By Francesca Devereux, Critical Resource analyst
The long-term success of East Africa’s booming oil industry will depend on companies’ ability to navigate a complex web of geopolitical issues
Since the London-listed Tullow Oil discovered commercial quantities of oil in Uganda in 2006, East Africa has attracted significant attention from explorers seeking to replicate its success. Very promising initial discoveries in Kenya, and high hopes for oil in southern Ethiopia, along with existing production in South Sudan, indicate the potential for large windfalls for companies and governments alike. Yet unlike gas discoveries in Tanzania and Mozambique, much of East Africa’s potential oil production appears to be located in landlocked countries, making the region’s nascent oil industry partly dependent upon finding a viable cross-border export route. The ability of companies to negotiate the complex web of security, geopolitical and infrastructural issues will determine whether the region’s oil industry ultimately proves successful.
The first major oil discoveries in the region were made in Uganda’s Albertine basin by Tullow Oil and Heritage Oil in 2006, followed by France’s Total and China’s CNOOC shortly afterwards. With some official estimates of total oil deposits at around 2.5 billion barrels (of which about 1 billion are recoverable), President Yoweri Museveni announced that he wanted Uganda also to become the regional supplier of petroleum products by establishing a refinery near Lake Albert. However, the country’s oil development has been slow, and mired by tax disputes and allegations of corruption- that Tullow has strenuously denied.
The discovery of oil in Kenya earlier this year adds some important regional-political dynamics into the mix. It is not known yet whether Tullow’s discovery in Kenya’s Turkana County is commercially viable, but the signs are positive both for Kenya and neighbouring Ethiopia, which shares the Turkana rift basin. Kenya has a more efficient and well-developed business sector, more advanced infrastructure (including a refinery and port) and sea access, so may now take prime place to exploit the region’s oil boom, weakening Ugandans’ hopes of regional oil dominance. Kenya’s potential role as a key oil-transit country has been augmented further by South Sudan’s search for an alternative export route to the south, after a spat with Sudan earlier this year led to its northerly pipeline being closed off for eight months.
Finding a safe passage
The Kenyan government certainly has ambitious plans to exploit its strategic position in the region’s nascent oil boom. The major development of the Lamu Port and Lamu Southern Sudan-Ethiopia Transport Corridor (LAPSSET), which promises roads, a railway and oil pipeline, will allow South Sudanese, and possibly Kenyan and southern Ethiopian, oil to flow out through the Lamu port (see map). This will be built as well as upgrading the Mombasa port to the south. However, there are several key challenges that companies will face when addressing the issue of exporting East African oil.
The first of these is a diverse set of security threats concerning potential transit through Kenya. In the wake of Kenya’s electoral violence in early 2008 Ugandan food prices increased by 15% highlighting the vulnerability of the region’s dependency on Mombasa imports. It is far from certain that Kenya will implement its new constitution (which includes, for example, additional checks and balances and limits on executive power) which is seen to be necessary to minimise the risks of this happening again. Companies will also need to be aware of how developing oil infrastructure affects regional tensions in Kenya. The Mombasa Republican Council, a group pushing for the secession of the Coast Province, have been gaining support from local people opposed to the development of the Mombasa and Lamu ports and have the potential to threaten the stability of the whole province.
A distinct but equally important security risk is the threat of terrorism in Kenya, evidenced most recently by a spate of grenade and armed attacks in Nairobi and Mombasa. Oil companies will need to ensure the personal safety of their staff, as well as minimising the risk of oil infrastructure and installations becoming terrorist targets. This is especially pertinent given Lamu’s proximity to the Somali border, which has already experienced kidnappings of foreigners. Lamu’s location will also require high levels of maritime security in order to avoid oil cargo ships becoming victims of piracy attacks.
Cooperation or competition?
The export challenge also raises geopolitical issues with which companies will have to contend in the region. Inevitable tensions have been rising between Uganda and Kenya over the role that each will play in the region’s oil boom. Such competitive dynamics are not conducive to building strong cross-border relationships, which will be necessary for negotiating sustainable oil-transit agreements between the two countries. (Elsewhere in the region, Sudan and South Sudan notably failed in this regard with their oil export dispute earlier this year, as noted above).
In addition, the Ugandan government’s insistence on the development of a refinery to process all its oil in anticipation of becoming the regional oil products supplier appears not to take sufficiently into account the impact that Kenya’s potentially larger and more strategically-placed find could have on East Africa. A small refinery in Uganda for domestic purposes could make sense. However, it may be that Uganda risks becoming left behind in the oil race if it does not start the time-consuming process of building a pipeline now in order to make its upstream efforts commercially viable.
In many ways, the Kenyan government’s plans for the $5 billion LAPSSET pipeline are similarly motivated by a desire to act as the regional lynchpin for the oil industry. Yet this will remain no more than a pipedream for the Kenyan government unless funding can be secured. While the Japanese firm Toyota Tshusho is rumoured to have made a bid on the construction of the pipeline, no formalised agreement is in place yet. Inevitably the amount of capital investors will be willing to stump up for the LAPSSET project will depend on the volume of commercially-recoverable oil reserves ultimately proven in Kenya. If these are very significant, Uganda’s ambitions for regional supply may have to be reconsidered, and a pipeline linking up with Kenyan infrastructure could become more attractive.
Thinking down the line
While the East African oil industry undoubtedly faces multiple challenges as it develops, there are some measures oil companies can take to mitigate the risks highlighted. For example, companies will find it important to engage with international donors who can both encourage peace-building in Kenya and influence regional cooperation. This could be through bilateral ties: the UK and US governments have a particularly important role to play in this respect. Just recently, the UK government organised a workshop using integrated expertise from UK Trade and Investment, the Foreign and Commonwealth Office and the Department for International Development. Multilateral organisations, especially the World Bank’s International Finance Corporation, could also play a key role in shaping regional cooperation.
It will also be crucial for companies to monitor the implementation of the new Kenyan constitution to understand how it will affect the relationship between the central government and local people, especially in the Coast Province. Finally, when plans are developed further for cross-border transportation systems, agreements will need to be clearly defined and agreed by all sides on the basis of economic logic, rather than political calculation, so as to ensure that they are sustainable.
Energy companies in other regions of the world have had to overcome similarly complex geopolitical and security challenges in defining and helping construct export routes for their oil. The 1,768km kilometre long Baku-Tbilisi-Ceyhan underground pipeline which BP and its partners built through Azerbaijan, Georgia and Turkey is one fairly recent case in point. A basic lesson from such experiences is that companies need to draw on all their skills in political analysis, diplomacy, partnership-building – and sheer patience in waiting for sufficient levels of regional collaboration – if they are ultimately to succeed in their goals.