By Powell Nielsen
The African Continent has a complicated relationship with natural resources. In academia, there exists a common thread equating natural resources in weaker states to conflict and instability. This phenomenon is known as the resource curse. Nevertheless, in the past 15 years many African countries have modernized their economies, expanded and diversified foreign direct investment, and focused new efforts in anticorruption and regulation. However, with the discovery of new, untapped oil reserves, will these resource-rich countries pursue a path of equitable industrialization, or fail to capitalize on their newfound wealth, perpetuating the cycle of foreign exploitation at the expense of local interests?
Many African countries have enjoyed newfound oil discoveries, with Namibia being a notable example. Namibia, known for its large mineral and metal wealth, recently discovered oil in deep coastal waters, adding to its estimated reserves of 11 billion barrels. These new discoveries have generated significant interest from energy investors and companies including Chevron, ENI, BP, Total Energies, and Shell. The US based Chevron is expected to commence oil exploration in 2024, along with ENI and BP announcing in May to form an agreement for a 42.5% interest in an offshore block. The more localized Total Energies currently operates two exploration blocks with one expected to begin development at the end of 2025. While all these companies have expressed real interest in taking part in oil extraction in Namibia, the legal systems designed to regulate oil production remain quite weak.
Namibia, a young democracy, lacks robust governance structures that lend themselves to corporate greed, outside influence, and internal corruption. For example, the laws regarding extractive industries were drafted in the 1990s leaving them blunt and inadequate to address possible concerns with their new oil boom. Until very recently, Namibia’s licensing and procurement framework for oil and gas assets was on a closed-door basis through direct negotiations leading to a huge backlog and the possibility for corruption due to a lack of government transparency. To combat this issue the Namibian government has created BIPA, their new corporate registry, however this process remains slow and chaotic. Namibia is not lost entirely though, as the government is applying to join the Extractive Industries Transparency Initiative, which requires members to disclose the details of contracts and licenses. This new effort stemmed from local campaigning to promote ownership transparency and corruption risk management in the public sector. If accepted, the Namibian government can prove to future investors of their honest intentions and proper business practices. However, other problems regarding local experience and logistical support also remain present.
Unfortunately, there is a lack of experienced local partners in the energy industry outside of those colluding with government connections thus scaring off sophisticated risk-averse energy businesses with strict anti-corruption policies and procedures. Namibia may consider implementing trade regulations analogous to those adopted by Norway during the early stages of its oil industry expansion. Between the 1960s and 1980s Norway required foreign oil companies to use domestic goods and services, to invest in joint industrial ventures, and transfer knowledge. While there may not be a large capacity to supply goods, Namibia can certainly supply a workforce that is both ready and able to gain skills in oil extraction, refinement, and manufacturing. Namibia will also need to strengthen their contracts to include assurances for locally sourced labor so that the local population benefits from oil production as much as foreign businesses.
Alternatively, other more economically developed countries on the African continent have recently scaled up oil production due to increased demand for non-Russian oil. With this new surge of interest, largely driven by expansion efforts in Algeria and Nigeria, pockets of opportunities may arise for industrial users and gas power plants to create a reliable gas demand making localized oil projects economical. Some countries, like Senegal have seen huge investment from national companies like Petrosen. Manar Sull, former Exxon and Oil Libya executive with 30 years’ experience in the industry, now heading the number two subsidiary regarding production for Petrosen, asserts that the company “will cover the whole value chain from upstream to downstream…and have an ambition to be globally competitive and become an important player in the oil and gas sector”. There are plans for this national company to reinvest profits in the education and health sectors, infrastructure, and even environmentally friendly electricity production. Petrosen has backed these claims by scaling up refining capacity along with allocating the bulk of oil production for local consumption hoping to achieve universal access to electricity by 2025. Currently, electricity access stands at 65% today. However, not all countries are as lucky as Senegal with localized production, some countries must handle threats such as terrorism or a change in government administrations.
