Move over, America.
East Africa has emerged as the newest potential player in the future geopolitics of energy. From oil in Kenya to natural gas in Mozambique, a region long thought to be devoid of energy resources is now receiving significant international attention. The opportunities and challenges of energy wealth abound in Kenya, Tanzania and Mozambique.
In Kenya, the U.K.’s Tullow Oil and Canada’s Africa Oil Corporation have struck black gold in the Great Rift Valley. In the coming years, the “Cradle of Mankind” may yield more than the bones of ancient humanoids. The companies making plays in the region are fast-tracking their exploration and evaluation, with plans to drill 11 new wells in 2013 (up from 2 in 2012). The region remains largely unexplored, but the companies are optimistic. According to Bloomberg, Tullow Oil estimates that the Rift Valley alone could yield as much as 10 billion barrels of oil. While such large reserves are not yet proven and production in Kenya is in its nascent stages, appropriate physical and legal infrastructure development and continued successful plays in the region could unlock East Africa as a vital source of supply to Asian markets in the coming decades.
Oil discoveries in East Africa are noteworthy on their own, but the bigger story thus far is in natural gas. In 2012, Mozambique and Tanzania had the first and second largest natural gas discoveries in the world. In an April 2012 report, the U.S. Geological Survey used geology-based assessment methodology to estimate that East Africa could have as much as 441 trillion cubic feet (tcf) of natural gas, more than Africa’s current energy king, Nigeria. Mozambique was home to four of the five largest oil and gas plays in the world in 2012, and Ernst and Young reports that Anadarko and ENI’s discoveries in the country could contain more than 100 tcf of natural gas.
Because of these large discoveries, Norway’s Statoil and Britain’s BG Group plan to build a $10 billion East African Liquefied Natural Gas (LNG) export terminal. Such a facility could export LNG into the competitive Asian market and create worldwide reverberations in the geopolitics of energy supply. East African natural gas could affect international energy markets by altering price dynamics as well. If the estimates in the bullish Ernst and Young report are correct, the break-even price for East African gas is $7 per million BTUs, compared to $10 per million BTUs for the lauded Australian supply.
Despite the optimism in some circles, other energy experts are less confident in East Africa’s potential as a major energy player. Statoil’s and BG Group’s ambitious export terminal plans are in the exploratory phases, and they have yet to make any investment commitments. Skeptics claim that such large-scale oil and gas development in Kenya, Tanzania and Mozambique will ultimately become snared by ineffective institutional and regulatory frameworks and the lack of a technically capable workforce in these “backwater nations.”
In particular, some have expressed concerns that laws in East Africa requiring companies to meet quotas for employing local people will slow resource development. A closer examination of such laws in Mozambique, however, reveals that the impact of the quotas may be overblown. Mozambique requires companies operating within its borders to source 5-10 percent of their workforce locally, depending on the size and type of the company. Such low targets should not impede resource extraction if companies commit to basic levels of economic inclusion (which is crucial to lessening some of the potential negative impacts of natural resource extraction). And given that the development of natural gas in Mozambique could increase the country’s GDP by an order of magnitude (with associated increases in tax revenue), the government may be eager to work with companies to ensure a friendly business environment for large-scale investments.
There is no guarantee of effective or functional resource extraction, particularly in countries with underdeveloped expertise and institutions. Companies and governments in East Africa must work together to avoid the particularly harmful effects of the “resource curse” – that is, where a country’s natural resource development strengthens its currency and stifles exports and innovation crucial to diversifying the economy. Countries like Nigeria demonstrate that oil and gas development can be harmful for local people, but they also prove that poor investment climates and deficient local expertise do not necessarily prevent production. If companies operating in the area commit to economic inclusion and infrastructure development, East Africa’s price-competitive product and proximity to energy-hungry Asia could position it as an important player in the future geopolitics of energy.