Friday, June 28, 2013

The East African hydrocarbon age: Are we primed for a resource curse?


The discovery of commercially significant quantities of oil in Uganda in 2006 was consequential. The discoveries in Uganda have been followed by discoveries in Kenya in 2012. Tanzania has seen world-class offshore gas discoveries. Experts believe more hydrocarbons have been discovered in East Africa in the last couple years than anywhere else on the planet. East Africa has entered a veritable hydrocarbon epoch.

Africa’s experience with oil and minerals has not been rosy. In a majority of Africa’s resource-rich countries, exploitation of natural resources is invariably linked to corruption, economic stagnation, conflict, social inequality and widespread poverty. This apparent paradox is commonly referred to as the Resource Curse. Economists have long held that resource rich countries are prone to rent seeking, conflict, corruption, and weak public institutions. Paul Collier, Oxford University Economist, has argued that poor management of large inflows of natural resource revenues makes other export activities uncompetitive and stifles economic diversification, leading to lower economic growth.

Angola and Nigeria are prime examples of the curse natural resource can bring to a country.
Angola is considered the archetypal case of the resource curse. The proceeds of this vast wealth financed two and half decades of civil war, just two years after independence. Millions of dollars in concessionaires’ bonuses are stashed abroad and much of the revenue is sequestered in a secret “parallel budget” with no public accountability. Angola’s poverty rate is estimated at 68%. Angola also ranks among the lowest in the world on other social indicators. According to a UNDP report of 2007, its combined school enrollment ratio was 25.6% and life expectancy was about 42 years

 Similarly, 50 years of oil production has not produced growth and prosperity in Nigeria. Nigeria’s annual per capita income of US$1,400 is less than that of Senegal, which exports mainly fish and nuts. Armed, rebels operating under the name of the Movement for the Emancipation of the Niger Delta (MEND), have intensified attacks on oil platforms and pumping stations. According to leaked internal financial data accessed by the Guardian, Royal Dutch Shell paid Nigerian security forces tens of millions of dollars a year to guard their installations and staff in the Niger delta about $383 million. A significant amount of Shell funding is paid through senior military officials, exacerbating corruption and elite rent seeking.

Is East Africa prepared to navigate the slippery slope of the hydrocarbons bonanza? Going by history as well as recent events – social and political – the spectre of the "resource curse" looms large in East Africa.

The Albertine Rift is a picturesque expanse of forested mountains and home of the rare Mountain Gorilla. Along with gorillas, the Ugandan stretch of the Albertine Rift is home to breathtaking biodiversity, nine national parks and four game reserves. However, in 2006, geologists discovered treasure underneath the Albertine Rift; oil. The Lake Albert region is therefore ecologically sensitive. It is also politically sensitive because it lies between two countries with a history of conflict. Environmental fragility and conflict is the quintessential witches brew.

There are growing worries that Uganda’s oil may exacerbate official corruption. Italian company ENI has been accused of trying to bribe senior government officials to secure oil rights. In December 2012, the Ugandan parliament passed the Petroleum Bill to regulate the country's emerging oil sector. The law grants the oil minister the power to grant and revoke licenses, including negotiating production sharing agreements without parliamentary oversight. Transparency is largely seen as an affront to long-term social cohesion. Diplomats and key players in the oil sector think the new law amounts to handing an “ATM Machine to the government. 

The gas rich region of Mtwara in southern Tanzania carries an inordinate burden of malaria, diarrhea and respiratory infections, which are the leading causes of morbidity and mortality. Infant and maternal mortality in Mtwara is one of the highest in the country. Similarly, at 48, life expectancy in Mtwara is among the lowest in the country. Here is how one resident characterized Mtwara; “since independence, we have had no roads, schools, hospitals or access to water, and employment is nightmare. Mtwara is a symbol of poverty in our country."

