Oiling the East African Community

By Ibrahim Kasita
Posted on Friday, 12 March 2010 15:00

Oil will soon be gushing from wells across the East African Community. Uganda has found it, and Kenya, Rwanda and Tanzania are looking hard. It is sink or swim for the region’s common market, argues Ugandan journalist Ibrahim Kasita.

Dreams of petrodollars have followed the discovery of oil and gas in commercial quantities in Uganda, but this bonanza could make or break the fledgling East African Community (EAC) Common Market, either opening up its new free market or strengthening state intervention and visiting the dreaded ‘resource curse’ on us all. Success or failure will affect the EAC’s neighbours too, for energy, business and markets.

Oil reserves are expected to reach five billion barrels and what has been found so far – 700m barrels – is currently worth $50bn. For rough comparison, this is two-thirds of the current combined annual gross domestic product (GDP) of the EAC, some $73bn between Uganda, Kenya, Tanzania, Rwanda and Burundi.

Exploration in Kenya has intensified in the four large sedimentary basins of Lamu, Anza, Mandera and Tertiary Rift. In Tanzania there are indications of hydrocarbon potential but little exploration: the biggest discoveries have been the Songo Songo and the Mnazi Bay gas fields. In Rwanda, oil exploration is taking place in the Kivu Graben, part of the Great Western East African System.

It is clear that landlocked Uganda alone has more energy than it or the region can use, so neighbours stand to gain from exports because Uganda needs pipelines to the sea, either to Mombasa in Kenya or Tanga or Dar es Salaam in Tanzania.

Integrating infrastructure throughout the EAC is essential to bringing down costs to compete with the efficient Gulf wells and refineries. So far, there are oil and gas pipelines being laid between Dar es Salaam, Tanga and Mombasa, and the extension of the Mombasa to Kampala oil pipeline to Kigali and Bujumbura.

The known and projected reserves seem adequate for EAC and Great Lakes consumption for 30 years at present levels, but there is little local refining. The refinery in Port Mombasa in Kenya processes 1.6m tonnes of crude oil annually but total regional demand is 5m tonnes.

Iran proposes building a refinery in Uganda, but the government wants the China National Offshore Oil Corporation, France’s Total or the Irish/UK Tullow Oil (or all together) to build a three-million-tonne-a-year refinery because they have the experience and resources for a one-to-two-billion-dollar plant. The scale of modern refineries requires building for the region rather than single countries. Some Asian countries, including China, are keen to invest too.

But massive expansion will demand massive investment and a massive improvement in business conditions for foreign investors, including harmonised EAC investment and exploration rules to give investors legal mechanisms for prospecting, building and transporting across national borders. Special legal and fiscal regimes have already attracted an increase in exploration bids but there is much to be done, especially for other kinds of businesses that do not involve hundreds of millions of dollars.

There must also be direct benefits to those living on the land that is yielding fossil fuels, rewarding their property rights separately from the royalties going to the government, in order to empower individuals, not just the state: it is people, not governments, who create economic activity.

Governments must also remove the obstacles to creating and running businesses so everyone can benefit from the promised EAC free market. Right now, the EAC members, except very low-ranked Burundi, are just within the top one-third of the World Bank’s Doing Business survey for Sub-Saharan Africa – but even the best, Rwanda, is only just within the top one-third worldwide.

EAC members must live up to their promises of allowing region-wide free trade and movement for all products and services, so efficient markets can develop rapidly, not just in oil. Energy could drive robust and sustainable economic growth in East Africa but only if coupled with economic freedoms, lower corruption and better business conditions for all.

The big bucks of energy could help open up the EAC Common Market, which starts on 1 July and removes some of the world’s highest tariff barriers, or they could become entangled in state meddling and cronyism. The energy bonanza can be a blessing instead of the resource-curse that has propped up repressive regimes and impoverished so many Africans.

Ibrahim Kasita is a business reporter on the Ugandan daily New Vision.. For more on oil in Uganda, read Parselelo Kantai’s report from Buliisa on the shores of Lake Albert.

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