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Challenges Faced by Emerging Energy Producers in Sub-Saharan Africa: Averting the ‘Resource Curse’

John O. Kakonge - 31st January 2013
Energy Producers in Sub-Saharan Africa: Averting the ‘Resource Curse’

This synopsis briefly explains the challenges faced by African countries with emerging oil and gas industries in bringing widespread economic advancement to their countries. Although, on the surface, the challenges appear straightforward, in essence they often prove to be very taxing and intractable. They are closely interrelated and, regrettably, have lingering consequences, which have come to be known as the 'resource curse'.

At core the task facing these countries is how to ensure that the investment and rewards that ensue from oil and gas exploitation do not turn into this curse, working as a destructive force dividing civil society and government, spawning malpractices and benefiting only a chosen elite.

Managing expectations

When a country discovers oil, the first challenge it faces is the need to manage the expectations of its citizens. Many people in the country will at once form the impression that they will become rich, especially the politicians in the capital and the populations living around the drilling sites. To counter this misapprehension, the government of the day should make sure that all relevant information, such as exploration costs, the volume and quality of the discovered reserves, and the payment agreements, is made public. The government should publish what percentage of the profits from the sale of oil will go into the national budget, what percentage will be set aside for development programmes and what will go into a sovereign wealth fund. Currently much of this information is never made available, resulting in mistrust between civil society and the government.

Moreover, many developing countries fail to tell their citizens that oil revenues are a time-limited phenomenon and the country must take advantage of the years of income from hydrocarbon exploitation to expand its agriculture and industry. It must be made clear that the resource is finite and so are the streams of revenue that result from it. Any long-term added value that it might have will derive from the prudent investment and use of those income streams. Often the citizens expect or are promised subsidized gasoline and no one bothers to point out that this is a benefit that mainly profits the better-off members of society.

Oil and gas resources and the revenues they produce do increase the wealth of a nation. Such revenue, however, is finite and short-lived and its effects quickly lost if the money is not invested in the development of profitable public infrastructure. Moreover, developing the extractive infrastructure of a country is essential if its natural resources are to be properly harvested. The Oil and Gas in Africa report, a 2009 joint study by the African Development Bank and the African Union, observes that many African nations are experiencing the paradox of having significant oil wealth and yet continue to languish in widespread poverty. As the authors point out, African citizens expect to see the oil and gas revenues invested in important areas such as human capital and infrastructure advancement, yet this is often not the reality of resource exploitation. By way of illustration, the report cites an estimated 2.5 billion cubic feet of Nigerian gas that is burnt off every day because of a lack of suitable infrastructure: a waste of energy and a loss of revenue.

Capacity-building

The second challenge is the local capacity to manage an oil and gas industry. Unsurprisingly, in many emerging oil and gas producers this capacity is limited. The technical term for this property is ‘absorptive capacity’ – a useful concept even if no exact measurement can be made. The competition for lucrative new jobs causes much anxiety and animosity between foreign expatriates and local professionals. To begin to address such conflicts, after definitive confirmation of the potential of a drilling site, African governments should start training the staff that they will need to exploit the discovery. Although it may be difficult to be proactive when training costs are prohibitively high and the reserves not proven, an attempt must be made to gear up the national capacity for resource exploitation.

The petroleum sector has two main components, upstream and downstream activities, and governments should prepare themselves appropriately for both. Unfortunately, African countries have serious limitations when it comes to upstream activities, namely exploration, drilling and the development of wells, and production. Those limitations notwithstanding, they should still build their capacities with both components in mind. Young engineers trained in upstream techniques should be attached to oil companies for on-the-job training to gain relevant experience. Fortunately, in countries of the global South several national oil and gas companies have now built sufficient expertise in both upstream and downstream work so that they can bid for international projects: these include Petronas in Malaysia, Sonangol in Angola, and Petrobras in Brazil. In 1995 in Trinidad, the Kenson Group set up the Kenson School of Production Technology to develop education and training modules through which young people may obtain the knowledge and skills required by the hydrocarbon industry. Qatar Petroleum also has a well-established training school focusing on the training of middle level personnel who are key in the oil and gas sector. Other institutions from Indonesia, Malaysia, Qatar and Saudi Arabia offer similar courses in the oil and gas sector to candidates from developing countries.

New entrants to the industry should establish contacts, within the framework of South-South cooperation, with the national oil and gas producing companies of the above-mentioned countries in order to benefit from their knowledge. As Iwayemi (2011) points out, the focus should be on ‘increasing skills acquisition through formal and informal education and training, technology transfer, access to new technologies and ideas, and technical assistance’.

Local content

A third challenge is the usual absence of any defined amount of local content in oil and gas contracts. The oil and gas industry is very specialized and does not employ many people. If the country's own population are to enjoy any benefits from the industry, oil and gas development contracts should contain requirements for local content. This will ensure that local people not only benefit from a local gas industry, but have also a sense of ownership as stakeholders. In Trinidad and Tobago international companies are required to make a commitment to contracting local companies (UNDP, 2010). To monitor this requirement the Government of Trinidad has established a database on the status of projects and the associated opportunities for local content. Establishing local content participation and policies helps citizens to acquire the capabilities and skills required and associated with the oil and gas industry.

Such capabilities and skills are especially important to developing countries in that they allow for heightened control over the exploitation, production, distribution and marketing of oil and gas and, it is to be hoped, result in a more prosperous and sustainable future. Developing countries are becoming increasingly cognizant of the importance of local content. Note, for example, the recent announcement by the Ghanaian Minister of Energy, Dr. Joe Opting Adjei, that the government was collaborating with the upstream oil companies working in Ghana to provide overseas training to Ghanaians as part of the local content provisions in the respective Oil and Gas contracts. By incorporating overseas training for Ghanaians into oil and gas contracts, the government is hoping their citizens will acquire the appropriate skills.

