Analysis: Why East Africa Has to Hold Onto the Oil and Gas Dream to Spur Economic Growth

By Stephen Kuria and Bernard Ayieko…

The oil and gas market has been shaken and stirred by a raging storm. Some multinationals are actually abandoning the rigs, especially offshore ones.

The US rig count has gone down by 31 to 760 on a month-by-month count. In some cases, exploration programmes have been put on the backburner.

Analysts have argued that only the rich Arab nations have sufficient financial muscle to weather this raging storm.

According to the Daily Telegraph, only the Saudi Arabia’s pockets are deep enough to weather the current oil slump.

Saudi Arabia derives 80 per cent of her total revenues from the sale of the black gold.

Even with such financial muscle, the Arab nations have also diversified to other areas to help them even out such odds.

The recent efforts by the Organisation of Petroleum Exporting Countries (Opec) nations to kill off the US shale have sent oil prices further south.

What this situation has done is to make East Africa’s oil and gas prospects bearish.

But why is East Africa the new frontier for oil and gas? The recent discovery of huge oil reserves in Kenya and Uganda tells the story.

Tanzania too has discovered natural gas. It is estimated that Kenya has found over 600 million barrels while Uganda has over 6.5 billion barrels of oil reserves.

Tanzania, the largest country in East Africa, geographically, has discovered 50.5 trillion cubic feet of gas – which is among the largest in the World.

Kenya and Uganda are expected to start the process of oil commercialisation in 2017 while Tanzania’s dream of producing gas is expected to kick-off in 2019.

These discoveries are vital to the region and could see these countries earn billion of dollars useful in paying our foreign debts, earn foreign exchange and help in balancing current account deficits.

Further, the discovery has the potential of speeding up economic growth and development by attracting investments in roads, rails and other infrastructure projects.

The Lamu Port South Sudan Ethiopia Transport (Lappset) corridor estimated to cost over KSh300 billion is such a key project involving the construction of a network of roads, railways and pipelines linking Kenya, Ethiopia and South Sudan.
This feeds into the regional economic integration and opens up space for intra-Africa trade.

The only anathema to this positive forecast is the falling oil prices.

It is not the timing that’s poor but it has also made it difficult for investors in the oil exploration sector to recoup their initial investments in the associated infrastructure.

The emergence and sudden increase in the supply of shale energy – a rapid growing trend in the US where domestic energy exploration and production of petroleum and natural gas is obtained from fine-grained sedimentary rocks, is not making the situation better.

Analysts Wood Mackenzie and Verisk Maplecroft based in the UK, concludes that Iran has the world’s third-largest oil and gas reserves, behind Russia and Venezuela but ahead of the US and Saudi Arabia.

McKinsey & Company believes that Africa is expected to increase its oil production output from 13 per cent to 15 per cent by 2025.

If it goes as planned, Kenya and Uganda could play a key role in growing this oil output in Africa.

But Africa should focus on growing its demand by utilising oil and gas produced within African borders to fire up power stations.

In fact, it is cheaper to utilise gas than diesel. In Nigeria it costs $157 per megawatt hour to generate electricity whilst it only costs $55 through gas fired thermal generation.

The East African dream is valid and will persist but we have to get the fundamentals right to generate change.

The appointment of Mr Charles Keter and Mr Dan Kazungu as Cabinet Secretaries for Energy and Petroleum and Mining respectively could be the midas touch that is needed to push forward the legislative agenda for the extractives sector.

Perhaps, there is an opportunity for the region to learn from Australia’s success story in the sector so that we can unlock the hidden potential that the sector has on job creation, income generation and poverty alleviation.

The author is managing director of Accelerate to Excellence Consulting A2E and Chairman of Kenya Australian Chamber of Commerce based in Perth Australia.

This Opinion was first published by The Daily Nation

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