Risk and Trends in Africa: Implications for Oil and Gas

Alex Vines, OBE, Research Director, Chatham House

March 2014

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African Oil

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Nigeria Algeria AngolaCongo (Brazzaville)Gabon ChadEquatorial GuineaCameroon Sudan

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US and Chinese Imports of Crude and Products from Selected African Countries

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China

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Kenya

Kenya Concessions

Kenya

• The president, Uhuru Kenyatta, will remain in power

until the next election in 2017-18. His Jubilee Coalition

will remain the largest group in parliament, and the

Coalition for Reforms and Democracy will be the official

opposition.

• Pro-market reforms will shape policy, but ongoing

institutional restructuring and possible turf wars may

lead to some delays in implementation.

Kenya Oil

• The latest well, Agete 1, follows four others—that have been found to contain oil since Tullow and its 50:50 partner, Canada's Africa Oil, announced in March 2012 their first success.

• Tullow is set to drill a further 12 wells over the next year, projected reserves could approach the 1bn barrel mark. This fails to match the reserve base in some of Africa's mid range oil producers, such as Chad (1.5bn barrels), Congo (1.6bn barrels) and Equatorial Guinea (1.7bn barrels), but would probably be sufficient to ensure Lokichar's commercial viability.

• Tullow was obliged to suspend operations for two weeks on security grounds (from October 26th to November 8th) after a protest march by disaffected locals demanding more jobs and opportunities to fulfil tenders. In a subsequent agreement between the firm, the central and county governments, and local community leaders Tullow agreed to double its social budget to KSh340m (US$4m) a year, to increase training programmes and facilitate local tendering. The government, for its part, promised to improve security in the region, which is prone to banditry and inter-communal clashes.

• However, the two-week shutdown caused "quite substantial" losses, according to Tullow, and there is still a risk of similar disruption in future. Another key challenge in Turkana is the poor transport network and the complete lack of oil-related infrastructure, such as pipelines, which will push up development costs and delay the onset of production

Tanzania

Tanzania

• The president, Jakaya Kikwete, will step down in 2015 when his second term ends. His party, Chama Cha Mapinduzi (CCM), will continue to dominate the political scene, but internal divisions will grow as the 2015 elections approach.

• The opposition is expected to continue to make gains, and there is the prospect that a genuine multiparty democracy will start to emerge.

• Internal split in Chadema over the competing presidential ambitions of two of its members, Wilbrod Slaa and Zitto Kabwe helps CCM.

• Demands for greater autonomy and calls by some groups for secession from the mainland will cause protests on the semi-autonomous islands of Zanzibar.

Tanzania

• The party's next presidential candidate will be selected in early 2015, and the faction associated with a former prime minister, Edward Lowassa, is now in the ascendancy. Other leading presidential contenders include the foreign affairs minister, Bernard Membe, and the works minister, John Magufuli.

• A new constitution is expected to be in place before the 2015 general election. The second draft, released in December 2013, retained a proposal for a federal union to be made up of a government of the United Republic of Tanzania, a government of Zanzibar and a government of the Tanzanian mainland. This would lead to greater devolution (with the number of issues coming under the responsibility of the union government falling from 22 to seven), thus threatening the political hegemony of the CCM.

Shell and Zanzibar

• Following the signing of the Memorandum of Understanding (MoU) between the

Revolutionary Government of Zanzibar and Shell International Exploration and

Production (Shell), in August 2013 the two parties are now looking forward to the

long-term cooperation on the development of the oil and gas sector in Zanzibar.

• Representatives of the Revolutionary Government of Zanzibar and Shell met in The

Hague, Netherlands for the inaugural joint implementation committee (JIC) on 19th –

20th January 2014. During the meeting, constructive discussions were held in the

areas of capacity building, social investment and progress in the oil and gas sector.

• The JIC was set up for the purpose of effective implementation of the MoU. The MoU

outlines the cooperation between Shell and Zanzibar in the oil and gas sector and

describes initial activities.

PSA model

• Tanzania has yet to finalise its natural gas policy, and debate rumbles on over how much gas should be sold to foreign investors and what safeguards should be put in place to ensure development of the country’s own gas and electricity sector.

• The new model published on 4 November 2013, which replaces a 2008 PSA, introduces a minimum signature bonus payment of $2.5m and a production bonus of at least $5m, payable when production starts. It also sets a royalty rate of 12.5 percent of oil or gas production for onshore or shallow operations, and 7.5 percent for tougher offshore production.

• The new offshore royalties are a notable increase from 5 percent previously.

• Cost recovery - the amount companies can recover per year before profit splitting with the state - has been reduced to 50 percent from 70 percent previously. Unlike the previous rules, the obligation to pay capital gains tax is now detailed. While this will increase the costs of farming out, it could reduce the likelihood of the kinds of investor disputes which have stalled oil and gas activity in neighbouring countries - especially Uganda, where a lack of clarity over capital gains tax led to several arbitrations between companies and the state.

