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October 24, 2012updated 29 Jul 2020 12:03pm

East Africa’s new gas frontier – exploration without exploitation

The East African offshore oil and gas industry is about to become one of the world's biggest energy frontiers. But before this can happen, countries such as Mozambique, Tanzania and Kenya have many challenges to overcome. Heidi Vella explores the region's problems, pitfalls and possible solutions.

By Heidi Vella

Unlike West Africa, East Africa has been slow in discovering and tapping its offshore oil and gas riches – but not any more. After several significant discoveries in offshore Mozambique, Tanzania and most recently Kenya, big energy companies are queuing up to be a part of this new energy boom.

Recently, a US Geological Survey of East Africa’s coastal waters estimated the region may contain up to 441 trillion cubic feet of natural gas, a figure that will likely increase over time with further exploration. While this is good news for East Africa and energy companies alike, the imbalance between the inexperience and pressure facing governments and the commercial interests of the companies, could lead to a promising venture turning into an unlevel playing field filled with rising tensions and general mistrust. Now is a pivotal time for Mozambique, Tanzania and Kenya to get the development process right in order to avoid trouble in the future.

Several key issues could potentially be problematic in the process of offshore development in the region: negotiating contracts, transparency, corruption, regulatory frameworks and distribution of wealth.

While international help is available from organisations such as the World Bank, the Extractive Industries Transparency Initiative (EITI), which encourages transparency, and Revenue Watch, which assists in negotiations and regulatory frame work, it is ultimately down to the governments to make the right decisions for their respective countries.

As Revenue Watch’s deputy director Antoine Heuty says: “Now is the right time to put the right systems, check and balances in place.”

Transparency is the key

EITI is working with Mozambique and Tanzania to achieve more transparency in the offshore oil and gas industry and promote a more accountable industry.

“Recently, a US Geological Survey of East Africa’s coastal waters estimated the region may contain up to 441 trillion cubic feet of natural gas.”

In 2010 and 2011 Anadarko discovered huge recoverable gas pay finds in Mozambique’s Rovuma Basin, which PTT Exploration and Production and Italy’s Eni also have stakes in. There is expected to be between ten and 30 trillion cubic feet (TCF) of natural gas offshore.

No extraction of gas has taken place so far. However, next year Mozambique will be taking bids from companies for further wells and eventually hopes to export gas to the world’s biggest consumer of natural gas, Asia, which Mozambique is ideally located to reach.

Currently Mozambique’s and Tanzania’s governments do not publish contracts set up with oil companies, but are members of EITI’s revenue transparency scheme.

Heuty believes concealing contracts can lead to corruption. He says: “The problem is the deals are made secretly and this opens the door for corruption; they [governments] may do that [negotiate contracts] without the best interests of the countries in mind. Secondly if you don’t have government transparency you can’t compare deals with other countries in similar situations.”

This effectively creates an uneven playing field when striking up deals because gas companies can buy access to contracts, whereas governments can’t.

“They [governments] don’t have access to the professional resources – contracts, lawyers, ecologists, economists – that the companies do,” says Heuty.

Transparency is also needed to manage expectations, says Heuty. When a big discovery is made, expectations tend to skyrocket and people believe their lives will change over night. However, even an oil fortune doesn’t go very far when spread per capita in a highly populated country. If expectations aren’t managed, public unrest and anger can rise when they don’t see any immediate significant change to their lives.

A commitment to change

Although Mozambique and Tanzania are hesitant to adopt all recommended international processes, the fact that both countries have signed up to the EITI signals a change. The only problem is the EITI doesn’t require countries to disclose their contracts, only what tax contributions companies pay and revenue governments receive, so publically no one knows how much governments actually should be receiving.

“In 2010 and 2011 Anadarko discovered huge recoverable gas pay finds in Mozambique’s Rovuma Basin.”

Deputy Head and EITI International Secretariat, Eddie Rich believes there is a strong indication that transparency will become more common place.

He says: “They’re already asking for more and more information: how much should we have been paid? Then they start asking the next question – was it a good deal? Which is where you need international comparisons.”

This kind of thinking has already worked for Tanzania in its gold mining industry. Revenue Watch helped Tanzania renegotiate gold mining contracts and it eventually received 300% more money than before. These are lessons Heuty believes Tanzania will want to apply to its burgeoning gas industry.

Tanzania’s estimated gas riches were increased by ministers in October, from 28.74 tcf to 33 tcf. This includes gas discovered at the Zafarani-1 exploration well by Statoil at the beginning of the year. The potential in the area is such that British Gas recently announced plans to invest about $15bn in the country during the next decade – more than half the country’s GDP.

Tanzanians are already demanding a more conscientious approach to the oil and gas industry. This month, Zitto Kabwe, chairman of the country’s parliamentary committee on public organisations, demanded a ten-year moratorium on licensing and production to allow the country to create solid policies and institutions, in order to regulate the industry and be able to responsibly manage the new influx of money. Parliament are hoping to pass a new oil and gas law in November that promotes transparency, accountability and a more streamlined negotiating process.

A spokesman from Statoil said of their working relationship with Tanzania: “Statoil strives to have a sound and transparent dialogue with authorities and other relevant stakeholders… Our partners and the authorities in the counties in which we collaborate will of course need to consider how to apply and which of our experiences are relevant and adapt them to their context.”

From aid to independence

Heuty believes a lot of governments enter into international initiatives because they feel pressured into it by the international community that provides them with aid. However, Rich says: “These are countries that have one more electoral cycle where their biggest revenue is international aid, after that it’s going to be gas.”

“The potential in the area is such that British Gas recently announced plans to invest about $15bn in the country during the next decade.”

This means the onus is on the governments to get things right first time, because more than ever, the world is watching.

“If they get it wrong now they will never get it right, because if you start of on a bad train before you know it you’re Nigeria,” says Rich.

It’s not just governments that may be tempted to game the system. Heuty says companies may also employ underhand tactics.

“There are a number of pricing issues where companies are overpricing certain things so that they show a lower level of profits,” he says. “I think things like this are undermining the money these countries get and I think that is a major issue for Mozambique, Kenya and Tanzania.”

Tanzania and Mozambique are further into the process of building their oil and gas industry than Kenya, which only detected offshore gas in September 2012, when 52 metres of net gas pay was discovered. Not much is yet known on how Kenya plans to execute its find, but it may well take Tanzania and Mozambique’s lead.

Governments in Kenya, Mozambique and Tanzania face huge pressure to shape their futures with these new gas finds. While the international community can assist, Rich says respective governments must ultimately help themselves. He adds that he is hopeful for the future of the offshore oil and gas industries in these countries, and that they show genuine interest in a fair and open industry.

Related content

Windjammer Exploration Well, Mozambique

The Windjammer exploration well is located in Rovuma Basin, Area 1 offshore Mozambique.

Songo Songo Gas Development and Power-Generation Project, Tanzania

The Songo Songo gas field is located on and offshore Songo Songo island, about 15km from the Tanzanian mainland and 200km south of the commercial capital, Dar es Salaam.

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