Oil and Gas East Africa Rising?

In a single day in late March no less than three African countries announced discoveries of oil and gas. The details of a new gas find off the coast of Tanzania instantly inflated the shares of the two companies involved, British Gas and Ophir Energy. For both, this was the fourth successful strike out of […]

In a single day in late March no less than three African countries announced discoveries of oil and gas. The details of a new gas find off the coast of Tanzania instantly inflated the shares of the two companies involved, British Gas and Ophir Energy. For both, this was the fourth successful strike out of four wells drilled in their exploration campaign off the coast of Tanzania.

Other companies also got in on the action. On the same day, Italy’s biggest oil groups, Eni, revealed a new gas discovery off the coast of Mozambique that took its deposit in the giant Mamba complex from 0.8 trillion to 1.1 trillion cubic metres.

It was Kenya, however, that stole the show. Speaking on national television, President Mwai Kibaki announced that oil had been struck in the East African Rift System in the northern country of Turkana. A further drill in May by the Anglo-Irish Tullow Oil and its Canadian partner Africa Oil, proved successful in the same Ngamia-1 concession which borders Ethiopia.

Although it is still unclear whether the deposits contain commercial quantities of oil, the find nonetheless raised new hopes among Kenyans. Even so Kibaki’s announcement comes with a caution: “This is the first time Kenya has made such discovery and it is very good news. It is however the beginning of a long journey to make our country an oil producer,” he said.

All this fanfare has perhaps overshadowed Uganda which looks set to reach the coveted status of being an oil producing nation by the end of the year. This is when the first commercial oil is expected to be pumped out of Lake Albert by Tullow and its partners – France’s Total and China’s National Offshore Oil Company.

The world’s thirst for energy and rocketing prices of oil have encouraged oil companies, and especially small exploration firms, to look for hydrocarbons far beyond the beaten paths of Africa’s top five players: Nigeria, Angola, Algeria, Libya or Egypt. Their cumulative output still accounts for 90 percent of the oil extracted on the continent however.

Land-locked Uganda is only one example, amongst others, of a growing trend to prospect for oil in unchartered territories in East Africa. Global companies have been drilling or buying up exploration blocks off the coast of Mozambique, Tanzania and Kenya. But smaller exploration firms such as Ophir, Afren, Africa Oil and Premier Oil have been also scouting less conventional grounds for ‘black gold’. So far we have seen these players bidding for concessions in Lake Tanganyika, signing deals in Madagascar and even drilling in Ethiopia’s Ogaden and, for the first time this year, in Somalia’s semi-autonomous region of Somaliland.

The ‘new frontier’ approach has proved rewarding. But it is natural gas, so far, that has become the hot story in the region following a dozen major discoveries within the past year in the warm waters of the Indian Ocean.

Two of the new kids on the block, Mozambique and Tanzania, have now identified reserves of gas large enough to build Liquefied Natural Gas (LNG) plants. This is crucial for these economies as being able to liquefy gas means it is transportable to remote destinations where it can be used for electricity generation or for heating.

Experts estimate that the combined deposits found by Anadarko and Eni in Mozambique could contain up to 1.7 trillion cubic metres, the equivalent of the gas reserves in Kuwait. As a result, vast funds have been promised: Eni has pledged to invest $50 billion in LNG plants in Mozambique in the next ten years. And in 2013, Anadarko is expected to announce its final decision on an investment in LNG plants in the country of approximately $18 billion.

On a lesser scale, neighbouring Tanzania is also on its way to becoming a gas producer and exporter. British Gas and Ophir Energy – backed by Indian steel billionaire Lakshmi Mittal – say that their latest discovery in March brought the proven gas reserves in their concession close to the minimum threshold volumes required to build two LNG plants. As has been seen in Mozambique, impoverished Tanzania is also attracting a growing flow of new investments. The chairman of British Gas, Rob Wilson, has said the company would invest up to $20 billion in the country’s gas sector in the second half of the decade.

Other figures are in East Africa’s favour too. Future liquefied gas exports from the region are mainly destined for Asia, where LNG commands higher prices than anywhere else in the world. This is due to high demand from Japan following the Fukushima nuclear disaster last year.

