By Dr. Ahmed Heikal
A lot has been written and said about the potential impact the collapse in global oil prices might have on East Africa’s nascent hydro carbon industry.
After five years of exciting new discoveries, the region had become one of the most promising new exploration frontiers, creating widespread optimism for the region’s economic transformation. This situation appears to have changed with some oil exploration companies talking about leaving or scaling back operations. Indeed, the current low barrel price has put into question the commercial viability of extracting the oil.
Whilst this scenario appears to paint a very gloomy picture for the East African oil industry going forward, it’s important to note that historically global oil prices are relatively volatile rising and falling in cycles determined by varied interdependent factors. In 2008 for example, the price of a barrel of oil peaked at $147 in July then fell to $35 in December before stabilizing at between $60-80 by mid 2009.
Given that all indications are that East Africa will eventually become an oil-producing region, the real questions that need addressing should be: What measures should the region look at putting in place in order to cushion itself from the future effects of such shocks? Which investment strategy should East Africa follow in order to ensure there is a constant flow of the much-needed capital? And finally, what role should oil play in the region’s future energy mix given the tendency for it to become the primary energy source once it becomes affordable and is available in large quantities?
Finding answers to these questions is not easy given the multiple sovereign nations involved and differing economic variables such as GDP ratios, which suggest that some of the countries might be better positioned to withstand the price shocks than others. I am of the view, however, that there are key lessons that East Africa can draw upon from other countries in order to come to its own practical conclusions.
As noted earlier, oil prices are and will continue to be volatile over cyclic periods. Creating the capacity to refine crude oil into final products would thus be an important first step towards protecting East Africa’s “domestic” market. This brings me to the next point of how to attract a continuous flow of investments in order to fully develop the potential sector. A lot of effort seems to be directed at attracting foreign financiers particularly from Western countries and the East, the argument being that they have the necessary capital levels, knowledge and expertise required to fully exploit the hydrocarbon opportunities.
Whilst this is true to a certain extent, the problem with this approach is that their backers are often financial institutions based thousands of miles away in countries with complex inter-bank credit arrangements, and which are highly sensitive to international price fluctuations. This is the reason that a number of exploration companies have been re-assessing their oil investment options in East Africa. A much more long-term and balanced approach for the region would be to look at raising capital from within the region through bonds or other financial instruments and work in partnership with international oil majors. Alternatively, East Africa should look within Africa for investors with a greater patience, belief and understanding of the continent’s market.
Finally, planning for the right energy mix for East Africa before the oil comes online would be key towards securing EA energy future. Other parts of the world have shown that once oil becomes available there is a tendency to start focusing on it as the magic bullet or solution for all energy requirements forgetting the fact that it’s a finite resource.
A regional energy policy that strikes the optimum balance between resources versus needs – short, medium and long term – needs to be developed. Any such policy must include renewable energy as a cornerstone, in particular solar energy, for which the cost of production has fallen by as much as 70% over the last five years. So, East Africa should not view the fall in global prices as a crisis but as the much-needed wakeup call to better prepare for and secure the region’s long-term strategic socio economic investment objectives.
Dr. Ahmed Heikal is the founder and chairman of Qalaa Holdings.