The Expectations of Stakeholders in Eastern Africa's Oil and Gas

18 Pages·2016·0.58 MB·English

The Expectations
of Stakeholders in
Eastern Africa’s Oil
and Gas
August 2016 / KS-1633-WB032A
The Expectations of Stakeholders in Eastern Africa’s Oil and Gas 1
About KAPSARC
The King Abdullah Petroleum Studies and Research Center (KAPSARC) is a
non-profit global institution dedicated to independent research into energy economics,
policy, technology, and the environment across all types of energy. KAPSARC’s
mandate is to advance the understanding of energy challenges and opportunities
facing the world today and tomorrow, through unbiased, independent, and high-caliber
research for the benefit of society. KAPSARC is located in Riyadh, Saudi Arabia.
Legal Notice
© Copyright 2016 King Abdullah Petroleum Studies and Research Center (KAPSARC).
No portion of this document may be reproduced or utilized without the proper attribution
to KAPSARC.
The Expectations of Stakeholders in Eastern Africa’s Oil and Gas 2
Key Points
ocal content is a political imperative in Eastern Africa, and how it is implemented has implications
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for the economics of oil and gas projects and could also affect expected government revenues.
Policymakers need to weigh the trade-off between encouraging local content against endangering
the viability of a project by loading it with ill-equipped, untrained or costly local options. Highlights from a
KAPSARC workshop on this issue include:
Stakeholder expectations about local content should be tempered by an understanding of the size of
the reserves and the development plans under consideration.
For most new-producing countries, the opportunity to create meaningful local content is front-loaded in
the value chain; primarily in the upstream activities. This is a significant point in Eastern Africa because
the time needed for workforce and SME development will exceed the CAPEX phase of many upstream
projects. Consequently, the promise of midstream and downstream local content would have missed
the opportunity.
Getting the expectations of stakeholders “right” will help maintain the social license to operate. One of
the simplest ways to do this is to begin discussions, in real terms, on what an individual or family can
expect in gains in welfare from the windfall revenues that will go to the government.
The Expectations of Stakeholders in Eastern Africa’s Oil and Gas 3
Summary for Policymakers
he expectations of citizens are some of the The scale and timing of developing Uganda’s
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most important, yet overlooked aspects of reserves mean that the bulk of investment will
developing oil and gas reserves in new- be completed before the skills and capacity
producing countries. These expectations are closely to undertake the complex engineering and
tied to the forecast income from developing the oil fabrication have been developed. Unless
and gas reserves, but these revenues are only part development plans for their oil reserves are
of the value proposition. The economic spillovers materially delayed, the opportunity for local
of local content may also be part of the prize, but
content will probably be restricted to service
the complexity of these benefits are not always well
industry jobs supporting the international
understood by domestic stakeholders.
oil companies (IOCs) and oilfield service
companies. There is an implicit trade-off
Local content has recently been seen as a political
between the rents and the spillovers.
imperative to extract more rent from the value chain,
but often these are conceived without concern for
By contrast, the scale and timing of developing
how they affect the economics of the projects. Local
their gas reserves provides Mozambique with an
content could be recast as an economic imperative
opportunity to build a natural gas-driven economy
that seeks to maximize domestic participation in the
with high levels of local content. This is true
sector, but not to the detriment of the project and the
even if initial levels of local content are low.
total revenues to be received by the government.
Getting the expectations of stakeholders “right” is
The timing and complexity of developing oil and
key to maintaining the social license to operate.
gas reserves will have a significant impact on the
With low oil and gas prices shrinking the fiscal
amount and economic impact of local content.
prize, policymakers in new-producing countries
Upstream projects generally present the earliest
are beginning to see local content as an economic
opportunity for maximizing local content in new-
imperative. Realistic expectations for stakeholders
producing countries. Despite having commercially
in the areas where oil and gas projects will be
viable amounts of oil and gas reserves that could
undertaken will be essential to prevent the political
generate significant windfalls, the reasonable
imperative from denying them the benefits of the
expectations of stakeholders in Uganda and
Mozambique should be radically different: economic spillovers.
The Expectations of Stakeholders in Eastern Africa’s Oil and Gas 4
Background to the Workshop
everal countries in Eastern Africa expect a country. The specialized nature of these projects
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to receive significant revenues from inevitably leads to significant information asymmetry
their recently discovered oil and gas that often widens the expectations gaps between
reserves. Responsibly extracting and developing stakeholders.
these reserves to promote inclusive economic
KAPSARC hosted a workshop on August 4-5,
development is the greatest challenge for
2015, in Dar es Salaam, Tanzania, to discuss the
policymakers managing these energy sectors.
expectations of stakeholders in Eastern Africa’s oil
Beyond developing the reserves, policymakers
and gas projects. This workshop brought together
have the additional challenge of managing the
some of the principal stakeholders from Uganda,
expectations of other stakeholders in the oil and gas
Mozambique, Kenya and Tanzania to explore these
projects.
