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The Devil’s Excrement

The Devil’s Excrement

5.2.2013 16:10

Have you ever been to the First Class Lounge at Heathrow’s gleaming Terminal 5? Premier cru champagne is chilled, the carpets are thick, the lighting soft, the luxurious sofas are inviting and the music is playing soothingly. Do you know who you will find there? Most of the guests are heavily bejeweled African men and their wives and daughters in exotic head scarves. How can people from some of the poorest countries in the world, ridden by civil conflicts, afford that?

Juan Pablo Pérez Alfonso, a Venezuelan minister who was among the founders of OPEC, famously labeled oil “the devil’s excrement”. It wasn’t the dark colour or unappetizing smell but the impact this natural resource had on the lives of people in Venezuela, ranging from the income polarization, through the jump in corruption to the impact on environment. Oil creates huge wealth fast and with it often comes, in countries with minimal governance in place, corruption on a truly epic scale.

There is now a whole new slew of countries in Africa which are even less prepared to deal with the mixed blessing of oil & gas discoveries than Venezuela was in its time. African oil has been taking growing importance globally, mainly due to the recent oil discoveries on and off Africa’s shore. Currently five countries, Nigeria, Libya, Angola Algeria and Egypt, dominate Africa's upstream oil production. Together they account for 85% of the continent's oil production. But that is just the tip of the iceberg. Barely a month goes by without a new oil discovery in Africa. Only five of the continent’s 55 countries are currently neither producing nor exploring for oil. Exploration is taking place not only by the early-mover prospector companies but also by the oil-hungry and non-risk-averse China (China e.g. owns 40% of Sudan's oil production), and most recently also by the global oilies.

A resource bonanza is generating big government revenues and some real benefits for Africans. Road networks are expanding, public services are improving. But most of it with a serious lack of transparency. Much of Angola’s income is managed by a national oil company that operates under commercial secrecy. The oil revenues of Equatorial Guinea are a state secret. This is both wrong and dangerous. Observers say corruption has been rising. Ministerial car parks across the continent are filled with the fanciest limousines. A lot of money still reaches public budgets, but without oversight it is often badly spent. Many new roads go nowhere, shiny new hospitals have too few doctors.

Nigeria was the first where massive oil deposits were discovered. The petroleum industry in Nigeria is the main generator of GDP in this West African nation which with 170 million inhabitants is also the continent's most populous. A recent wide-reaching investigation into the Nigerian oil industry found that the state was short-changed by at least $29bn over the past decade due to cut-price gas deals made between Nigerian officials and oil multinationals. Oil theft is rife and estimated to be as high as 250,000 barrels per day, or 10 per cent of total production. At the same time, both the Nigerian government and the oil corporations have been criticized as too slow to implement reforms aiding the desperately underdeveloped area where oil has so long been produced already since 1950’s (!) and at remediating the horrible environmental degradation that petroleum extraction has brought.

Ghana has an estimated three billion barrels of proven oil reserves. Backed by a generous investment by Sinopec, the giant Chinese state-controlled oil company, oil wells have been drilled and pipelines laid although most work was performed by the Chinese and the local men didn’t secure the much needed employment. Ghana became an oil producer two years ago. Its new president, John Dramani Mahama, elected in December 2012, pledged to use the country’s oil revenues to improve infrastructure, education and power supply. This is crucial in the country where, despite record-high prices of gold and cocoa as well as the new oil revenues, about half of its 25m people live on less than US$2 a day.

Several other African countries are watching Ghana’s progress, in particular the East coast countries of Mozambique, Kenya and Tanzania. The leading oil& gas consultancy Wood Mackenzie estimates that recent gas discoveries in Mozambique and Tanzania of more than 100tn cubic feet are on a truly global scale. In Mozambique, American Anadarco Petroleum and Italian ENI found in “their” fields up to 60tn cubic feet of recoverable resources of gas, a potentially highly lucrative source of LNG exports to Asia. Mozambique is one of the poorest countries on the planet, ranked 184 out of 187 nations in 2012 UN Human Development Index. Life expectancy is just 50 years. Crucially and tellingly for the gas projects, Mozambique’s gross domestic product last year was $12.8bn – half the estimated cost of two planned “trains”, as gas liquefaction facilities are known.

Given the scale, you cannot help but wonder if the country can even pull this out. The International Monetary Fund, Norway and the World Bank are all advising on how to build a sustainable oil & gas industry here and avoid at least some of the mistakes made by other countries with poor legal system and lack of transparency. Norway in particular is singularly qualified to do so. The Government Pension Fund of Norway, formerly called the Petroleum Fund, has for years been collecting the surplus from the country’s oil revenues for the benefit of the society at large and with its current valuation of US$654 billion is the largest pension fund in the world and the largest stock owner in Europe. The Norwegians are advising Mozambique what measures to implement so that the oil revenues can at least partially be used for the long term benefit of its people. They are trying to get the country to start with establishing a petroleum policy, which would then be translated into legislation, putting an appropriate corporate governance in place. Only then should contracts be drawn up. Acting on this advice, Mozambique has established several separate institutions, a regulator, a ministry and a national oil company.

The next challenge is to train enough people to implement the legislation. A tragic feature of many developing countries facing such newly found riches has always been the temptation to do it as quickly as possible, egged on by a whole cheering crowd of companies, other countries and advisers, and of course the personal interests of people in decision-making capacity. This means countries often end up making decisions before they have improved their capacity sufficiently.

So will oil and gas be a blessing or a curse for Africa? “That’s the hundred billion dollar question”, says one official in Mozambique. That sounds ominous to me…

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