Elation as Kenya exports Oil; what does it mean for Oil rush in East African region

On 1st of August 2019, President Uhuru Kenyatta announced that Kenya had joined the list of world oil exporting Countries by selling its first crude oil at a cost of 12 Million United States dollars.

While the news reverberated across the Country and the region with elation, it is also possible that Kenya’s announcement could trigger a contagious rush to the bottom with East African Countries jostling to outcompete each other by signing off deals and agreements locking off future markets with potential buyers. Some of these deals may not be necessarily good.

By Moses Kulaba; Governance and Economic Analysis Center

Addressing the cabinet and media in Nairobi, President Kenyatta said Kenya had sold its barrels of crude oil to a buyer whose identity still remained a secret.

“We are now an Oil exporter. Our first deal was concluded this afternoon with 200,000 barrels at a price of USD 12 Million.  So I think we have started the journey and it is up to us to ensure that those resources are put to the best use to make our Country and to ensure we eliminate poverty, said Kenyatta.

The news reverberated in the region and globally with a new player on the market. Obviously there was more excitement and elation in the Lokichar Oil fields where Tullow Oil and its joint partners continue to explore more blocks with more vigour and determination.

Kenya discovered its first Oil in 2012 and since then, explorations have continued in the Lake Turkana basin region with deposits being reported and more projections made to increase. In its previous reports Tullow estimated some 560 Mln Barrels in possible reserves and these are now projected to increase as prospects for more discoveries are higher than before.

This would translate into 60,000 to 10,000 barrels per day of gross production, which is said to be insufficient to warrant the construction of a refinery locally hence the export plans

The sold consignment was delivered by truckers at the Kenya Petroleum Refineries facilities in Changamwe, Mombasa since July last year, under what the government described under the early oil project

What does this mean for Kenya and the East African region?

The deal concludes that Kenya once ruled off as an oil novice in the region, with the lowest volumes of discovered oil is running a head of its East African neighbors in reaching exporting oil country status many months before any of its East African neighbors can sell a drop of oil.

For Kenya, this is game changer in regional geopolitics as not only does the oil revenue bring a new line of foreign exchange earnings into its economy and thus consolidating its position as the regional economic superpower.

Galvanizing on its early market entry status, Kenya could tap the available markets and seal off any available contracts beating off any potential competition from its neighboring countries.

The oil revenues could also breathe some life into its Lamu Port South Sudan Ethiopia Transport (LAPSSET) Corridor development plan which has stalled for among others lack of partners. With oil revenues flowing, Kenya can go alone developing the ambitious infrastructure projects along the corridor all the way to the Ethiopian boarder.

Contrary to nay Sayers, the oil export could be a window to emboldened security in the Turkana area as the government seeks to protect vital oil installations and export routes to the coast.  For many years, Lake Turkana basin has been one of the most volatile and insecure areas in Kenya as marauding armed warriors move from one village to another raiding for cattle. Civilians and military installations have been attacked and people killed.

In June, 2018 Turkana residents stopped five trucks from ferrying crude oil to Mombasa over rising insecurity along the border with Baringo. The resident complained of insecurity in the area but also complained of what they call consider unresolved issues on oil sharing benefits between the National governments, County governments and local communities over the 5% share which they wanted channeled to their bank accounts rather than for development as rallied by a section of leaders.

There is no way we can be a security threat to the oil we have protected and guarded for years. So the specialized and additional security personnel (protecting oil) should head to Kapedo and secure people.

Kenya’s oil export announcement could trigger a contagious rush for oil in the East African region, with each country racing to drill to bottom in search for oil. In an effort to outcompete each other, those already with oil discoveries such as Uganda and South Sudan could race to the market sealing off deals and contracts with potential buyers and agreements for future markets. Some of these deals maybe bad.

 Uganda was the first to strike oil around its Albertine graben in 2005. According to Uganda’s Ministry of energy the petroleum deposit discovered so far were estimated at 6.5barrels of which 1.5bln are considered as recoverable.

The Ugandan oil is supposed to be exported to the global market through a 1,443 electric heated East African Oil Pipeline (EACOP) via Tanzania. The East African Crude oil pipeline is expected to unlock East Africa Oil potential by attracting invest and companies to explore the potential in the region.

According to the project schedule available on the EACOP website the detailed engineering and procurement and early works were supposed to have been made in 2018 and construction started in 2019. The first oil exports were expected in 2020. But it appears all these are behind schedule.