• A local content provision is highlighted by some analysts as problematic. The new rules are somewhat vague. They oblige companies to maximise their utilisation of goods, services and materials from Tanzania, giving priority to locals “in all aspects of petroleum operations”, and require an annual spending plan of $500,000 earmarked for developing the skillsets of Tanzanians. In effect, companies are being asked to sign up to the country’s local content rules, but there is currently no local content strategy at the national level,

• The opposition seeks a firmer stance on local participation in the sector

"Natural Gas Policy of Tanzania 2013

• The "Natural Gas Policy of Tanzania 2013" document regulates mid and downstream activities of the industry, which include gas processing, liquefaction, transportation, storage and distribution.

• The policy document states the government would "ensure that the domestic market is given first priority over the export market in gas supply."

• The government said a separate policy would be drafted to guide upstream activities such as exploration, development and production stages of oil and gas operations

• The policy also said the government would ensure natural gas processing takes places on shore, contrary to calls by the international oil and gas firms who would prefer to build off-shore plants.

• The policy also calls for the establishment of a natural gas revenue fund to ensure transparency and accountability over collection, allocation, expenditure and management of all natural gas revenues.

Licensing Round

• The new terms do not affect existing licenses, but apply to the current licensing round launched on 25 October 2013 in Dar es Salaam. The round - Tanzania’s fourth, which runs until May 2014 - is offering seven deep sea offshore blocks next to proven reserves (in depths of 2,000 to 3,000m) and the Lake Tanganyika North Offshore Block, which is at 1,500m and runs along the western arm of the East African Rift System, a proven play for commercial liquid hydrocarbons. Asian companies are showing particular interest, such as ONGC and Thailand’s PTT.

Mtwara Pipeline

• Protests in Mtwara in 2013 against the US$1.2bn pipeline that is to be constructed to transport natural gas from Mtwara to Dar es Salaam.

• The protests were in reaction to the presentation of the Ministry of Energy and Mineral Resources' budget 2013/14

• Minister Sospeter Muhongo confirmed that construction of the pipeline would proceed despite local opposition.

• The gas pipeline project forms a key part of the government's plans to make effective use of Tanzania's recently discovered gas reserves. It is to be used to transport gas to Dar es Salaam, where it will be used to generate roughly 3,900 mw of power. This is well above Tanzania's current peak power demand of roughly 950 mw and would bring an end to the chronic power shortfalls that have crippled local businesses.

• The rationale for transporting gas to Dar es Salaam seems to be that this is where most electricity is consumed. The pipeline has, however, faced strong opposition in Mtwara, whose residents want the gas to be processed locally to boost employment opportunities. Mtwara remains one of the most underdeveloped regions in the country, with high levels of poverty and unemployment.

• Dissatisfaction with the distribution of revenue from the gas sector will contribute to sporadic unrest in coming years .

• This will not significantly undermine the sector's development.

Mozambique

2014 2014

Daviz Simango

Afonso Dlakhama

Jose Pacheco, Alberto

Vaquina and Filipe

Nyussi

GAS and Oil

• Wood Mackenzie expects Mozambique to export its first LNG cargo by 2019, while Tanzania will have to wait until 2021.

• “Frelimo’s dominance remains unchallenged. As such, pending changes to regulatory and fiscal codes for the gas sector in Mozambique are likely to pass through the legislature by year’s end and before a new bid round in Q1 2014,” according to Eurasia Group

• Many analysts put Mozambique’s first LNG exports at around 55 billion cm per year, which would amount to annual revenues of over $30 billion at current spot LNG prices paid in Asia, where Mozambique plans to sell

• Any commercial oil discovery would pose difficult questions for Mozambique: would LNG remain the priority, or would the focus switch to oil?

• On 28 November 2013 Sasol also declared that it expected to begin commercial production of oil in Mozambique in 2014, based on a small onshore discovery near the Temane field in the southern Inhambane province. The field would represent the first commercial production of oil in Mozambique, where hitherto only natural gas discoveries had been considered viable. The project is to produce about 2,000 barrels/day of oil, a small amount in commercial terms, but which would further diversify Mozambique's export base.

• “The clock is ticking for both nations, as global shale gas exports threaten to saturate the markets before either has had time to export any gas.” Lloyds Energy Review

Uganda

Uganda

• The president, Yoweri Museveni, and his National

Resistance Movement (NRM) have ruled Uganda since

1986 and will continue to dominate the political scene.

• Uganda is a possible target for al-Shabab, a group of

Islamist insurgents that opposes the presence of Ugandan

troops in Somalia. Bomb attacks are a strong possibility

given Uganda's porous borders and weak law enforcement.

• The negotiation of oil contracts will prove controversial, and

the opposition will seek to stoke public resentment over the

perceived inequity and corruption involved in the deals that

are struck.

