IS IT POLITICS OR JUST FINANCE THAT'S DELAYING THE DEVELOPMENT OF EAST AFRICA'S OIL
Delays and disagreements have slowed down the extraction and exportation of new oil discoveries in Kenya and Uganda.
It was not long ago that East Africa was the shining frontier of the continent’s oil scene.
Uganda sparked the rush in 2006 after wildcatters ventured deep inland and made Africa’s largest onshore discoveries in decades. And Kenya’s northwestern Turkana region continued the run with new oilfields found in 2012.
With crude prices averaging almost $112 per barrel at that time, it
was hoped these fresh discoveries could be linked up with a new regional
pipeline network stretching from
South Sudan to the coast. It was believed that oil could economically transform the East African region.
Yet a decade on, little progress has been made on the pipeline, while
Uganda and Kenya’s oil remains trapped far from international
markets.
Security risks have hindered developments, while the steep drop in
crude prices from late-2014 has slowed things down. However, politics –
both domestic and regional – have also been central to the delays.
Domestic politics
Uganda
In Uganda, where government estimates suggest reserves of 6.5 billion
barrels, a consensus has now been reached to develop an export pipeline
by the early-2020s . But this has only come after various disagreements
deferred developments.
It took years, for example, for President Yoweri Museveni to back
down from his original idea of meeting East Africa’s petroleum needs
through a large-scale oil refinery. This was widely regarded as an
uneconomic proposition and a smaller-scale option has now been
accepted.
Progress was also stalled by a series of drawn out tax disputes in
Ugandan and London courts. However, it was Museveni’s hard bargaining
with international oil companies over the terms of production licenses
that brought things to a crawl, with the two sides finally reaching an
agreement in August 2016.
To his credit, Museveni has provided Uganda with a relatively
favourable deal. But it came at the cost of delaying oil production for
several years.
Kenya
In Kenya, after much fanfare following its first oil discovery, there
have only been marginal exploration gains of late. Estimates of
recoverable oil in the South Lokichar Basin of the Turkana region have
now risen to 750 million barrels according to operator Tullow.
Nevertheless, low-cost onshore oil continues to draw in big players
from the global energy industry. Just this week, the French oil major
Total entered the scene after acquiring Maersk Oil and Gas, along with
its Kenyan assets. Alongside partners Tullow and Africa Oil, it will
look to bring Kenyan oil to international markets.
However, an unhealthy relationship between local and national
politicians could present an impediment to production. This was most
recently demonstrated in the August 2017 elections. During the campaign,
President Uhuru Kenyatta sparred with Turkana governor Joseph Nanok
over the president’s refusal to sign a bill that would grant the county a
high share of oil revenues.
Turkana been neglected by Nairobi for decades, and local politicians
are now wrestling to control new resources brought in by oil
development. This led to a suspension of operations for several weeks
in 2013 due to local protect, and again in June this year as locals
blocked roads and seized oil company assets.
In Turkana, grievances over a lack of jobs and development will not
go away because the election season is over. Kenyatta will need to work
towards a compromise with county politicians and local communities if
the industry is to make further progress.
South Sudan
Since its separation from Sudan in July 2011, South Sudan’s oil
industry has been severely undermined by political intervention and
armed conflict. Oil production was around 350,000 barrels per day around
the time of independence, but only 130,000 barrels per day in
early-2017, according to government officials.
The government has ambitious plans to more than double the current
production rate, but South Sudan needs a significant period of internal
stability before oil companies will be willing to take the risk to
invest in revitalising its aging oilfields. Without investments in
enhanced oil recovery or significant new discoveries, output from South
Sudan’s current oilfields will not reach pre-civil war highs again.
The best prospects for new oil are in Jonglei state. But the large,
isolated and unstable region is hardly a desirable destination for
low-cost, risk-free exploration. Total has been flirting with exploring
there for decades. It was recently in fresh talks with the government,
alongside partners Tullow Oil and the Kuwait Foreign Petroleum
Exploration Company (KUFPEC), but negotiations broke down in April.
Regional tensions
Uganda
Beyond ongoing domestic challenges, regional relations have also
emerged as a complex challenge. In landlocked Uganda, this has centred
on whether to opt for a pipeline to the coast through Kenya – via
Turkana’s oil reserves – or through Tanzania.
It was only after years of wrangling with the former that Uganda
recently announced construction would soon start on a pipeline through
the latter. The plan is that the estimated $3.9 billion, 1,443km
pipeline will run from Lake Albert down the western edge of Lake
Victoria and to the Tanzanian port at Tanga.
If the decision holds, it means that East Africa may eventually have
to construct two separate pipelines. Uganda could have saved the region
costs by joining up with Kenya’s pipeline, but it was concerned about
security and delays from land disputes in Kenya’s restive north. Kampala
was also keen to avoid over-dependence on Nairobi as its dominant trade
gateway.
In its bid, Tanzania offered to lower tariffs on the pipeline to
competitive rates. It presented a more feasible timetable, fewer land
acquisition constraints, and lower security risks.
However, this option will not necessarily be problem free. Over the
30-40 year lifespan of the oil production, politics in both countries
will certainly shift, and Tanzania could take advantage of its position
as Uganda’s only transit route.
The wildcard in the region’s pipeline politics will be whether Total –
given its recent entry into Kenya and majority stakes in Uganda –
revives the idea of building a pipeline from Lake Albert to the Kenyan
coast, and ditching Tanzania altogether.
Kenya
Depending on how this pans out, Kenya may still need to go it alone
in building its own pipeline. President Kenyatta says a route from
Turkana to Lamu will spur development in the marginalised region and
that new economic opportunities will dampen security concerns. However,
others fear that political elites are looking to further enrich
themselves through land grabs in the north.
In any case, the persistence of lower global oil prices means that,
in absence of a new deal with Uganda on a regional pipeline, Kenya will
likely need to discover more oil if investors are to see financing a
Kenya-only pipeline as a fruitful venture.
South Sudan
South Sudan may have attained political freedom in 2011, but it is
still dependent on a pipeline through Sudan to export oil, the
government’s main source of revenue.
A deal was struck late last year to extend the arrangement between
Juba and Khartoum until the end of 2019. The agreement includes a
sliding scale for transit fees, which will help ensure that South Sudan
does not run a loss when global prices are low.
However, the political relationship between the two Sudans is anything
but stable, as the short border war in 2012 demonstrated. Khartoum may
attempt to extract new political and economic concessions from South
Sudan when the current agreement expires.
Source: Petroleum Economist.
It’s the politics
After years of domestic and regional political wrangling, some
progress may be being made in terms of extracting and exporting East
African oil. But many disputes are yet to be resolved, while others may
still heighten uncertainties.
The undefined and porous borders across Africa, for instance, could
lead to further quarrels. Uganda’s exploration on the borer of Lake
Albert is already being protested by the Democratic Republic of Congo.
Meanwhile, Kenya’s push for maritime exploration in the Indian Ocean is
being contested by Somalia.
The implementation of international rulings on disputes elsewhere in
Africa – for example, between Nigeria and Cameroon – could set important
precedents in solving such border disagreements.
Over a decade on from the initial discoveries, East Africa’s oil is
still yet to deliver on its promises. There have been many factors
behind the delays, but many have been caused by domestic and regional
politics, both of which will continue to be central in determining the
success of new growth opportunities.
A version of this article was originally published in the AFRICAN ARGUMENTS.