According to Ministry of Uganda expected to conclude its financial deal for its joint pipeline with Tanzania by June, 2019, opening for the way for its construction. According to the information provided by then, Stanbic Bank Uganda, was supposed to be the lead arranger for USD2.5billion funding for the 1,455 km (EACOP) project. The deal was expected to have been concluded in June, 2019.

Kampala was also expecting that the Final Investment Decisions (FID) between the government and the oil partners to determine when funds for the project will be made available, the terms of the financing and when the project execution will commence with a projected timeline between 20 and 36 months

The pipeline was expected to jointly develop the USD 3.5 billion pipeline, described as the longest electrically heated crude oil pipeline in the world. The balance of USD 1billion is expected to come from shareholders in equity

However, by the time Kenya announced its export deal in July, the earth breaking ceremony commencing the start of the EACOP pipeline construction had not started. Negotiations were reported as ongoing. In June 2017, the Daily Business Newspaper carried an article with a headline ‘Uganda’s Oil may not flow by 2020’ as the required infrastructure may not be complete  by then[i]

What this means for Uganda is that time is of essence and the sooner the EACOP project construction takes off the better for its potential oil market.

Figure 3: The Government of Tanzania and Uganda sign the Inter-Governmental Agreement (IGA) for the East African Crude Oil Pipeline (EACOP)  in May, 2017

 

So why do some oil projects like take long to materialize?

Lack of astute leadership, effective institutions and canning ambition to drive the projects to fruition. In some countries the political leadership and responsible institutions can be weak, whereby the essential operational process surrounding the oil projects can be clogged in political rhetoric and undertones which make decision making quite cumbersome, inefficiently slow and less assuring to the investors

Technical aspects such as Quality of crude oil discovered

High Sulphur crude oil can such as the Ugandan and Kenyan crude oil can be waxy and costly to transport via pipeline as it requires constant heating along the route.  This explains why the 1,433 km EACOP is described as the longest electric heated pipeline in the world. This adds to complexity in technology and costs on heating required to operationalize the project. Investors may

Oil reservoir behaviors and recoverable volumes – The discovered oil reserves are not always the same as the recoverable volumes. In some projects the reserves can be large yet due to geological and technological factors the recoverable volumes are low.  The behavior of the oil reservoirs is therefore a significant factor in determining whether the recoverable volumes will be consistent with the early projections and economic models over the plateau period. A change in the recoverable volumes can trigger massive losses and may lead to complete closure of the oil project. Investors are happy to rush projects where recoverable volumes will be sustained

Financing aspects such as financing structure -Lack of financing for some reasons or high interests on the investment loans secured from investment-lending institutions can be a delaying factor.  The decision to invest may therefore take long as the investors or partners to the oil project juggle and weigh the available financial options viz a vis the current and future costs of the project on the country and the investors

Economic metric considerations such as the Net Present Value (NPV), Rate of Return (RoR) and Internal Rate of Return (IRR) of the project.

These are calculations undertaken to determine the economic and financial viability of the project. They are used to determine how much return and how long it will take to recoup the initial investment and starting generating profit.

According to online sources such as Investopedia, the Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.

The Rate of Return (RoR) is the net gain or loss on an investment over a specified time period, expressed as a percentage of the investment’s initial cost. This simple rate of return is sometimes called the basic growth rate, or alternatively, return on investment, or ROI. If you also consider the effect of the time value of money and inflation, the real rate of return can also be defined as the net amount of discounted cash flows received on an investment after adjusting for inflation.

The rate of return is used to measure growth between two periods, rather than over several periods. The RoR can be used for many purposes, from evaluating investment growth to year-over-year changes in company revenues. Its calculation does not consider the effects of inflation.

The internal rate of return (IRR) is a measure used in capital budgeting to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the Net Present Value (NPV) that makes the Net Present Value (NPV) of all cash flows from a particular project equal to zero.  It is mathematically calculated as IRR=NPV=t=1∑T (1+r)t −C0 =0)

IRR is the rate of growth a project is expected to generate. The IRR is used in capital budgeting to decide which projects or investments to undertake and which to forgo.

Generally speaking, the higher a project’s internal rate of return, the more desirable it is to undertake. Assuming the costs of investment are equal among the various projects, the project with the highest IRR would probably be considered the best and be undertaken first. IRR is sometimes referred to as “economic rate of return” or “discounted cash flow rate of return.”