Uganda

• Since the discovery of oil in 2006, the development of Uganda's oil industry has moved at a glacial pace and commercial oil production is unlikely before 2017, at the earliest. In September the government granted its first production licence to a consortium comprising Tullow Oil, Total and the state owned CNOOC.

• The approval of a new legislative and regulatory framework in December 2012 also paved the way for a new round of exploration licensing.

• Further discoveries could significantly increase the size of recoverable reserves.

• Uganda's oil industry could generate US$5bn a year, equivalent to 23% of the country's GDP today. The current production-sharing agreements imply that more than 60% of this would go to the government, lifting annual public revenue by US$3bn. (To provide a comparison, Uganda's total domestic revenue last year was just US$2.8bn.)

• Uganda's government says it has finalized negotiations with foreign oil companies exploring in the country, clearing the way for to start commercial crude production.

– The office of Energy Minister Irene Muloni said on 27 January 2013 that the government is set to sign a memorandum of

understanding with the companies: Britain's Tullow Oil, France's Total, and state-owned China National Offshore Oil Corp. It remains unclear when that will happen.

Regional Infrastructure & Politics

Conflict Trends

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Leadership Transitions

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2012

• Oxford Analytica

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2012

• Control Risks

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Risk Zones

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Block Operator Partners

19/11 BP (50%) Sonangol P&P (40%), China Sonangol (10%)

24/11 BP (50%) Sonangol P&P (50%)

20/11 Cobalt (40%) Sonangol P&P (30%), BP (20%),

China Sonangol (10%)

36/11 Conoco-Phillips (30%) Sonangol P&P (50%), China Sonangol (20%)

37/11 Conoco-Phillips (30%) Sonangol P&P (50%), Repsol (20%)

35/11 ENI (30%) Sonangol P&P (45%), Repsol (25%)

22/11 Repsol (30%) Sonangol P&P (50%), Statoil (20%)

38/11 Statoil (40%) Sonangol P&P(30%), China Sonangol (15%),

ExxonMobil (15%)

39/11 Statoil (40%) Sonangol P&P (30%), Total (15%), ExxonMobil

(15%)

25/11 Total (35%) Sonangol P&P (30%), Statoil (20%), BP (15%)

40/11 Total (35%) Sonangol P&P (35%), Statoil (20%),

ExxonMobil (15%)

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Pre-Salt (February 2011)

Block (s)

Company

Year Acquired

Share (%)

Partners

19 CSIH 2011 10 BP [OP]

20 CSIH 2011 10 Cobalt [OP] (40%)

36 CSIH 2011 20 Conoco-Phillips [OP]

38 CSIH 2011 15 Statoil [OP]

Data on corruption

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% of firms expecting to give gifts…

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Cobalt

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Medium and Long Term - Demographic

• Pop. Growth 2.87% (2012 est.)

• Urban growth rate 4.93%

• Rural areas 1.03%

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WB Data

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June 2008

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August 2011

Dar – one of the fastest growing cities

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Sahel

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Arc of Instability

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Nigeria: ‘Puzzling Contrasts’

• Nigeria will be sub-Saharan Africa’s biggest economy, sooner rather than later;

• Ranked 153 out of 186 countries in the United Nations Human Development Index;

• Estimated 10.5 million children out of school; close to 25% working age population is unemployed;

• Economic growth will average 7% in 2014-17; is estimated to be 6.7% in 2013;

• Political leadership, party splits and the north-south divide: furthering political polarisation and economic isolation. Boko Haram will “swim in a tide of chaos”;

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Succession Risks in 2011- what has changed?

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Piracy –

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African Trends to 2025

Increasing transnational security challenges

Weak institutional capacity and resilience;

Strong economic growth and increasing resource demand;

Increasing demographic changes and urbanization;

Advances in communications and information technology

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1 2 RISK FACTORS FOR INSTABILITY IN AFRICA

SO CIAL, CULTURAL,

DEMO GRAPHIC FACTO RS Ethnicity

Language

Religion

Group geography, histories, relations

Urbanization

Center-Periphery divide

Youth bulge

SECURITY FACTO RS

Security forces used as political tool for oppression

Abusive, corrupt, poorly trained security forces

Limited civilian control of security forces

State unable to provide security

History of coups, violence, group conflict

Presence of armed groups

Presence of organized crime groups

High crime levels

ECO NO MIC FACTO RS Poverty

Inequality and unequal

opportunity

Mismanagement

Corruption

Unemployment

Discriminatory economic institutions

Natural resource competition

Land management

Development and modernization

Illicit networks

PO LITICAL FACTO RS Elite politics

Inter-group politics

Poor governance

Weak and/or discriminatory institutions

Weak or nonexistent conflict resolution mechanisms

Corruption

“Ungoverned” spaces; safe havens

Divisive electoral systems

Exclusionary national ideologies

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Thank you.

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