When Atlas Development & Support Services, an African-focused company involved in oil and gas exploration, listed its shares on the Nairobi Securities Exchange late last year, it showed that recent discoveries in East Africa are creating a stir.
Since the discovery of significant quantities of oil in Uganda in 2006, more discoveries have followed in quick succession, especially in the past five years. In fact, more hydrocarbons have been discovered in the past three years than anywhere else. As a result, oil and gas has become one of the top sectors, rated by investment value, in the region.
Not so long ago, East Africa was considered a sleepy backwater for the upstream oil and gas industry. It has now become a main area of focus for exploration. Efforts by Tullow Oil, one of the exploration and production giants, have so far delivered around 1.7 billion gross barrels of oil in Uganda and over 600 million in Kenya. While onshore exploration has opened up oil plays in these countries, offshore exploration success in Tanzania has heralded a major new focus on the development of the region as a liquefied natural gas (LNG) hub. Significant gas finds in Mozambique are expected to make the country the second-largest exporter of LNG in Africa, after Nigeria, by 2025. In 2012, one third of all global oil and gas discovered was in Mozambique.
Some of the projects are going to have massive transformative impact on the region. Kenya, which launched the world’s largest single turbine geothermal power plant in 2014, is set to generate 30% of the country’s additional power over the next 20 years according to the United Nations Environment Programme. The renewable energy project will also potentially reduce the cost of energy across the country by as much as 50%. The country is considered to be one of the most promising geothermal prospects in the world. In an article by The Guardian, geothermal is described as “the darling of on-grid solutions” for the country and according to the Geothermal Energy Association, the country “will become the world leader if its planned projects are completed on time”.
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Similarly, gas finds are expected to transform the economies of Tanzania and Mozambique. Access to the lucrative Asian LNG market has significant benefits for the two countries and could act as a catalyst for meaningful economic development. The windfalls are expected to be used to deliver substantial social, economic and infrastructural improvements. In addition, as Africa starts to focus more and more on securing adequate supplies of crude oil and liquid fuels to satisfy growing local demand, it will boost foreign exchange flows, distribution of wealth, infrastructure development, stability and security of supply.
As exploration gains momentum, the lack of proper developed infrastructure remains a challenge. It is estimated that between $60 billion to $70 billion needs to be invested to strengthen the sector. The future development of the industry is dependent on this. Fears around the shale oil revolution dampening demand for East Africa’s oil, as cited in the 2013 PwC report on shale oil, should ease up as considerable demand still remains from nations such as China and India. Other key challenges the industry is grappling with include a shortage of oil and gas workers, political interference, uncertainty and delays in passing laws.
There is potential for the energy sector to overcome these challenges. The pace of regulations is keeping in step so the region stays in touch with its competitors and investment remains attractive. Wider economic and political factors could also work in East Africa’s favor. If the region continues to build on the current momentum and creates investor friendly policies, there is no doubt that the sector is bound for greater heights.
As the last true oil and gas frontier, East Africa has already taken off. The journey for a brighter tomorrow has begun.
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