Social factors such as land acquisition and due diligence for compensation– The nebulous and intricate balancing act between the local laws and the international standards as guided by the International Finance Corporation can be a hindrance. Quite often the local standards for compensation can be law, corrupt unfair yet the IFC standards requires fair and equity

Negative diplomacy: The oil projects could delay or fail to take off all together due to negative diplomacy. Whereby disgruntled actors such as activists, companies, politicians who may not be excited or about the project may quietly lobby, urge, convince or cajole the financing institutions not to finance the project.

Security Risk:  Oil projects cost lots of money in investment and thus require assurances that financial investments and their installations will be guaranteed.  Oil projects can stall as investors and their partners gauge the security risks

Some or all of these factors could be now at play in the East African region and could be explanatory factors as to why some petroleum projects are progressing at a snail’s pace or stalled all together. Perhaps Kenya’s early oil export could be trigger for its neighbors to start thinking ahead.

 

 

 

[i] https://www.businessdailyafrica.com/economy/Uganda—oil—2020-Standard–Poors-Tanzania/3946234-3982464-j7rbsq/index.html

WB Reports Tanzania Economic Growth was lower , warns Poverty reduction is Constant

According to the World Bank Group, Tanzania’s economy is estimated to have grown by 5.2 percent in 2018, a figure which is lower and in contrast to the government’s National Bureau of Statistics estimates of 7 percent but still more than the Sub-Saharan Africa average of 2.3 percent.

The Tanzania National Bureau of Statistics reports that real GDP growth was 7%, slightly higher than 6.8 percent in 2016, however, the Wold Bank reported, official demand side data including data related to consumption, investment and net trade suggest that growth softened in 2018. This is according to the WB’s latest Tanzania Economic Update report released in July, 2019 titled ‘’Tanzania Economic Update: Human Capital: The Real Wealth of Nations” 12th Edition
Using demand side data World Bank Staff estimate that real GDP growth from 2018 was 5.2 percent lower than the NBS estimate but still more than double the SSA average of 2.3%.

The softening of consumption growth was supported by Tanzania Revenue Authority (TRA) data showing lower consumption tax collection as well as tight controls on public consumption expenditures.
The report is quite critical of government’s investment and fiscal performance, whereby it stated that investment growth remains’ dampened as significant under execution of public development plans, lower levels of FDI inflows and improved but relatively low private sector credit growth.

The trade balance also deteriorated in 2018 with exports contracting by 3.9% in gross value and imports increasing by 7.8%
Mid fiscal year accounts for 2018/19 show a low deficit and significant shortfall in both spending and financing which together with high payment arears raise questions about budget credibility. Whereby, the deficit for the first half of the fiscal year was a low 0.7% of GPD against a budgeted 1.6%. The revenue shortfall relative to budget were even larger than spending shortfalls. Domestic revenues especially tax collections under performed by about 12% against mid-year targets and fiscal external financing under performed by more than 80%. As a result, the budget significantly was under executed for capital projects needed for growth and job creation.

Government arears to contractors and supplies to pension funds by utilities such as Tanzania National Electricity Supply Company (TANESCO) to their suppliers remain unsustainable high at an estimated 5.7% of GDP in mid-2018.
The WB also warned that although the level of public debt currently was sustainable, recent changes in its composition raised concerns about liquidity risks.

The external position was challenged by an expanding current account deficit and declining reserves. The exports had fallen partly due to lower cashew nut exports and imports increased because of capital goods imported to supply development projects. The current account deficit had to 5.2% of GDP for the 12 months ending January, 2019 up from 3.2 percent a year earlier.

Reforms to relieve the regulatory burdens on business was moving slowly. According to the WB government had introduced abruptly new laws affecting mining, public –private partnership and statistics that had raised private sector concerns about policy predictability.
High population growth was undermining the reduction of poverty. Despite efforts between 2007 and 2016 that had reduced the Country’s poverty rate from 34.4% to 26.8% the absolute number of poor people had remained at about 13 million due to high population growth.

Although the most recent poverty measures based on the Household Budget Survey of 2017/18 was still being processed, it seemed likely that the downward trend poverty rate continued but had become more gradual, the WB stated.
The WB report figures raise further controversy on the accuracy in generation of Tanzania’s statistical figures and throw a spanner into the ongoing debate among stakeholders on which statistics should be considered as credible for planning purposes.