Tanzania, a country with large natural gas reserves but a high demand for refined oil, has experienced both development and supply chain difficulties. Chiefly, the creation of a pipeline between Uganda along with recently halted negotiations with LNG developers due to a change in energy ministers. Tanzania also holds the fifth largest recoverable natural gas reserves in Africa, producing enough to satisfy its own demands and being an important channel to landlocked countries like Kenya and Zambia. Furthermore, countries like Mozambique with large natural gas reserves are unable to generate enough funding to extract gas, along with facing difficulties regarding terrorist organizations like ISIS and Al-Shabaab (no connection to Somalia). Unfortunately, the Mozambique-based Al-Shabaab has killed around 6,000 individuals and displaced 1 million in the past 7 years. Furthermore, this relatively new terrorist organization has sworn allegiance to the Islamic State. Both these countries experience a common dilemma regarding their natural resources, often becoming a curse rather than a blessing. With ineffectual or weak governance structures their industries could fall prey to larger western-backed companies or even terrorist organizations. Harkening back to Norway’s oil industry, nationalisation led to profits nearing 170$ billion from oil and gas revenues. Currently, the fund stands at 1.71 trillion USD. This revenue was put into social programs, infrastructure building, and a sovereign wealth fund which continues to grow, securing the future of Norwegian citizens after the oil dries up. For reference, a sovereign wealth fund is a state-owned investment fund that invests in real assets globally. They have been used to provide financial assistance to citizens in many other oil and LNG-rich countries like Kuwait, Abu Dhabi, and Saudi Arabia. Tanzania and Mozambique have a long road ahead of them before they can turn their LNG industry into a form of public funding to better the economic situation of the average citizen, but by making solid governance decisions on regulating LNG extraction and fostering transparency in contract negotiation they can lay the groundwork for a national resource to fund domestic improvement. This way, perhaps, western companies can provide a boon to emerging industries in Africa.
Many African countries on the road to modernization and industrialization have utilized various initiatives and think tanks to help build and strengthen existing regulation and government structures. One includes the African Growth Initiative (AGI) which “provides evidence-based policy recommendations for national, regional, international actors and policymakers”. Created by Oxfam and Brookings Institute, this initiative has seen some progress in creating safeguards against anti-corruption, but it still lacks enforcement capacities or any real teeth. Even Tanzania has begun an LNG project in a host agreement, initiated in February of 2023, between Equinor (Norway) and Shell (UK) to operate gas fields and LNG plants for exports to Asia and Europe along with domestic power generation. However some difficulties remain. The World Bank is hesitant to fund fossil fuel projects in places like Namibia, Nigeria, and Angola due to climate concerns and the fact that renewables tend to be cheaper development projects than fossil fuels. Furthermore, western countries tend to export gas to western markets or have little confidence in local production due to the lack of downstream industrialization that comes with refineries. Training a local workforce and investing in local refineries and oil-related manufacturing is costly, and currently there is no incentive for western corporations to invest in these types of ventures. Seed money is required to get up and running, and without help from outside organizations like the World Bank, IO’s, and various development agencies, these countries may never get the chance to utilize their oil potential as renewables become more in demand. By demanding transparency and drafting concrete regulation early, these countries can avoid these concerns and create incentive for large foreign companies to build their own national industries. Oil and LNG may always be a staple in the global economy, without close regulation and a nationalized plan, these countries may be forced to sell their precious reserve rights off to the highest bidder, resulting in once again, a resource curse relationship plagued by outside interference and internal corruption.
Africa is a huge continent with many countries, different governance systems, and approaches to the energy sector. The countries described above are only a small piece of the puzzle in the overarching energy boom that has taken place on the continent in the past 10-15 years. Oil has been discovered offshore in many other countries facing similar dilemmas and difficulties especially related to a lack of expertise and industrial capacity in refining and exporting oil and gas. However there remains hope as countries like Senegal have seized their resource market by the reins and intend to utilize it to push their country into further modernization driven by energy profits. Regardless, African countries better move fast to secure their resources as Western countries may look back to former colonies as oil supply has disappeared from Russia due to the war in Ukraine. The geopolitical and global economic situation puts weaker states with resources in a precarious position as demand for oil and LNG will only increase both domestically and internationally.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.