Politics of Poverty

What’s needed to ensure Africa’s oil boom is not a bust

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A natural gas pipeline operated by South African energy company, SASOL, in Mozambique. Source: http://bit.ly/1H4qdAG

With billions on the line, and oil prices declining, an opportunity awaits to ensure African states and communities get a fair deal.

Julie Kim is a Program Officer for Extractive Industries at Oxfam America.

Oil prices are at their lowest in years. Looking ahead, expert analysts at Goldman Sachs have even flirted with the idea of prices falling as low as $20 a barrel. While consumers in the US and abroad are relishing the opportunity to pay less at the pump, investors and oil-producing countries are hurting as the future continues to look dim. The plunge in oil price threatens almost $1 trillion of spending on future oil and gas projects globally. Investments that once looked promising are now being called into doubt. And while there is plenty to be worried about, it may be just the right time for oil-producing countries – especially emerging producers in regions like Sub-Saharan Africa – to negotiate fairer deals for upcoming projects.

Let’s rewind for a second to a year ago. The price of oil was hovering around $100 a barrel. Oil and gas exploration was in full swing with several significant projects coming online. More than 50 wells were completed in the East Africa region in 2012 alone, and billions of dollars in government revenue were anticipated to support much needed infrastructure and social services. To give an example of the scale of the industry, total investments across Ghana, Mozambique and Tanzania is currently estimated at around $4 billion per year over the next few years.

Recent oil and gas discoveries in East Africa – Mozambique, Tanzania, Uganda and Kenya especially – have drawn attention to the region. These discoveries sparked many to ponder whether East Africa would experience an oil and gas boom of its own. Oxfam has cautioned that in order to manage the boom responsibly and sustainably, there must be space for civil society, media, and government officials to be active and informed to ensure transparency and accountability as the projects take shape. Oxfam’s Accountability through Active Citizenship program – with support from the Norwegian Agency for Development Cooperation – is helping to do this by supporting key emerging petroleum-producing countries like Ghana, Mozambique and Tanzania to promote environmentally, economically and socially responsible management of oil and gas resources.

Now, back to 2015 – oil prices have halved.

Many companies important to the region – such as Tullowhave slashed their exploration and capital expenditure budgets. Several key projects in East Africa are only a few years from production with many facing final investment decision in the coming months. A lot is hanging in the balance. Uncertainty in the regulatory framework was ranked by industry players as one of the biggest challenges for oil and gas development in Africa, according to PwC’s 2015 Africa Oil & Gas Review. Analysts argue that the low commodity prices should serve as a wake-up call to governments to review and revise their legislation to provide a more investor-friendly environment that is economically attractive for industry players. However, the challenging environment of low oil prices and the threat of deferred or abandoned investments can lead to dangerous short-term thinking. And that is risky for communities, governments and companies alike.

Here’s why: Allowing legislation and regulations to slacken in order to attract investors now will likely yield further complications later when even more capital has been sunk into these projects. Governments and companies may be tempted to strike quick deals or even renegotiate contracts to include special accommodations to lock in the investments. This could include lowering tax obligations, providing tax holidays, reducing local content requirements, bypassing public consultation, easing or circumventing the permitting process and other incentives.

That is why it is essential for oil, gas and mining contracts to be fully disclosed. Without access to the agreements, civil society watchdogs, the media and parliamentarians will not be able to ensure that contracts are negotiated fairly, that governments are collecting all monies owed under contracts, and that communities are being adequately consulted and compensated. There is already some consensus on this, with Kenyan President Kenyatta supportive of oil contract disclosure, as well as a number of companies like Tullow and Statoil.

And we can’t afford to turn back now.

Easing community consultation requirements and social development commitments will likely breed local discontent. Reducing government take of oil and gas revenues will mean that when oil prices recover, governments and local communities will lose out while companies will walk away with their pockets full. A reduced budget means governments will be constrained in their ability to pay salaries and provide social services, further aggravating the potential for social instability.

There are many challenges ahead and significant work to be done.

For example, in Mozambique, 5,000 people are anticipated to be resettled to make way for a massive $20 billion LNG processing industrial park in Cabo Delgado.  Research by Oxfam elsewhere in the country has shown that mining-induced resettlement can go awry without proper planning and resources. Oxfam is supporting local partners to inform communities about the laws and their rights and is also planning to undertake in-depth field research to better understand how resettlement will impact on women, youth and men in the Cabo Delgado area.

So: is East Africa still experiencing an oil and gas boom? We’ll see. But for now, the current lull buys breathing room for governments, civil society and communities to get their houses in order and prepare for what’s to come if and when prices (and activities) hike back up. The slump in prices and slowdown of activities is an opportunity.

It is time to take a hard look at the legal and regulatory frameworks for oil and gas development and make sure that they are strong and ready to provide the accountability and oversight they were intended to. It is time to invest in building knowledge and skills in local, front line communities to prepare them for the rapid change that they will inevitably be faced with. And it’s time for countries to think about diversifying their economy so they do not become beholden to boom and bust cycles in the future.

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