy supplies, especially in developing countries. In the past two decades, companies have become more and more streamlined and rid themselves of “non-core” activities. With some exceptions, their core capabilities do not include development of local power and fuel systems. They are not interested in building local energy markets for themselves; they aim to serve existing markets.
A U.S. Leadership Role?
New models and new relationships are needed that put the development of oil and gas resources in a broader context and ensure equitable and sustainable development for East Africa.
Energy sector reform is needed to make investment in electricity generation and distribution commercially attractive, as are new financing instruments such as guarantees that link together upstream and downstream investments to stimulate and protect investment in the delivery of much needed local energy.
To do this, a wider set of players than governments and oil companies alone need to be involved. A forum that brings together thought leaders from international oil companies in the region; corporations with expertise in power projects in developing countries; development and project finance banks; and East African government advisors could find innovative solutions to the problem of developing the region’s oil and gas resources in a way that is profitable for oil companies and governments, yet also achieves a step change in access to energy across the region. Without bridging this gap, there is a risk of lose-lose outcomes with holdouts developing between governments and companies around domestic use of oil and gas.New models and new relationships are needed that put the development of oil and gas resources in a broader context
The United States could play an important role in this respect. With new shale gas and oil transforming the domestic energy market and moving the country towards self-sufficiency, interventions abroad may no longer be seen as tainted by energy security aims, increasing U.S. credibility as a third-party mediator.
Over the past decade there have been innovative partnerships between governments, companies, donors, and non-governmental organizations. The Extractive Industries Transparency Initiative is changing how revenue management is done. Now we need a similar but different coalition to find ways to use local energy resources for local energy supply as well as export. The United States could, and perhaps should, play a leading role in this effort.
Policymakers and industry have come a long way since the early days of oil and gas development in Africa. Finding a way to bridge this last gap, between local and international energy production, could transform the lives of some of the poorest people in the world and secure the investments of some of the world’s largest businesses – a rare dual benefit indeed.
Jill Shankleman is a senior scholar at the Wilson Center and former senior social and environmental specialist at the World Bank. She now works as a consultant on social and political risk to multinational companies and banks, where her work focuses on oil, gas, mining, and power projects in developing nations.
Sources: AllAfrica, Anadarko, CNN, Center for Global Development, Financial Times, Food and Agriculture Organization, International Finance Corporation, Republic of Uganda, Reuters, Southern and Eastern Africa Consortium for Monitoring Educational Quality, World Bank.
Photo Credit: “Night Rig,” courtesy of flickr user arbyreed (R. B. Reed). Map: A survey assessment of oil and gas resources in East Africa, courtesy of the U.S. Geological Survey.
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