issues. KAPSARC’s research partners from leading
economic think tanks in Eastern Africa joined them,
The primary stakeholders are the political
along with international experts working on issues
representatives that are ultimately accountable to
of local content and indigenization of industry. This
the public, private sector foundations that represent
workshop explored topics that included:
the domestic business community, technocrats in
the ministries that oversee the sector, the national oil
Local content: An economic imperative?
company, international oil companies and financial
institutions that fund the projects. We recognize
Local content vs. windfall revenues.
that there are additional key stakeholders such as
international donors, civil society organizations and
Expectations for midstream and downstream
regional bodies, but exclude them in an effort to development.
sharpen the discussion.
Implications for the social license to operate.
These stakeholders interact in the planning,
development and execution of these large This brief summarizes the issues and considers
energy projects, and in doing so contribute, even possible implications of these expectations in
unwittingly, to the expectations that are created in Eastern Africa’s upstream oil and gas sector.
The Expectations of Stakeholders in Eastern Africa’s Oil and Gas 5
Local Content as an Economic
Imperative
etermined not to repeat the past mistakes of the development plans being considered for each
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other countries, local content requirements country. The examples of Uganda and Mozambique
are now accepted as an “imperative” that well illustrate this.
must be addressed by policymakers in Eastern
Africa. The question is no longer whether to have Uganda has approximately 1 billion barrels of
local content requirements for the energy sector, recoverable oil reserves to be developed over three
but how much local content should be required and areas. The exploration phase is finished and the
how to implement it. The answer to these questions production phase has begun with first oil expected in
lies in how the debate is framed and by which 2020. While the production life for these reserves is
stakeholders. around 30 years, nearly 80 percent of all the capital
expenditures (CAPEX) will be made within the
In our previous workshop (Maputo, Mozambique, first five years of the development – when the field
in January 2015) local content was presented as a would have only just begun producing. KAPSARC
political imperative with its roots in the unrealized estimates total CAPEX on Uganda’s three fields to
prosperity from developing mineral resources (see be more than $8b. Operating expenditures are less
KS-1521-WB19A for the brief from this workshop). than $350m a year until decommissioning begins.
Many of the “new-producing” countries in Africa,
determined to avoid the same fate, embraced a new For Ugandan energy officials, the front loaded
resource nationalism during the time of >$100/bbl oil nature of their development plans means that the
prices. Oil and gas reserves were seen as a “cake” opportunity for local content is very short. There
that was meant to be shared between the IOCs is not enough time to create new industrial sectors
and the domestic industry/workforce in the country to yield exploration and production companies
where the resources were discovered, and political or directly service the IOCs and achieve high
leaders sought policies that would maximize the percentages of local content to the same extent
share of the cake going to their constituents. as, say, Nigeria. There’s also little opportunity for
Ugandan firms operating in other sectors to diversify
IOCs, international bodies such as the World Trade and “pivot” to the energy sector where they can win
Organization, and a growing number of researchers, contracts. Perhaps only with the discovery of new
have pointed out that politically-driven calls for commercially viable reserves could Uganda begin to
local content are potentially very harmful to the develop the industrial base necessary to sustain a
economics of these large projects; in effect reducing highly-skilled energy sector workforce.
the overall size of the cake so that there is less
for everyone. In a low oil price environment, local The economic imperative for Uganda’s local content,
content requirements that negatively impact project then, is to maximize the participation of Ugandan
economics are no longer viable. This has led to local firms in service industry jobs supporting the IOCs
content being recast as an economic imperative that and oilfield service companies. Firms working in
calls for the highest level of domestic participation areas such as administrative and support services,
in the sector without harming the viability of the food and beverage services, accommodation, freight
project. The amount and type of local content, then, transport, basic civil engineering projects, and
is highly dependent on size of the reserves and waste collection and treatment are most likely to
The Expectations of Stakeholders in Eastern Africa’s Oil and Gas 6
Local Content as an Economic Imperative
win contracts in support of the upstream business. last more than 25 years and involve more than 20
Ugandan officials are pushing hard for local fields. According to Rystad Energy, the total CAPEX
content in these support roles in the first years of required is more than $100b, with peak spending
development. By contrast, specialist oil development approximately eight years after construction of
skills such as welding and construction cease to be the liquefied natural gas (LNG) facilities begins,
large opportunities for Ugandan firms in the absence but generally equally distributed throughout the
of new discoveries. 25-year development. In other words, Mozambique’s
energy sector development is not front loaded,
Now let us consider the case of Mozambique but instead has a long period of significant foreign
with recoverable reserves of 120tcf and potential direct investment through which it could develop an
reserves of more than 250tcf of natural gas, industrial base. Mozambican energy officials have
according to Wood MacKenzie. Mozambique’s the opportunity to incentivize IOCs to develop local
exploration and production phase is expected to firms that can participate in the sector over time.
