One conclusion drawn from the annual 'Africa Oil Week', held in Cape Town, South Africa, between 31 October and 4 November 2011, was that the East African region holds great potential for investment opportunities within the oil and gas sector. The beleaguered East African region has been plagued by on-going political unrest and widespread violence, which have hindered the development of a productive oil and gas sector. This has resulted in a decreased risk appetite amongst foreign investors.

This discussion paper will address the evidence that has surfaced which suggests that this trend is reversing, and that the East African region is experiencing significant growth in investment from foreign companies keen to profit from the area’s potential. This shift has led to the portrayal of the region as the 'new frontier' of oil and gas opportunities.⁽²⁾ The question remains, however, whether the East African region, in spite of its volatile security environment, has the potential to live up to this image in 2012. If it can surmount certain obstacles, East Africa could become a major global focus for the oil and gas sector, with major consequences for the region.

The risks and obstacles of investing in East Africa

The idea that East Africa presents itself as the 'new frontier' for oil and gas opportunities stems from the fact that currently little is known about the geography of the area, with a lack of seismic data and geological knowledge, compared to the much greater explored West Africa. Executive Chairman of Britain's Cove group, Michael Blaha, has stated that there have only been 500 oil wells drilled in East Africa, compared with 15,000 in the established hydrocarbon province of West Africa, and 20,000 in North and Central Africa.⁽³⁾ Due to this current under-exploration, the East African region accounts for a mere 1.5% of oil wells drilled on the African continent as a whole.⁽⁴⁾

The waters off East Africa are yet to produce a commercially viable oil source. Mike Rego, Exploration Director for Aminex, has stated that “Oil remains the prize in off-shore East Africa...no commercial oil has been found yet despite increasing evidence for its potential presence.”⁽⁵⁾ This can be explained, in part, by the risk of operating in the area, as East Africa is regarded as a far more volatile region to operate in compared to the rest of the continent. One major risk which negatively affects the drilling for hydrocarbons along the East African coastline is the threat posed by piracy, as there have been incidences of pirates targeting oil and gas rigs in the past. On 4 October 2011, for example, seven suspected Somali pirates attacked an oil and gas exploration ship owned by Petrobras off the coast of Tanzania.⁽⁶⁾ The persistent threat of piracy has the potential to hinder the progress of offshore oil and gas production in the future.

The opportunity and incentives of investing in East Africa

Alongside these risks, exists great opportunity within the oil and gas industry. The year 2011 saw a significant increase in offshore rig activity on the African continent as a whole, and there is currently significant evidence that East Africa could be at the brink of economic, and in turn, social improvement, propelling itself into the global spotlight. A spokesperson from Cenkos Securities has stated that although East Africa is "high risk and hugely expensive," it is also "exceptionally rewarding" if exploration operations are successful.⁽⁷⁾

On 5 January 2012, Cove Energy put itself up for sale. It has been predicted that this sale, which is expected to amount to up to US$ 1 billion, will have dramatic implications for oil and gas exploration and development in East Africa. Analysts have predicted that the sale of Cove will act as a catalyst for development in the oil and gas sector, resulting in a “takeover spree,” as the sector experiences a renewed interest from larger companies who own the available funds to invest in the region.⁽⁸⁾ Anthony Lobo, head of Oil and Gas at KPMG, has predicted: “You will see a lot of players with market caps between US$ 50 million - US$ 250 million being Hoovered up quickly by bigger companies wanting exposure…The smaller players have the finds but don’t have the capital and they will get gobbled up by the larger players and the majors.”⁽⁹⁾ This in turn will lead to an increase in size of projects, and increasing demand as major companies become more dominant. The sale of Cove energy could, therefore, mark an important shift in promoting the East African oil and gas sector globally. This progress has already become apparent, as companies such as Tullow Oil and Africa Oil initiate large scale drilling programmes in the area, highlighting a reinforced interest in the region.

Mozambique and Tanzania – promising regions

Mozambique and Tanzania have been pinpointed as the two most promising countries to promote growth in the East African oil and gas sector. Tanzania, which is currently being explored for both onshore and offshore opportunities by major companies such as Petrobras, BG/Ophir and Shell, has recently been described as being on the “cusp of major transformation into a gas driven economy.”⁽¹⁰⁾ Tanzania is expected to receive Foreign Direct Investment of around US$ 7 billion from Ophir Energy and its partner, British Gas. Other multinational companies such as Petrobras and Statoil are also initiating drilling programmes in 2012.⁽¹¹⁾ The International Monetary Fund (IMF) has highlighted Tanzania’s potential for becoming a major producer of natural gas by 2020. The country has proven natural gas deposits of about seven trillion Cubic Feet (CF). However, it is estimated that, following exploration projects, Tanzania will confirm around 60 trillion CF of natural gas.⁽¹²⁾ The Tanzanian Government is preparing for major foreign investment in the next five years, following ‘imminent’ oil and gas discoveries in the region.⁽¹³⁾