The government maintains that its statistics are credible and should be quoted as official and in 2018 passed a law (The Statistics Act of 2018) to enforce this. The Act made it a criminal offence to invalidate, distort or discredit any official data or to collect and publish any statistics which contradicted statistics from the NBS.

However, this law faced criticism from different actors arguing that it gives undue monopoly to government in generating statistical figures and limits room for debate and criticism of official data which may have some errors or generation of alternative statistical data by independent private entities and organisations. Some amendments were made in June to relax on some of the stringent provisions but the Act still requires some kind approval from the NBS.
The report raises significant concerns and challenges on the state of the economy and progress of reforms to improve the business and investment environment.

The latest reported figures which contradicts some of government’s official statistics and economic progress perhaps should serve as a wakeup call to the government to reassess its figures and provide clarity.

Election Coordination Mechanisms: A comparative study of Tanzania, South Africa and Nigeria

Proper election coordination is a major factor in successful elections in a multiparty democracy. The findings and key message coming out of a short policy study and governance practice note by GEPC suggests that there is no universal approach to coordination between Electoral Management Bodies (EMBs) and Office of Registrar of Political Parties (ORPPs). Each country has developed some sort of coordination based on its existing political and legal dispensation.

This short policy study and governance practice note sought to undertake a comparative study of Tanzania and South Africa, Nigeria with a view of contributing towards electoral reforms and minimizing of electoral disputes.

However when ranked on the common standards and guidelines for electoral management and  regulation of political parties, Tanzania scores unfavorably on a number of major aspects; Finality of decisions of its EMB (the National Electoral Commission) and Office of Registrar of Political parties, whereby there decisions are final and cannot be challenged in court,

The appointment of Tanzania’s National Electoral Commission (NEC’s) commissioners is not subject to a parliamentary vetting process, NEC’s mandate is limited to Presidential elections and local elections organised and supervised by local government executives under the Minister responsible for local government. The EMB and Officer of Registrar of political parties’ report to the responsible Minister compared to its comparative Countries such as South Africa and Nigeria where these institutions are answerable to parliament.

Tanzania only ranks in equal measure with its comparative peers EMB and Office of the registrar of its political parties in the as Constitutional bodies and its organs headed by persons of high integrity at a level of a judge or retired judge.

The study therefore recommends that as Tanzania prepares for the next local and general elections, the country should practical measures to

  • Review of current election coordination mechanisms with view of minimizing overlaps and election disputes
  • Implement Court decisions current and previous in regards to election related matters such as independent candidates and role of local government executives in election management
  • Increase avenues for transparent and objective dispute resolution. These should be documented and formalised in law
  • Adopt and adapt best practices from the comparative countries on matters related to election management and coordination, including opportunities to legally challenge the finality of decisions by the election coordination mechanism

 

A table summary of salient features of EMB and ORPP structures, functioning and coordination and our ranking based on European Commission (EC) Common Standards & guidelines for Electoral Management and Political parties Regulations [1]

