Africa — from petrodollars to progress

African states rich in resources are striv­ing to increase domes­tic involve­ment in their economies – espe­cial­ly in oil and gas. In attempt­ing to increase domes­tic par­tic­i­pa­tion through­out the val­ue chain, some African states have begun intro­duc­ing local con­tent laws, sup­port­ing indus­tri­al diver­si­fi­ca­tion and cre­at­ing a broad­er eco­nom­ic base for the future. If effec­tive, these mea­sures could pro­vide a frame­work to enable resource-rich states to ben­e­fit from Africa’s poten­tial and trans­form their economies.

Africa holds around 8 per cent of the world’s oil and nat­ur­al gas reserves. Some states have devel­oped their oil and gas sec­tors sig­nif­i­cant­ly. Nige­ria and Ango­la, in par­tic­u­lar, have estab­lished them­selves as exporters and bor­row­ers in the inter­na­tion­al mar­ket, and rank as the top two pro­duc­ers in sub-Saha­ran Africa. Buoyed by sig­nif­i­cant new ener­gy finds, oth­er states, such as Ghana, the Ivory Coast, Kenya, Tan­za­nia, Ugan­da, Mozam­bique and Chad, offer new oppor­tu­ni­ties. In 2012, about half the world’s dis­cov­er­ies of con­ven­tion­al oil and gas were in East Africa alone.

Nat­ur­al resource exploita­tion pro­vides impor­tant sources of rev­enue for African states through invest­ments, sales and com­modi­ties-backed bor­row­ings. But this invest­ment has not nec­es­sar­i­ly broad­ened the eco­nom­ic base, pro­mot­ed employ­ment or added val­ue domes­ti­cal­ly. African gov­ern­ments have reaped finan­cial rewards with­out max­imis­ing resid­ual ben­e­fits, such as own­er­ship, skills devel­op­ment and the growth of relat­ed sec­tors.

With their new poli­cies, how­ev­er, African states will look to encour­age inter­na­tion­al investors and Africans to progress in shap­ing the continent’s eco­nom­ic des­tiny.

LOCAL CONTENT LAWS

In recent years, states such as Nige­ria, Ghana and Ugan­da, have passed local con­tent laws. By encour­ag­ing domes­tic par­tic­i­pants to become stake­hold­ers in a range of enter­pris­es relat­ing to oil and gas, African states have sought to ensure that their cit­i­zens increase their role in devel­op­ing the broad­er econ­o­my.

In 2010, for exam­ple, Nige­ria enact­ed local con­tent laws. Oil and gas deals now require cer­tain types of domes­tic par­tic­i­pa­tion, includ­ing prof­it-shar­ing, equi­ty involve­ment, train­ing and employ­ment. Nige­ri­ans have since ben­e­fit­ed from 38,000 jobs in explo­ration and pro­duc­tion, engi­neer­ing, trans­porta­tion and logis­tics, in large part due to local con­tent require­ments. In that time, local com­pa­nies have increased their par­tic­i­pa­tion in the oil and gas busi­ness from 10 per cent to more than 30 per cent.

Invest­ment has not nec­es­sar­i­ly broad­ened the eco­nom­ic base, pro­mot­ed employ­ment or added val­ue domes­ti­cal­ly

Part­ner­ships between local busi­ness­es and junior oil com­pa­nies are grow­ing in the upstream oil sec­tor of explo­ration and pro­duc­tion, espe­cial­ly in more acces­si­ble fields that may not require sig­nif­i­cant cap­i­tal or new tech­nolo­gies. Arguably, local par­tic­i­pa­tion has yield­ed ben­e­fits that would have been absent oth­er­wise. Pro­duc­tion in some places has increased by 40 per cent, accord­ing to some esti­mates, and inter­rup­tions are down sig­nif­i­cant­ly. (By respond­ing effec­tive­ly to com­mu­ni­ty con­cerns and build­ing on their domes­tic rela­tion­ships, local com­pa­nies may have reduced the inter­rup­tions that plagued for­eign oil com­pa­nies’ oper­a­tions in the rel­e­vant fields.)