Governance

The fourth challenge presented by the oil and gas industry is poor governance. The sector is infamous for its lack of transparency and the secrecy surrounding oil revenues. For example, in Equatorial Guinea the Ministry of Petroleum is treated as the personal property of the president and his family. Recruitment is reserved for people directly related to him. A large part of the oil wealth never reaches the state’s coffers – it goes directly into the pockets of corrupt officials. According to an investigation by Manendra Sahu, the sub-Saharan African countries that were producing oil were among the most corrupt nations in the world.

There is no reason why information about the oil and gas sector should not be made widely and easily available to all stakeholders: this is especially true of the negative consequences associated with the petroleum industry. The resource curse described in the Oil and Gas in Africa report derives from the inverse relationship between resource abundance and development. Sadly, this curse is all too widespread in developing countries. Non-renewable resources such as hydrocarbons are commonly exported. This often results in a high revenue collection by a corrupt – or, at the very least, misguided – minority, often politicians. According to the same report, ‘the key issue is that natural resource revenues tend to replace more stable and sustainable revenue streams, exacerbating problems of transparency and accountability’.

There is no easy remedy to Africa’s resource curse. But, as remarked by Kofi Annan, the problem can be approached through global cooperation between private sector leaders in the extractive industries, African governments and civil society. For this to succeed, tough laws must be enacted by developed countries and African countries to punish the corrupt practices, especially by international companies and local collaborators. There is also an urgent need for African countries to develop a reformed, transparent and accountable oil and gas sector leading to sustainable economic growth, new jobs and investment in health, education, capacity building and proper environmental management. One happy example of such development can be seen in Botswana, now a middle income country, which has been able to use its natural resource revenue successfully and set an instructive precedent for other resource-rich African countries (Sarraf and Jivanji 2001). The country's success in avoiding the resource curse has been achieved largely by maintaining strict control over public expenditure and encouraging diversification in national industry.

Environmental issues

The final challenge considered by this note relates to the importance of environmental impact assessments (EIAs) to determine the negative impacts of the drilling, transportation and proposed uses of the exploited resources. These EIAs should be comprehensive and the teams carrying out the work should be well qualified and seasoned by practical experience. However, if the country is short of accredited engineers, ecologists and environmentalists, not to mention all the other skills required for an efficient and standard setting operations, then outside help becomes inevitable. In this case the issue should not be a strict division between international and domestic capacities but a marriage of the two and an effort to elevate, in due course, the national contribution.

Given the high-risk nature of operations by the petroleum industry, the draft EIA should be widely published to help all stakeholders to give proper consideration to the associated social and environmental risks and impacts. The executive summaries should be translated into local languages and the local media should be involved in assisting people to understand the implications. The operating companies and the government must then devise a management plan that conforms to the recommendations of the EIA and should decide how this plan is to be enforced. The operating companies, government and local people should make a compact that they will not allow drilling for oil to cause environmental pollution.

This resolve should be reflected in the technical service contract. According to the 2012 Open Oil report, the costs of cleaning up pollution should be borne by the contractor. This was the case with BP following the massive oil spill in the Gulf of Mexico. Clearly, a variety of lessons may be learned from other oil-related polluters, which are instructive and should not be repeated, such as that in the Niger Delta in Nigeria where pollution destroyed not only the fishing industry but also poisoned the soil EIAs can, of course, play a very useful role in averting such situations. Ironically, as the 2012 Open Oil report confirms, ‘many countries consider the environmental and social impacts of minor importance and see the baseline assessment, impact assessment and management plans as a box-ticking exercises that can get in the way of developing the resources, generating revenues, as quickly as possible’.
Despite the shortcomings of the EIA process, it must still take its rightful place in Africa, especially for such sensitive and risk-laden projects like oil and gas exploration. Thus, a major effort is needed to bring the various stakeholders – politicians, non-governmental and civil society organizations, the public and relevant government agencies – into all phases of the decision-making process.

Conclusion

In short, there is no doubt that the oil and gas industry has the potential to change the lives of many people in a number of developing countries. Oil and gas development, however, is a highly challenging undertaking that is sensitive to political, social, and environmental dimensions. It calls for a high level of transparency, honesty and well-articulated policies. If experience tells us that certain developing countries, notably Botswana, Malaysia, Qatar, Saudi Arabia and Trinidad and Tobago, have managed to benefit from this industry, there is surely no reason why every sub-Saharan oil and gas-producing country cannot also do so. Sub-Saharan countries should reach out and learn from these countries. The challenges highlighted in the present article sound a clear warning to emerging oil and gas-producing countries in Africa, which they ignore at their peril, lest their oil windfall become a curse. The disastrous experience and examples of Angola, Gabon and Nigeria serve as a sober reminder.

 

Dr. John O. Kakonge is a Special Advisor, South-South News, New York, USA.

References

Iwayemi, L. (2011) “ Mobilizing Financing through Carbon Markets and Multilateral Climate Funding for Emerging Oil-and Natural Gas – exporting Economies in Africa.” In; Bressand, A (Ed.), Getting it Right: Lessons from the South in Managing Hydrocarbon Economies. New York. pp. 211-233.

King. (2012). “Ministry Assures Local Content, Local Participation on Course.” http://www.energymin.gov.gh/?p=524

Sarraf M., and M. Jiwanji. (2001). ‘Beating the Resource Curse: The Case of Botswana’. Environment Department Paper, No. 83. Washington DC: The World Bank.

UNDP Special Unit for South South Cooperation. (2010) Briefing Paper—Institution Strengthening of oil and gas Management through South South Cooperation, New York.