As one would imagine, expectation among the communities of Mtwara is very high; everyone expects instant, dramatic change in fortunes. From jobs, better public infrastructure and improved services. More importantly, the local communities expect to retain and control significant proportions of revenues accruing from the sale of resources. Contestation over revenue from gas resources has been characterized by violence in the recent weeks as local communities march in protest against the construction of a pipeline to transport gas from Mtwara to Dar-es-Salaam.

Politicians have weighed in on the question of resource revenue. Musoma MP, Hon. Mkono, fully supports Mtwara residents opposition to the construction of the gas pipeline to Dar-es-Salaam arguing that Mtwara residents’ have learned from the Buhemba Gold Mine in the Mara region a private company extracted gold from Mara between 1994 and 2004, but years later the region continues to be among the least developed in the country with few schools, no tarmacked roads and no hospitals. Mtwara MP, Hasnain Mohamed Murji also supports agitation for more equitable distribution of natural resource revenues. In Hon Mukono’s view, Tanzania’s economic policies have failed to protect local interests.

Politicians with a national purview have a different view. Wading into the acrimonious debate, President Jakaya Kikwete argued that Mwanza and Shinyanga “have been producing gold, but they have never claimed to enjoy alone all benefits from gold." According to Energy and Minerals Minister Sospeter Muhongo, “the gas issue is being politicized and Tanzanians should avoid injecting politics into serious matters of national interest”.

For the Turkana people of northern Kenya, pastoralism, the main source of livelihood has become exceptionally untenable in the past two decades. The drought of 2011 was particularly devastating. More than a quarter million of people in Turkana county live on food aid and 9 out of 10 people live below $1.25 a day. Completion of Ethiopia’s Gibe III Dam on the Omo River could transform Lake Turkana into Africa’s Aral Sea, destroying vital ecosystems and the fragile livelihoods they support.

According to experts it took 58 wells to find the first commercially viable oil discovery in the North Sea. For Turkana, it took only three. But can oil really be a game changer; a sign that a big payday for the Turkana people is at hand? Kenya’s key sectors, from agriculture and power generation to forestry and fuel imports, have all been appropriated by the powerful vested interests always jostling to control the country. The question on everyone’s mind is who will control the country’s oil? Moreover, ethnic identity, including control of communal resources, especially has often been at the center of Kenya’s historical socio-economic and political troubles. Politicians have fostered economic opportunities for their acolytes. The pressure valve last blew in 2007, when accusations of vote rigging in a general election exploded into ethnically charged violence. More than 1,000 people died and many more were displaced.

What is clear is that there is a high correlation between resource curse and unaccountable institutions of governance. Kenya, Uganda and Tanzania are all characterized by weak institutions of private property, a weak bureaucratic capacity, a proclivity for strong presidential rather than parliamentary democracy. These characteristics make all three countries highly vulnerable to the resource curse despite honest efforts, with the help of the World Bank and the African Development Bank, to institute strong policy and legal regimes.

MIT economist Daron Acemoglu argues that institutions of private property ensure protection of property rights of investors, provide political stability, and ensure the political elites are restrained while also promoting participation of the citizens. A culture of democratic political competition, a strong parliamentary democracy and a broad based participation at the local level can provide safeguards against a resource curse.

Accountable democratic governance buttressed by competitive democratic politics and a vibrant parliamentary system is something of a sine qua non for effective natural resource governance. Kenya’s vibrant political competition along with devolved governance structures presents a starting point for building strong technical and institutional capacity to ensure separation of policy, regulatory and commercial development roles for effective natural resource governance.

Although strong institutions of private property are lacking, better outcomes on hydrocarbon governance may result from strengthening transparency. Each country must sign up to the Extractive Industries Transparency Initiative, which requires companies to publish all payments to the government and the government to publish all payments received from extractive companies. All stakeholders must demand public disclosure of spending, revenue accrued from extractive industries and establishment of a sovereign wealth fund to regulate reckless spending of such revenues, which could undermine competitiveness in non-hydrocarbon sectors.

