Significant oil and gas discoveries in East Africa have sparked excitement and hope that the region can transform its economies, providing thousands of new jobs and lifting many people out of poverty.
But the jury is still out on whether the frontier countries of Uganda, Kenya, Mozambique and Tanzania can avoid the ‘resource curse’ which has dogged the continent’s biggest oil producers, Nigeria and Angola. This is when the exploitation of abundant mineral resources leads to a weakening in governance, economic distortions, slowing growth and a deterioration of living standards for the poor.
The history of oil development in Africa so far has not set a happy precedent. Oil accounts for more than 90% of the export revenues of Nigeria and Angola, and has fueled rapid rates of economic growth. But the influx of wealth has not led to the kind of broad economic development required for either country, or for the more than half of their combined population of 180 million still living in grinding poverty.
The International Monetary Fund says that $32 billion went ‘missing’ from Angola’s coffers between 2007 and 2010, while other studies suggest that several billion dollars worth of oil revenues have been embezzled in Nigeria.
However Nigeria has recently taken a very positive step. It has established sovereign wealth funds to manage excess earnings from crude oil and gas, by putting aside money for future generations, funding infrastructure and stabilizing its budget.
Ghana, a newcomer to Africa’s oil and gas frontier, has started out on a promising note. The country is on track to become the continent’s third-biggest oil producer, with output of 400,000 barrels per day (bpd) in a few years. This is a fraction of the output of both Nigeria and Angola, which are each producing closer to two million bpd. But Ghana, with a population of 25 million, has taken steps to manage its resources in a transparent and efficient manner. In 2011, the government passed laws to govern how oil revenues are allocated. It created a public interest and accountability committee to monitor the process, with 13 members from professional bodies, think tanks, and pressure groups. And like Nigeria, Ghana’s government has also prepared the ground for a sovereign wealth fund.
Modest quantities of oil have been discovered recently in Uganda and Kenya. Kenya has the advantage of being a highly diversified economy, unlikely to be disturbed by a sudden influx of oil revenue. It also has a coastline which enables its oil to be exported easily to expanding Asian markets. Uganda, on the other hand, needs a pipeline to transport its crude to Kenyan ports. Kenya is set to become the first oil exporter in East Africa, but its reserves of 300 million barrels are dwarfed by those of Uganda, which has 2.5 billion barrels. The Kenyan government is reviewing petroleum sector laws and discussing with stakeholders how better to allocate its resources to drive infrastructure development as well as expanding training and education.
However, it is the massive natural gas discoveries off the coasts of Tanzania and Mozambique which have generated the most excitement about the region. At present, the two countries (mainly Mozambique) are believed to have about 220 trillion cubic feet of natural gas offshore. This could eventually make the region one of the world’s top exporters of liquefied natural gas (LNG).
The challenges these two countries face in developing their resources are similar to those that must be tackled in Kenya and Uganda. Firstly, massive infrastructure development is needed
for the conversion of gas to LNG, which could drain money from other sectors of the economy. The price tag of proposed oil and gas investments in Uganda, Tanzania and Mozambique amounts to about $50 billion, which is very large relative to the size of their economies.
Not only are the projects capital intensive, but it will take several years for significant revenues to be gene-rated, which means that these countries need to tap international credit markets. This poses a problem as none of them has investment-grade credit ratings, which will make borrowing costly. One possible strategy would be to incorporate infrastructure development requirements in the deals signed with international oil companies, provided they make financial sense.
East African oil and gas producers need to ensure that they get a fair slice of the pie in these agreements, without deterring investment. They must also increase their power- generating capacity to keep up with a faster pace of economic growth, Standard Bank warns in a recent report. Taking everything into consideration, energy policy must move swiftly to keep up with the breathtaking pace of oil and gas development in the region.