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Petroleum could make or break the East African community

October 23, 2013 - 1:16pm -- Nick Young

This piece was published in The East African in April, 2012, at a time when I busy getting Oil in Uganda up and running. That project occupied me for a year, but it is doing okay by itself now so am I free to think about other things.

The announcement last week of a promising oil discovery in Kenya, combined with news that Tanzania’s offshore gas fields are proving even richer than at first thought, raises the prospect of an East African region transformed by hydrocarbon wealth.

An oil and gas bonanza does, however, bring risks as well as opportunities. National economies suffer in the long run if revenues are simply eaten by local elites, rather than invested to diversify and strengthen other economic sectors. The disappointed expectations of sidelined citizens can lead to strife.

This is exacerbated when oil is found in places whose inhabitants already feel marginalised by post-colonial development. Such was the case in Uganda, where commercial quantities of oil were first found, in 2006, in the Bunyoro kingdom. Tullow’s successful Kenyan well was sunk in Turkana County, and will rekindle interest in the oil potential of Uganda’s neighbouring Kadam Moroto basin. The semi-nomadic peoples on both sides of the border already have legitimate grievances about central government neglect. Oil wealth under their feet may sharpen rather than resolve those grievances.

In Uganda, oil is becoming another battleground for civic activists and opposition groups to air their discontent with a government that, according to an Afrobarometer opinion poll published last week, now has an approval rating of only 26%. Many people fear that President Museveni plans to capture oil rents in order to feed patronage networks to prolong his 26 year rule.

‘Resource curse’ risks are real and serious, but should not lead to premature cynicism or gloom.

East Africa’s potentially huge but still largely unmapped petroleum and mineral resources have aroused global interest mainly because of increased demand from an economically resurgent Asia. This is sometimes portrayed as Asia’s—and especially China’s—‘voracious appetite for resources.’ But Asia’s economic take-off is good news not only for the hundreds of millions of Asians who once lived in chronic poverty, but also for the global economy. An important launching pad for that take-off, not just for China but also for Malaysia, was the prudent use of petroleum resources to invest, to acquire technology, and to diversify. East Africans should take heart from this.

Transparency, accountability, a coherent and fair regulatory framework, a sensible business plan for saving and investing part of the natural resource wealth for future generations will certainly help East Africa make the best use of its underground and underwater assets.

These are difficult things to achieve, and the road will likely be potholed, but they are possible. Leastwise, the context today, with so many African states engaging in exploration and production, is rich with learning opportunities and examples of ‘best practice.’ The world is a more transparent and connected place than it was thirty years ago, and there is a real opportunity to consign the mistakes of the past to the dustbin of history.

Another danger on the horizon, however, is the emergence of petro-state rivalries within East Africa.

Uganda’s 2006 discoveries led to government visions of adding value to Ugandan oil by building a refinery that could meet domestic demand and also supply refined products to regional markets. That was perhaps a rosy vision but it was neither stupid nor venal. However, Uganda’s progress from exploration to production stalled in a series of disputes between the government and international oil companies, and the wider context is now different.

South Sudan’s decision to pipe oil to a refinery in Lamu, rather than paying exorbitant transit charges to the northern neighbour from which it seceded last year, is one game changer. Kenya’s discovery last week is another. Depending on the amount of oil that is eventually found in Kenya, the country might also choose the value-adding local refinery option.

With Tanzania also prospecting for oil, which may well co-exist with its natural gas deposits, the worst-case scenario would be a region divided rather than united by its natural resources, bristling with oil-financed military hardware, and quarrelling over cross-border reservoirs.

The best-case scenario would be a serious effort by the national governments to share information and technology and to work towards a coordinated strategy for the development of the region’s energy resources as a whole.

Serious consideration should also be given to the question whether a unified currency might serve as an antidote to the economic ailment known as ‘Dutch disease’ (whereby national currencies appreciate with natural resource sales, weakening the export competitiveness of agricultural products and manufactures.) Should East African countries pool their currency appreciation risks, or go it alone?

In short, petroleum may well be a defining issue for the future of the East African Community.