For the new energy producing countries, benefits will come essentially from export revenues, royalties, taxes on profits and income and mining rights. Based on current gas prices, analysts estimate the potential revenues for Mozambique, for example, to be $150 billion in the next ten years, roughly ten times the country’s GDP.

It is hoped that the newly discovered resources will boost industrialisation. For instance, the Ugandan government has secured from its partners a commitment to build an oil refinery in return for access to the country’s resources. This will be a rarity in East Africa – and would mean that Uganda could then export refined oil to the rest of the region as well as beyond. Job creation might not happen on a large scale, as LNG plants do not employ many workers. But indirect job creation is expected in infrastructure and services.

The new resources are also poised to fuel economic development as part of the extracted gas will be consumed locally by the growing mining sector in Mozambique and neighbouring South Africa. In addition, newcomers to the energy sector are also determined to reap higher revenues from their contractual dealings with oil companies. In that respect, a number of African governments seem to be upping the ante. Globally the mining sector is witnessing a trend towards ‘resource nationalism’ which has seen countries from Indonesia to Australia, Zambia and Guinea negotiating higher royalties and taxes and, more importantly, securing increased capital from foreign partnerships in mining projects.

A similar trend is emerging in the energy sector. Uganda has played tough by demanding – and receiving – a $435 million capital gain tax when London-based Heritage sold its stake to Tullow Oil.

However many fear that states have much more to do if they want to secure a fair share of revenues, and more importantly ensure that these revenues benefit the people and not only a small clique of politicians and business elites. In both Uganda and Kenya, tensions are running high. Ugandan civil society groups and MPs have accused Tullow Oil of paying bribes to politicians, an accusation the firm denies. Farmers and landowners have also complained that Uganda is on the verge of being an oil producer but the level of compensation received from the oil company for claimed land is not much.

In Kenya there are worries over corruption as well as security. Somali piracy remains a threat off the East African coast, and the oil fields are in a particularly volatile area. There are also already disputes brewing over concessions. For instance, Kenya and Somalia disagree over their maritime border demarcation. Only a few weeks after the Turkana oil discovery, the minister for northern Kenya, Mohamed Elmi, said his nightmare would be to see a rebel group in the affected area claim marginalisation, thus sparking off an endless insurgency. He warned about the need for legislating fair resource distribution of the petro-dollars:

“I don’t see how any legislation will pass without saying a certain amount will go to the county for its development,” says Elmi.

Indeed legislation will be paramount for the future of the oil sector and its beneficiaries. Investors and civil society alike agree on the need for legal frameworks not only to safeguard security of contracts and transparency of tax regimes, but also to define clear rules on bidding processes, provisions for compensation over land, environment protection and management.

Alarmingly, there are signs that a number of African’ energy states: are lagging behind in adopting this legislation. In Uganda two oil bills were tabled in parliament in February but are yet to be voted on. A third bill on revenue management is in the pipeline. Mozambique’s government plans to increase the maximum stake it holds in future oil and gas blocks to a maximum of 40 per cent from a current threshold of 25 per cent. But the planned reform has not officially been launched.

Meanwhile Tanzania is drafting a new strategy to accommodate its future status as a’ gas economy’ and the expected inflow of billions of dollars in foreign investment. A gas and petroleum revenue management bill is expected to be drafted by the end of the year.

So there is room for optimism. Rolake Akinkungbe, head of oil and gas research at Ecobank Capital, says that the imposition of democracy and the rule of law should help some newcomers like Ghana show the way for other oil and gas producers on the opposite side of the continent – provided new legislation is passed and implemented.

And among oil diggers and investors alike the mood is clearly upbeat too. There are two clear reasons: the size of the deposits and the proximity of Asian markets. The scale of gas discoveries in and off East Africa is unprecedented and has led many to believe that there must be more. According to a survey by London-based oil company Afren, 19,000 wells have been drilled so far in North Africa and14,500 in West Africa. In East Africa that number is just 480.

And, the fact that the region seems under explored naturally fuels more hope and even a sense of anticipation: oil companies and geologists note that where natural gas is found there is often a good chance that oil will be found too.

Culled from BBC Focus on Africa