Neighbouring Mozambique, one of the world's poorest countries, is home to one of the biggest natural gas discoveries in a decade, attracting investors such as Royal Dutch Shell PLC to the region. On 16 January 2012, it was reported that EnI Spa and Anadarko Petroleum Corp had discovered approximately US$ 800 billion worth of natural gas beneath the Indian Ocean off the shore of Mozambique.⁽¹⁴⁾ This discovery, which was 50% larger than the anticipated amount, is 36 times more valuable than the nation’s economy, spelling out a positive future for the country as a gas-driven economy.⁽¹⁵⁾ The fields are reportedly large enough to support exports of liquefied natural gas (LNG) and the large, capital-intensive exploration projects will open up trade to the major economies of India and China.⁽¹⁶⁾

The curse of oil and gas

In response to the growth in revenue generated through oil and gas exploration projects, it is crucial that the Governments operating in the regions develop appropriate infrastructure to meet the challenge of redistributing the revenue fairly to local communities, and avoiding corruption. Although the revenue gained has the potential to boost local economies, there exist fears amongst experts that progress in the East African region will be hindered if the wealth generated is not managed properly. Lessons can be learnt from West Africa’s Nigeria, where significant wealth was squandered through corruption, leading to political and social unrest in the Niger Delta.

Furthermore, analysts have highlighted the negative implications that secretive contracts have on local communities: “Authorities have to give constant information on oil and gas exploration activities so that the surrounding communities can get prepared to participate in their own way in the new economic activities.”⁽¹⁷⁾ It is, therefore, clear that engaging with both local communities and companies is crucial in order to avoid local interests being overshadowed by multinational corporations. This issue becomes increasingly pertinent as major companies operating in the area are expected to become more dominant through acquisitions.

Concluding remarks

This paper has demonstrated the growing commitment amongst major international oil and gas companies towards the East African region. It is certain that foreign investment in 2012 will grow, signalling a dynamic and profitable year ahead for oil and gas companies working in the region. This reflects a more general shift in global perception in which the African continent is becoming increasingly in focus as a centre of economic development. Despite the persistent risk of working in this volatile region, it has been noted that “sub-Saharan oil and gas fiscal regimes have proven remarkably stable.”⁽¹⁸⁾ Therefore, if these risks are successfully managed, and the appropriate legislation is put in place to manage and co-ordinate the growing revenue, East Africa has the potential to move from the shadows into the global spotlight and, in its transformation, into the centre of oil and gas production.

NOTES

Contact Katharine Dennys through Consultancy Africa Intelligence’s Africa Watch Unit: (africa.watch@consultancyafrica.com).
(2) Stoddard, E., ‘Africa’s oil scramble heads east to uncertain waters’, Reuters, 28 October 2011, http://www.reuters.com.
(3) ‘East Africa, an underexplored oil and gas province’, Reuters, 1 November 2011, http://af.reuters.com.
(4) Ibid.
(5) Stoddard, E., ‘Africa’s oil scramble heads east to uncertain waters’, Reuters, 28 October 2011, http://www.reuters.com.
(6) Ng'wanakilala, F., ‘Tanzania arrests 7 pirates after attack on oil vessel’, Reuters, 4 October 2011, http://www.reuters.com.
(7) Patel, K., ‘Cove Energy: an M & A Catalyst?’, Financial Times, 5 January 2011, http://blogs.ft.com.
(8) Ibid.
(9) Sakoui, A., ‘Oil and gas: Eastern Premise’, Financial Times, 6 December 2011, http://www.ft.com.
(10) Makamba, J., ‘We’ve to take actions to benefit from anticipated massive investments’, The Citizen, 26 January 2012, http://thecitizen.co.tz
(11) ‘Huge gas deposits found in Tanzania’, TradeMark Southern Africa, 27 January 2012, http://www.trademarksa.org.
(12) Elinaza, A., ‘Tanzania to reign in natural gas production’, Tanzania Daily News, 30 January 2012, http://in2eastafrica.net.
(13) ‘Huge gas deposits found in Tanzania’, TradeMark Southern Africa, 27 January 2012, http://www.trademarksa.org.
(14) Gismatullin, E., ‘Poorest nations host biggest gas finds in sign of deals: Energy’, Bloomberg, 16 January 2012, http://www.bloomberg.com.
(15) Ibid.
(16) Ibid.
(17) Kasumuni, M., ‘Secrecy in oil exploration deals would trigger chaos, govt warned’, The Citizen, 26 January 2011, http://allafrica.com.
(18) Sakoui, A., ‘Oil and gas: Eastern premise’, Financial Times, 6 December 2011, http://www.ft.com.

Written by Katharine Dennys ⁽¹⁾