MM $ MM bbl
2500 90
80
2000
70
60
1500
50
40
1000
30
20
500
10
0
0
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048
CAPEX MM USD OPEX MM USD DECOMMISSIONING MM USD PRODUCTION MMbbl
Figure 1. KAPSARC estimates of Ugandan upstream oil production and expenditures.
Source: KAPSARC analysis.
The Expectations of Stakeholders in Eastern Africa’s Oil and Gas 7
Local Content as an Economic Imperative
Expected spending by operator spend type
Million USD
Exploration Capex
Production Opex
Abandonment Cost
LNG Expenditure
Subsea Brownfield Capex
Modification Capex
Well Capex
Development Capex
Figure 2. Rystad DCube estimates of Mozambique upstream & LNG expenditures.
Source: Rystad Energy DCube, version 2015-05-15.
The economic imperative for Mozambique’s local content requirements being considered build on
content, then, is to create an industrial base where existing laws and regulations and are not prescribing
currently none exists, which can forge the necessary manpower quotas or supply targets that could
linkages to other parts of the economy. In the short negatively affect the project. While a slew of new
run, Mozambican firms that can properly provide companies purporting to offer high-tech exploration,
services and basic civil engineering works should logistics and production expertise are opening in
be able to win contracts, but the real value of local Mozambique, the government is not yet considering
content is fostering new industrial sectors that can local content requirements in this area. Consider the
generate positive economic spillovers over time. The example of Empresa Nacional de Hidrocabonetos
question remains what is the best mechanism to (ENH), the national oil company of Mozambique,
achieve this goal. where they have identified the following short and
medium term (1-5 years) opportunities for local firms
For now it seems that Mozambique is content to to supply the exploration and production companies
allow the sector to develop organically. The local (EPCs) developing the gas fields:
The Expectations of Stakeholders in Eastern Africa’s Oil and Gas 8
Local Content as an Economic Imperative
Cabotage Certification and inspection
Shipping Topographic surveys
Demining Aviation (helicopters)
Storage Catering
Mechanic services Personnel protection and equipment
Site preparation and basic civil engineering None of these jobs are specific to the energy sector
and should easily be filled by Mozambican firms
Quarrying initially while the government and the IOCs work out
the necessary workforce development, specialized
Supplying basic construction materials
training and institutions to begin participating in jobs
directly supporting the IOCs as Mozambican EPCs.
Power supply
However, this is just the start of the country’s local
content. In the eyes of Mozambican policymakers,
Water supply
it is an economic imperative, over the long term, to
build a natural gas-driven economy with a high level
Car rental
of local content across the entire value chain similar
Education and training to Nigeria or Trinidad and Tobago.
The Expectations of Stakeholders in Eastern Africa’s Oil and Gas 9
The Expectations of Stakeholders: Local
Content versus Windfall Revenues
he cases of Uganda and Mozambique A discussion of local content requirements,
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present two very different examples of how especially those driven by a political imperative
a country’s reserves can determine the rather than economic, should be a part of the larger
economic imperative for local content. However, discussion about the economic benefits of natural
understanding these cases and appreciating the resource development. In other words, the political
complexity of each country’s reserves requires imperative to create jobs in an emerging energy
significant specialized knowledge that is often not sector should not come at the expense of resource
possessed by stakeholders in a new-producing revenues due to flow to a country’s national treasury.
country. Most stakeholders’ expectations are tied to
the expected economic benefits to be reaped from Stringent unrealistic local content requirements
developing these reserves. can create costly delays to oil and gas projects
that increases the capital expenditure required to
The primary economic benefits are in the form of develop the reserves. These cost increases are
rents paid by IOCs to explore, develop, produce and not usually absorbed by the IOCs, but are instead
sell the oil and gas found in a country. Managing passed on to the host country ultimately reducing
the revenues, and the expectations of these the revenues received by the government. The
revenues, is a significant challenge and has been political imperative to create jobs notwithstanding,
discussed previously in the KAPSARC Energy it is difficult to conceive a scenario where onerous
Workshop Series on Eastern Africa (see KAPSARC local content requirements, which delay oil and
papers KS-1520-WB18A and KS-1525-DP020A). gas projects causing major cost overruns, could
In the case of most new oil and gas producing end up creating robust forward linkages that spur
countries in Africa, the windfall of government economic growth in excess of the foregone rents.
revenue from these rents will surpass the economic Policymakers in new-producing countries advocating
impact of any local content created or increased for strong local content requirements as a political
productivity gains from existing industrial sectors. imperative should be aware of this trade-off.
The Expectations of Stakeholders in Eastern Africa’s Oil and Gas 10