The True Value of Our Resources
Big Barrels, the new book by NJ Ayuk and João Marques, takes a look at African solutions for African resource challenges.
Oil tends to have an enormous potential for disruption. The industry’s capital-intensive nature produces a staggering amount of wealth in a short period of time, but often bringing with it an inability to create jobs for locals, inflationary pressures and a destructive effect on other economic sectors. Does it have to be so? Our book, Big Barrels: African Oil and Gas and the Quest for Prosperity says that it doesn’t.
African nations from the Gulf of Guinea to the Mozambique Channel are finding their own solutions to problems that surface throughout the global energy industry. Forging a new path, responding to new challenges and implementing fit-for-purpose ideas, these petroleum explorers and producers each provide powerful examples of African solutions for African resources.
Ghana: Speed and Commitment
Ghana is the number one place to go to for an example of how to start an oil industry from scratch. After the discovery of the Jubilee field in 2007, quick development by Tullow Oil and Kosmos Energy saw the field producing first oil in just 40 months. Not a lot of time to prepare for a country with no experience in the oil industry. The first step was to ask for guidance from those who had succeeded before. Through the support of Norway and the assistance of global institutions including the IMF and the World Bank, Ghana’s leaders streamlined a comprehensive regulatory structure to deal with capital inflows from the oil industry under the Petroleum Revenue Management Act of 2011. This act was to be lauded as the best-designed and most responsible piece of oil legislation on the continent by international partners, and for good reason.
Caps on spending and access to capital for the national budget were imposed under the regulation of institutions independent from the government. The act also created the Ghana Petroleum Funds. Conscious of the volatility of crude oil prices, the government established the Ghana Stability Fund, which takes a part of the annual profits from oil production and keeps it for when oil revenue falls below expectation and a compensation of the national budget is necessary. To safeguard the rights of future generations, the act establishes the Ghana Heritage Fund, which is to keep its proceedings for at least 15 years without being touched. These structures, defined from the outset in Ghana, took Norway around 40 years to create, and are evidence of a level of political transparency and commitment to sustainability unusual in any country.
Another good example from Ghana is its free press and active civil society. In contrast to many other places, where the lack of involvement and understanding of the oil industry has given rise to protests (like in Mtwara, Tanzania), riots and even armed groups acting to sabotage the industry (as in the Niger Delta, Nigeria), in Ghana the population was actively involved in the drafting of the regulation that would come to manage oil revenue. The press covered the subject regularly and balanced the pros and cons accurately. Civil society organizations (CSOs) were quick to organize and build their own capacity to scrutinize oil contracts and demand regulatory transparency.
Today, the Civil Society Platform on Oil and Gas (CSPOG) is Ghana’s main popular platform to scrutinize the government’s role in oil revenue management, acting as an umbrella organization for 60 petroleum-specific CSOs and about 120 members. It was the CSPOG that lobbied for the government to release the draft Petroleum Revenue Management Act to the public for popular scrutiny and actively contributed to the inclusion of changes to the document, demanding tighter regulation and transparency initiatives. These and other organizations also promoted clarification sessions all across the country to instruct people on what was to come and to manage their expectations about the wealth to come from the oil industry. The social stability despite rapid change in Ghana proves the value of popular input in the ongoing regulatory debate.
Nigeria: Local Content Trial, Error and Success
The oil industry is mainly controlled by multinationals and many countries struggle to create opportunities for local workers and companies. Nigeria has had decades of trials with different local content strategies and can offer some insight into how to go about creating local content policy. Since the 1970s Nigeria tried to impose quotas on local employee participation, as well as local ownership, to little success. The capital intense nature of the industry implies that only a miniscule part of the population can be employed by the operating companies. Lack of expertise and trained professionals among the local population further exacerbates the problem. Local ownership failed to promote integration, as it mostly answered the interests of well placed individuals, thereby failing to meet the needs of the wider population and facilitate the transfer of wealth.
In 2000 the paradigm started to shift from indigenization to what is now referred to as the domiciliation of capital strategy. This does not mean forcing the companies to keep capital in the country, but giving them the resources to do so. Through this approach and accompanying regulation the government has managed to push foreign companies to keep their procurement in-country, enabling a spectrum of activity and wealth creation much wider than that of direct employment in oil production. Through the promotion of training programs locally and abroad and the development of pipe mills, shipyards, welding companies and a myriad of associated services, the government made it possible for the oil companies to source their equipment and services locally, technically making it cheaper for them, and giving both employment and capital involvement to locals. The strengthening of the financial sector and creating guarantee structures for investors has also allowed a greater involvement by the financial sector in the Nigerian oil industry. After 50 years of oil production, Nigerians made the oil industry their own.
Profits from Transparency
Issues of corruption are not uncommon among oil producing countries. Weak regulatory and administrative structures as well as ill designed policies and excessive opacity regarding deals and contracts gives a lot of room for officials to take advantage of their positions. The introduction of transparency policies in national law can help mitigate this problem. Nigeria and Liberia, for instance, have both become compliant members of the Extractive Industries Transparency Initiative. Member countries file regular reports citing the proceeds from oil and gas and companies’ payments to governments. This has allowed for payment reconciliation analysis to detect billions of dollars in unpaid taxes over the last decade, and made it clear to governments how much they stand to lose by allowing lapses in transparency. Ghana is now making it mandatory that all oil contracts signed are published for public scrutiny. And Nigeria is imposing a beneficial ownership disclosure law that will allow authorities to know exactly who benefits from contracts signed with the government and if any of them is a position of conflict of interest.
The Way Ahead
Management of the petroleum industry and its revenues is not a one-size-fits-all affair. Local conditions vary widely and the challenges are many, but so are the potential rewards for the local populations. With its oil and gas revenues, Equatorial Guinea went from having almost no power at all to full electricity access in just 20 years; oil has greatly contributed to infrastructure development in Ghana, and Mozambique’s and Tanzania’s gas reserves have the potential to lift millions of people from poverty.
There has been no example of a country deciding not to exploit its oil reserves for fear of economic instability, and no leader is going to deny their people the possibility to improve their living conditions. The case studies in Big Barrels show that for African nations the ‘resource curse’ stereotypes are being made redundant. For many parts of this continent, petroleum resources are the route to prosperity.
Big Barrels: African Oil & Gas and the Quest for Prosperity by NJ Ayuk and João Marques will be officially launched at the Africa Oil & Power 2017 conference on June 5-7 in Cape Town. NJ Ayuk will be speaking on our Policy and Law panel.
Picture courtesy: LADOL