Economy

Kenya explores ways to avoid Africa’s road to oil curse

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The Ngamia 1 oil rig in Turkana County, Greater transparency and accountability are some of the ways governments can turn oil wealth into a blessing. STEPHEN MUDIARI

Summary

Best standards

  • Ghana offers the best example in Africa.
  • Nigeria and DRC are faced with persistent conflicts over their resources.
  • Norway’s model is the best global practice..
  • EITI spells out the best standards for management of natural resources and sharing of revenues.

High quantities of oil have been documented as a curse for poor countries. But Kenya’s Minister for Energy does not think so. “What we have is a political and oil management curse,” say the minister, Kiraitu Murungi.

Nigeria’s Niger Delta is one example of where oil wealth has corrupted Africa’s political elite, perpetuated exploitation, destroyed the environment, provoked social conflicts, civil wars, abuse of human rights, distorted economies and increased poverty.

Gold deposits have catalysed conflict in the volatile north-east of the Democratic Republic of Congo. Africa’s third largest country by land area is rich in precious minerals such as diamonds and gold but its people have gained little from this wealth because of conflict and bad governance.

“Most oil conflicts revolve around sharing of revenues and environmental protection,” said Nicholas Gumbo, the chairman of the Parliamentary committee on energy. Compared to Nigeria, Kenya which has continued to walk the long and difficult journey for nearly six decades now in its efforts to search for oil and gas deposits has an attractive legal, regulatory, fiscal and acceptable risk reward allowance but is weak on policies on the management of commercial discoveries of petroleum resources. The sharing of this wealth is often contentious.

The headache is how to ensure that oil, natural gas, coal or money from any other natural resource is used on a three win basis—a win for the host country, for the community and a win for the oil company.

(Read: Foreign firms to pay more for Kenya’s minerals)

Natural gas along the Coast, oil in Turkana and the coal discovered in Kitui are expected to equip the country with three key primary forms of energy that are required to boost industrialisation, socioeconomic development and power itself to middle income status under the Vision 2030 economic blue print.

Amidst this there is robust interest in exploration and raging debate on compensation and community rights as various interests are waiting for the news of commercial viability and new revenue streams from these resources. This makes it even more urgent for the government to develop comprehensive oil and gas policies, strategies, legal and institutional framework.

In Turkana, Kitui coal fields and Lamu where successes have been recorded, communities are demanding more involvement in the decisions on the newly found natural wealth. They want compensation in line with the Constitution that has brought about major changes and opportunities in the way the affairs of the sector are managed.

Last week, energy policymakers at the ministry and its technocrats went to Nigeria “to learn from that country’s success and mistakes and develop the best policies in Africa”. The study tour comes as the country is preparing to come up with laws to govern oil and gas resources.

Mr Murungi says his delegation went to study Nigeria’s Petroleum Industries’ Bill which is the basis of the laws for the petroleum industry that Africa’s biggest producer and exporter has operated without any for nearly 60 years.

Kenya also chose Nigeria due to its successes and failures in managing petroleum resources.

“The success of oil exploration does not come without attendant challenges. You will appreciate that unless properly managed, the stakeholders’ issues can bring the oil and gas operations to a disruptive halt,” said Mr Murungi.

“It is extremely important that any issues that can disrupt or delay operations be handled speedily and in a manner that will ensure oil companies are not exposed to unnecessary financial risk,” he said.

Energy Permanent secretary Patrick Nyoike said officials had also visited Ghana. Mr Osten Olorunsola, the director of Department of Petroleum Resources in Nigeria, urged the Kenyan lawmakers to think about areas in which to invest oil and gas revenue before the drilling begins. He also encouraged the participation of local communities in drafting the framework.

“This way you will avoid pitfalls and conflicts that come with oil and gas money. You need communities’ participation, value additions of all oil products, environmental protection, modern oil and gas infrastructure network and ways to avoid duplication of roles,” Mr Olorunsola said.

“We would like Kenya to become a case study in Africa, where everyone can say indeed Africa can exploit its natural resources and get it right,” Camac Energy Inc Chairman and CEO Kase Lawal told the Kenya delegation.

Camac Energy is among the 44 international oil companies with petroleum exploration blocks in Kenya.

The firm signed four production-sharing contracts with the Government in May, 2012 relating to four blocks— L1B, L16, L27 and L28 in the Lamu Basin. The country has four exploration basins in Lamu, Mandera, Anza and Tertiary Rift which have a combined surface area of about 485,000 square kilometres. CAMAC has made commitments to acquire crucial exploration data in its against a total minimum financial expenditure of $33.7 million which is equivalent to about Sh3 billion just for the Initial exploration period .

George Wachira, an industry consultant, says the country needs a comprehensive policy for upstream or exploration matters and that policy makers can pick the best examples on sound oil and gas management revenues like Norway’s. “We learn from the best and worst practices. It is also good to go where systems have failed to know what to avoid. They should go to Norway to pick the best example,” said Mr Wachira in an interview.

Mwendia Nyaga, an industry consultant, says Ghana and not Nigeria offers Kenya the best example in managing its oil and gas resources. He called for goodwill in the law-making process.

Ghana oil and gas policy offers a good starting point and example that Kenya can adopt. Through Tullow Oil, Ghana made an offshore discovery — as is the case for Kenya— and made its first export of oil in 2010. Offshore oil, unlike inland discoveries, is faster to develop.

“Ghana has passed laws on revenue management and local content and the industry is new. Nigeria is a mature industry and it may not be appropriate to domesticate what has worked for them,” said Mr Nyaga.

“It depends on the goodwill of policy makers to make the right laws, he added. Consultant economist Mbui Wagacha says unexpected wealth from natural resources would be destabilising unless enjoyed responsibly.

Risk

Standards for management of natural resources and sharing of revenues are spelt out by global bodies such as the Extractive Industry Transparency Initiative (EITI) that guarantees best practices and transparency, helping governments to avoid political meddling in oil exploitation.

Some of the global success stories include Norway which stands out for disciplined use of their bounty and bans politicking on oil in election campaigns.

In the this wealthy nation of five million people, the main decisions on objectives, risk tolerance and ethical criteria lie with Parliament, with a clear division of roles between the owner (Parliament, Ministry of Finance) and the manager (Norges Bank), and its Central Bank.

In Norway, petroleum sector accounts for 25 per cent of GDP, 36 per cent of state revenues and 24 per cent of total investment, and 51 per cent of total export. Its petroleum fund is large and still growing. The $560 billion fund is intended to safeguard the sector wealth and stabilise the economy. Its function is to diversify from one asset (petroleum) to a portfolio of international securities, reducing the risk and increases returns.

The key decision is the strategic allocation to equities and to other asset classes (this defines the risk tolerance rather than return requirements). Parliament also sets ethical guidelines while the operational management is set aside for the Central Bank (Norges Bank).

Saudi Arabia, the world’s biggest producer and owner of the biggest known reserves, is accused of being unfair, even cruel, to foreign hired hands.