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Thursday, 7 November 2013

East African Oil & Gas Summit 2013 – 2013 in Perspective

The East Africa Oil and Gas Summit 2013 was held in Nairobi on the 29th & 30th of October. This year’s event was held under a backdrop of unprecedented growth and development in the upstream oil and gas sector in Eastern Africa.

Some of the highlights include:

1.     Uganda’s Tullow fields moving forward towards development and eventual production with the government approving the process after a mid-sized refinery was accepted by stakeholders as part of the deal.

2.     In Tanzania a new round of bidding for oil and gas blocks got underway in October, with Government expected to take between 65 -75% of PSA under free carry terms. The development of a gas pipeline from Songo Songo gas fields to Dar es salam continues.

3.     In Kenya, Tullow is moving towards commercial viability as assessment wells continue being spudded. Offshore Anadarko and BG have supped gas well in the recent weeks.
4.     Tullow and Africa Oil spudded their first Ethiopian wells early 2013.

5.     In the former Sudan, South Sudan and Sudan began pumping, transporting & exporting oil from the South’s oil fields after hostilities led to the closing down of the pipeline and oil fields in the south in early 2013.

6.     In Somalia the government issued its first exploration license to British company Soma Oil in over twenty years.

However, risks lurk in the shadows. Local content disagreements over jobs and contract allocations with the Turkana community in northern Kenya forced Tullow to shut down drilling operations after sustained demonstrations in October 2013. Earlier in the year, Tanzania faced a similar situation with locals along the Songo Songo pipeline protesting that the gas pipeline was passing through their lands while they were not benefiting from it.

There seems to be a lack of capacity in terms of up scaling local content in the East African countries as the oil and gas discoveries seem to have caught these countries unawares with legislation appearing to chase oil and gas development. The only country to date with a comprehensive oil and gas policy as regards to local content is Uganda. Kenya’s will only be ready by earliest 2016 according to industry participants involved in the process.

This leads us to another risk; Regulation Risk. With regulation and policies currently being reviewed to suit current and future needs of the industry this risk is a huge concern for companies. In other parts of the world changes in regulation have led to companies rejigging their strategies or withdrawing altogether. This is because investors give them money for oil and gas exploration based on certain assumptions underpinned by stable regulatory, policy and legal frameworks that make risks measureable. For most of the companies in Eastern Africa this remains a risk.

Its now coming to the fore that oil and gas like most extractive industries is very capital intensive yet creates proportionally far less jobs in relation to other industries such as services and manufacturing. Therefore, at the moment the focus of governments and all key stakeholders in East Africa should be to create employment in the support services industries that cater to the industry. This is the game changer, investing in support services such as logistics, transport, accommodation, and catering and non-core technical support services such as providing generators, sanitation, and security. The governments should put minimum requirements as regards to contracts awarded and employment to locals in their countries. This will ensure a quicker up scaling of skills in these sectors. The core technical skills such as drilling, welding, geology and geospatial engineering should take between 5 to 10 years to develop. There should be a strategy embedded in policy to fast-track the uptake of these skills in this sector.

However, entrepreneurial locals with seed capital can partner with companies from markets where the oil and gas industry is more mature and begin developing these skills and capabilities to prepare for when the industry will really boom in the coming years.
Infrastructure presents a huge risk because without pipelines, ports and airports etc., oil and gas cannot be exported to markets where its needed. However, the governments of this region have grand plans to upscale infrastructure. The question is whether they will be ready on time and who will pay for them.

The last issue on hand is that of security and political stability. With the recent terrorist attack at the Westgate Mall in Nairobi, that targeted an establishment that is frequented by foreigners and expatriates, security is clearly an issue that presents a huge risk. Investors shy away from investing in unstable or unsecure areas. Even when they invest they then have to invest heavily in security which erodes their margins and hence eventual return. It is therefore imperative that the governments in the region continue to foster peace and stability within and without their borders. With initiatives such as those of stabilizing Somalia and DR Congo should be given utmost support especially from regional countries and the international community at large. Because instability in one country has knock on effects in neighbouring countries where criminal elements move across borders to cause insecurity and instability.

The future looks bright for the Eastern Africa’s oil and gas industry but along the way risks lurk that could derail the boom that is in the offing.