East Africa is set to emerge as a global supplier of oil and gas within the next decade due to the recent major oil and gas discoveries in Mozambique, Tanzania, Kenya and Uganda. Uganda and Kenya alone are estimated to hold 4 billion barrels of crude oil while Tanzania and Mozambique claim 200 trillion cubic feet of natural gas. With the promise of unprecedented petro-revenues possible, host governments are working on bold, detailed, and comprehensive local content policies as they eye the next phase: production.
These policies, though intended to boost the economic well-being of the local population and indigenous enterprises, may bear unexpected costs. In an environment characterized by lack of skilled labor and poor infrastructure, the timing of local content policies may negatively impact the project costs, quality of work and schedule.
Current local content legislation in East Africa
Mozambique’s current local content legislation requires foreign contractors to contract local companies in procurement of goods and services, but there is no clarity as to what extent and percentage of jobs would be allocated to the citizenry. In Tanzania, local content policies are entrenched in the 2013 Production Sharing Agreement Model (PSAM) but are yet to be adopted into any effective petroleum contract.
Kenya plans to enact an ambitious local content policy in the next energy bill which is now expected to be completed by Q2 2015. With Kenyan current upstream hydrocarbons sector presently governed under the 1986 Petroleum Act (Cap 308), local content programs in the current oil and gas economic environment are limited in their effectiveness by the outdated legislation.
New efforts to create local content policy
It seems that East African governments are gradually devolving power to lower levels of governments to allow the control of natural resources to shift to the local population and companies. Central governments and international oil companies (IOCs) alike are facing increasing pressure to adopt and design upstream development and corporate social responsibility projects that are tailored to specific local communities.
In theory, this should ensure that labor, goods and services used in oil and gas operations are sourced locally. In reality, this has not gone smoothly due to the poor infrastructure and absence of the required skilled workforce, forcing IOCs to spend more time training local populations and building infrastructures to handle logistical issues.
In October Last year, Tullow Oil suspended drilling operations across blocks 10BB and 13T in Northern Kenya citing security concerns for their employees after local population protested asking for more jobs and better benefits. Tullow Oil eventually held meetings with local leaders, reaching an agreement to build a local office to handle the communities’ concerns. With similar incidents having been witnessed in Uganda’s Albertine and Tanzania’s Mtwara regions, these types of events highlight some of the roadblocks oil and gas companies encounter in managing local expectations in frontier regions.
Content Policy in long-term producers
Until now, East African countries new to the oil and gas markets have shown themselves as unready for implementation of comprehensive local content policies due to lack of skilled labor, poor infrastructure and inadequate capital. Yet even long-time oil producer Nigeria, producing oil and gas since the late 1950s, waited until 2010 when they enacted more complete local content programs. Now after half a century of oil revenues and productions, Nigeria has finally managed to develop better infrastructure and skilled labor relevant to the industry to give it the ability to withstand most of the challenges that followed generated policies.
While Nigeria is held up as a success story, another long time producer proves that time in the market does not necessarily equate with successful local content policy. Angola, a country with one of the most controversial local content policies in Africa, has been characterized by high operational costs, project development delays and some cases low quality work. The USD 10 billion Angola LNG plant project has experienced a string of setbacks that forced the plant to shut down. Some the problems facing the Angola LNG plant may be connected to local content policy.
Ghana which started producing crude oil in 2010, set up progressive local content policy in its draft bill initially beginning at 10% with target of 90% by 2020 but this is likely to be changed.
Recent oil and gas discoveries could provide an opportunity to stimulate economic advancement and social development in East Africa, if local content policies can address the needs of local communities. Only then can exploration and production (E&P) companies begin production and expect a reasonable return on investment.
Author: John Sisa