East Africa can avoid the resource curse. But there is no silver bullet legislation and no right advise, beyond the overriding imperative of political accountability and inclusive competitive parliamentary democratic governance. 

2 comments:

  1. Alex,

    You make an important set of points in this reflection. In January 2013, SID explored the region's nascent hydrocarbon economy. Here is an excerpt:

    1) Global energy markets are inherently uncertain

    East Africa is exciting because it is a relative newcomer to the global energy game. However the region’s domestic energy market remains small. The five EAC countries consumed 144,000 barrels of oil per day in 2010, up from 96,300 in 2003. Such a small local market will struggle to justify the billions of dollars of investment needed to build oil refineries and liquefied natural gas (LNG) plants.

    Therefore the ability to export the region’s oil and gas to global markets will drive investment decisions. This reality explains the tension between governments one one side who pushing for sizeable oil refinery and LNG plants to be built in Uganda and Tanzania, and investors on the other, who are seeking assurances that they will be allowed to export as much crude oil and gas as they need to make the economics of the costly projects work.

    Looking at the energy supply side globally there are proven reserves of 26,500 trillion cubic feet of global gas reserves, which is equivalent to 200 years of supply at current consumption rates. Technology is unlocking conventional and unconventional sources of gas (horizontal drilling, fracking, shale gas). These advances in technology and the game-changing discoveries of shale gas in the US – which could turn it from a net importer to a net exporter of natural gas – have raised the level of uncertainty about the future global energy markets that East Africa will face.

    Combined with what could be prolonged economic austerity conditions in the rich countries, the expanding energy supplies could push the world into a period of a price-depressing energy glut in the coming years. Production from the new sources in Uganda, Tanzania and Kenya is not expected to start earlier than three to five years hence, by which time the global energy marketplace could have changed beyond all recognition.

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  2. Continuing....

    2. “Unburnable Carbon” risks making East Africa’s discoveries worthless

    Another game-changer lurks on the horizon and this is the concept of ‘unburnable carbon’. Climate scientists have calculated that if 886 billion tons of carbon dioxide (886 GtCO2) is released globally during the period 2000 – 2050, there is a 20% chance that global warming will exceed two degrees celcius (2°C). By 2011, humanity had already burnt over one third of this 886 GtCO2 budget, and the known fossil fuel reserves easily exceed the remaining allowance. All fossil fuel reserves beyond this limit are what is referred to as unburnable carbon.

    Humanity’s efforts to keep global temperature from rising above 2°C by the year 2100 will intensify as the effects of global climate change manifest themselves more aggressively and with greater devastation. Such efforts may result in global agreements to radically limit the use of hydrocarbons as a major source of energy which would convert more than half of the world’s proven fossil fuel reserves, including East Africa’s new discoveries, into worthless ‘unburnable carbon’.

    3. Expect a very modest boom

    East Africa’s governments and citizens are expecting oil and gas to deliver a fast, deep and positive transformation of the collective and individual welfare. But internal cohesion is at risk as the hydrocarbons fuel an emerging clamour to renegotiate the social and political contract between citizens and the state. The recent Mtwara and Masasi incidents are proof of this. Evidence of growing demand for sub-national autonomy are evident also in Bunyoro in Uganda and Turkana in Kenya. Zanzibar is toying with complete secession, taking with it the rights to the oil and gas in its exclusive economic zone.

    Recent analysis suggests that the hydrocarbon boom may actually be a lot more modest than anticipated. Analysis published in June 2012 entitled "Managing a modest boom" concludes that “there are not going to be any significant oil revenues for Uganda, even at current crude prices, any time soon..By 2030 it may be about US$40 per person in 2012 US dollars.”

    This analysis has yet to register in the public discourse, allowing the expectations ‘bubble’ to continue inflating. While political, business and civil society leaders would do well to engage with the evidence in order to manage the expectations down, there is little sign of this happening soon or to the necessary scale and intensity.

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