In a deal demon­strat­ing the poten­tial effect of local con­tent laws, includ­ing on polit­i­cal and oper­a­tional risks, Shore­line Nat­ur­al Resources, a joint ven­ture between UK-list­ed Her­itage Oil and local com­pa­ny Shore­line Pow­er Com­pa­ny, acquired a sig­nif­i­cant inter­est in a major Niger Delta oil-pro­duc­ing block from a con­sor­tium led by Shell. As Nigeria’s largest-ever upstream acqui­si­tion financed by inter­na­tion­al banks, the deal was orig­i­nal­ly bridge-financed and sub­se­quent­ly com­plet­ed through a reserves-based loan arranged by Stan­dard Bank.

Oth­er African states have adopt­ed sim­i­lar mea­sures. Ghana, for exam­ple, has leg­is­lat­ed to increase local par­tic­i­pa­tion in terms of equi­ty, employ­ment, train­ing and ser­vices. Beyond those require­ments, Ghana­ian leg­is­la­tors have also estab­lished para­me­ters for min­i­mum equi­ty par­tic­i­pa­tion by indige­nous com­pa­nies. With­out this par­tic­i­pa­tion, petro­le­um-relat­ed agree­ments or licences will be invalid. Since pass­ing local con­tent laws in 2013, Ghana has award­ed sev­er­al oil blocks to con­sor­tiums, includ­ing Ghana­ian com­pa­nies, and has seen relat­ed ser­vices in insur­ance and finance grow.

ENHANCEMENT OF VALUE CHAIN AND INDUSTRIAL DIVERSIFICATION

Along­side the enact­ment of local con­tent laws, African states and cit­i­zens have begun har­ness­ing reserves to sup­port indus­tri­al diver­si­fi­ca­tion and broad­en their eco­nom­ic base. For decades, out­side investors have extract­ed resources and the val­ue derived from pro­cess­ing and man­u­fac­tur­ing as African states have raked in petrodol­lars with­out increas­ing their stakes in the val­ue chain.

Nige­ria, for exam­ple, imports 95 per cent of its diesel, sub­sidised at great expense with crude oil exports, and has his­tor­i­cal­ly flared much of its nat­ur­al gas, in part because of inad­e­quate infra­struc­ture. To move for­ward, Nige­ria has sought to devel­op its refin­ing capac­i­ty, for petro­le­um prod­ucts such as diesel and fer­tilis­ers, and mon­e­tise its nat­ur­al gas reserves. While sev­er­al for­eign firms have failed to deliv­er on oil refiner­ies announced over the last 15 years, the Niger­ian Dan­gote Group is poised to con­struct a major refin­ery and relat­ed petro­chem­i­cal and fer­tilis­er plants. Once com­plet­ed, at a pro­ject­ed cost of $9 bil­lion, the refin­ery will have a pro­duc­tion capac­i­ty of 445,000 bar­rels a day and employ thou­sands of work­ers.

Sim­i­lar­ly, hav­ing export­ed liq­ue­fied nat­ur­al gas (LNG) for more than a decade, Nige­ria has passed laws that require oil pro­duc­ers to sup­ply nat­ur­al gas for domes­tic uses such as pow­er gen­er­a­tion or petro­chem­i­cal pro­duc­tion. Oper­at­ing under these laws, Indo­ra­ma Eleme, a Niger­ian poly-olefins pro­duc­er, owned by the Indo­ra­ma Cor­po­ra­tion based in South East Asia, has sold 95 per cent of its pro­duc­tion domes­ti­cal­ly since 2006. Build­ing on that suc­cess, Indo­ra­ma Cor­po­ra­tion closed on the financ­ing of a large-scale fer­tilis­er project in 2013. The new plant will be the largest of its kind in Africa, and will ben­e­fit from com­pet­i­tive feed­stock pric­ing and a grow­ing domes­tic mar­ket.