  1. No Issue Explanation Traffic Signal
    1 Constitutional protection of EMB and ORPP Strengthens independence, confidence and performance Green
    2 Presidential Appointment of EMB Commissioners and ORPP heads Bad practice, Creates mistrust and may encourage patrimony Red
    3 Existence of Nomination Panel or Committee  for EMB Commissioners and ORPP Strengthens political and public trust in the institutions Green
    4 EMB and ORPP Chaired by Judge or Justice of high court May strengthen political and public trust that the actions and decision of these institutions are just and fair, but fair outcome is not guaranteed Yellow
    5 Civil Society involvement in Nomination of EMB Commissioners and ORPP heads Widens participation, increases public trust and credibility of the institutions Green
    6 EMB and ORPP embed Roles within a single institution such as IEC in South Africa or INEC in Nigeria May encourage ambiguity, Best to separate but also depends on accountability structures and clarity of the roles Yellow
    7 EMB and ORPP heads accountable to Minister Bad practice, may encourage direct political interference and patrimony Red
    8 EMB and ORPP heads accountable to Public Service Commission May be subject to limitations of public service administrative codes of conduct and requirements Yellow
    9 EMB and ORPP accountable to Parliament Increases accountability and public  scrutiny Green
    10 EMB and ORPP direct participation in nominations and vetting of candidates Encourages the EMB and ORPP to ensure candidate standing for election meet the eligibility criterion and legal requirements Green
    11 EMB and ORPP direct engagement in development of Party and Membership list for political parties Bad practice, Infringes on right of Political parties to determine their candidates Red
    12 Restriction of EMB and ORPP electoral  organization and coordination mandates to Presidential and Parliamentary elections (Tanzania’s case) Bad practice , may encourage direct political influence, foments elections disputes Red
    13 EMB and ORPP enforcement of Separate Codes of conduct or ethics Good to separate political issues from electoral matters Green
    14 EMB and ORPP separate Management of Party subventions, Financing Largely dependent on accountability structures Yellow
    15 Existence of EMB and ORPP elaborate operational procedures and independent guiding  law Provides clarity in operational mandates Green
    16 Existence of other constitutional institutions to support EMB and ORPP in democracy-such as  in South Africa Strengthens independence, trust and performance Green
    17 Decisions of EMB and ORPP Final on electoral and political matters Bad practice, May defeat justice and Fairness Red
    18 Detailed regulations for EMB and ORPP dispute resolution Provides clarity in dispute resolution Green
    19 Existence of formalised PPLC  and other similar bodies  to work with EMB and ORPP Enhances collaboration and potential dispute resolution Green
    20 Existence of an Independent Electoral Court or Tribunal to adjudicate on matters relating to EMB and ORPP Strengthens performance And expedites justice Green

     Comparative thematic analysis of Tanzania, Kenya, South Africca and Nigeria’s EMB and ORPP institutional setup, functions and our ranking based on European Commission (EC) Common Standard & guidelines for Electoral Management & Political Parties Regulation Standards[2]

    Issue Country Analysis Traffic sign
     

     

    Legal Constitution

    		Tanzania EMB Constitutional body, ORPP enacted by law Green
    Kenya EMB  Constitutional Body, ORPP enacted by Green
    South Africa EMB and ORPP Constitutional bodies Green
    Nigeria EMB and ORPP Constitutional bodies Green
     

     

    Appointments

    		 Tanzania EMB and ORPP Commissioners and heads are presidential appointees, without nomination Red
    Kenya EMB and ORPP heads are presidential appointee , upon nomination Green
    South Africa EMB and ORPP Commissioners and heads are Presidential appointee, upon nomination Green
    Nigeria EMB and ORPP heads are Presidential appointees, upon nomination Green
     

     

    Leadership

    		 Tanzania EMB and ORPP headed by a Judge or Retired justice Green
    Kenya EMB and ORPP headed by  none Judges Red
    South Africa EMB and ORPP headed by a Judge Green
    Nigeria EMB and ORPP headed by a Judge Green
     

     

    Roles

    		 Tanzania EMB electoral mandated limited to Presidential and Parliamentary elections, Local elections organised by Minister Red
    Kenya EMB electoral mandate extended to organise all elections Green
    South Africa EMB mandated to organise all elections Green
    Nigeria EMB mandated to organise all elections Green
     

     

    Accountability

    		 Tanzania EMB reports to the Responsible Minister Red
    Kenya EMB reports to Parliament Green
    South Africa EMB reports to Parliament Green
    Nigeria EMB reports to parliament Green
     

    Jurisdiction

    		 Tanzania EMB organise elections partially in Zanzibar. Zanzibar President and House of Representative elections organised by Zanzibar Electoral Commission Yellow
    Kenya EMB has nationwide jurisdictive coverage Green
    South Africa EMB has nationwide jurisdictive coverage Green
    Nigeria EMB has nationwide jurisdictive coverage Green
     

    Dispute Resolution

    		 Tanzania EMB and ORPP decisions are final Red
    Kenya EMB and ORPP decisions challengeable in court Green
    South Africa EMB and ORPP decisions challengeable in court Green
    Nigeria EMB and ORPP decisions challengeable in court Green

    [1] We developed these common standards and traffic signals based on standard democratic and accountability principles, international conventions, international benchmarks and European Commission (EC) guidelines for Political Parties Regulation.

    [2] Ibid. The European Commission (EC) (Venice Commission) guidelines for Political Parties Regulation guideline provide an overview of issues regarding the development and adoption of legislation for political parties’ regulation in democracies.

    ** The full report of this study can also be downloaded from our reports and publications sections