Inter­na­tion­al investors must under­stand that the land­scape is chang­ing and push for­ward part­ner­ships with domes­tic par­tic­i­pants

In Ghana, mean­while, the gov­ern­ment spends rough­ly $1 bil­lion a year import­ing crude oil to fuel pow­er plants. To reduce reliance and allow pub­lic and pri­vate enti­ties to ben­e­fit from cheap­er pow­er, the Ghana Nation­al Gas Com­pa­ny is build­ing a $1.4‑billion gas pro­cess­ing plant to sup­ply the domes­tic mar­ket with nat­ur­al gas from the near­by Jubilee Field. Equa­to­r­i­al Guinea is also build­ing a new LNG train, which will add 4.4 mil­lion met­ric tonnes a year to an exist­ing facility’s pro­duc­tion – now at 3.4 mil­lion met­ric tonnes per annum – and a mul­ti-bil­lion-dol­lar gas pipeline project to con­nect Nige­ria, Cameroon and Equa­to­r­i­al Guinea gas fields to the plant. The gov­ern­ment has part­nered with a US com­pa­ny to devel­op the petro­chem­i­cal sec­tor to meet domes­tic and region­al indus­tri­al demands, cre­ate jobs and grow the econ­o­my.

COMMON CHALLENGES

Despite mov­ing towards local own­er­ship and par­tic­i­pa­tion in the val­ue chain, African states must over­come com­mon chal­lenges. Although poli­cies on local con­tent and diver­si­fi­ca­tion could be trans­for­ma­tion­al, African states and local busi­ness­es even in rel­a­tive­ly estab­lished mar­kets such as Nige­ria or Ango­la have strug­gled to raise cap­i­tal, acquire new tech­nolo­gies and improve inad­e­quate infra­struc­ture.

While states with new dis­cov­er­ies may seek to learn from his­to­ry and avoid the “resource curse” that con­front­ed some of the more estab­lished oil and gas pro­duc­ers, they will also face chal­lenges. States such as Tan­za­nia and Mozam­bique have found that their plans to mon­e­tise nat­ur­al gas reserves will require exten­sive inter­na­tion­al par­tic­i­pa­tion to suc­ceed, giv­en the high-risk and cap­i­tal-inten­sive nature of these projects. Mozam­bique, in par­tic­u­lar, may find it dif­fi­cult to finance and devel­op mas­sive new gas finds, which could require ini­tial invest­ments of more than $50 bil­lion. New­er resource-rich states will need to bal­ance the desire to pro­mote these poli­cies against the need to attract inter­na­tion­al invest­ment if they are to max­imise their nat­ur­al resource poten­tial.

In pur­su­ing their poli­cies, African states must avoid deter­ring inter­na­tion­al investors who can pro­vide funds, man­age­ment exper­tise and tech­ni­cal knowhow nec­es­sary to achieve their goals. Indeed, local con­tent laws could have coun­ter­pro­duc­tive effects as inter­na­tion­al investors may elect to engage oth­er states or regions with less oner­ous require­ments, such as tax­es, train­ing, pro­cure­ment and oth­er costs of con­for­mi­ty. And because these laws and relat­ed poli­cies are rel­a­tive­ly new, investors may pre­fer to engage states with legal frame­works seen as more estab­lished and pre­dictable.

WAY FORWARD

Despite these risks, African states will con­tin­ue to explore new ways to man­age their nat­ur­al resources and resul­tant wind­falls. They will seek to grow domes­tic indus­try, build insti­tu­tions, and devel­op ser­vices to allow indus­try and agri­cul­ture to flour­ish. As local com­pa­nies con­tin­ue to increase their par­tic­i­pa­tion in domes­tic indus­try, they will grad­u­al­ly devel­op nec­es­sary expe­ri­ence and exper­tise. Inter­na­tion­al investors must under­stand that the land­scape is chang­ing and push for­ward part­ner­ships with domes­tic par­tic­i­pants. If suc­cess­ful, the oil and gas indus­try could help Africa achieve its poten­tial.

LOCAL CONTENT LAWS

ENHANCEMENT OF VALUE CHAIN AND INDUSTRIAL DIVERSIFICATION

COMMON CHALLENGES

WAY FORWARD