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Building an African regional content

May 27, 2020

Dr. Arron Tchouka Singhe is an oil & gas expert, and key advisor to African countries on policies and strategies to maximize the benefits of exploitation of their petroleum resources.

He currently serves at Chief Oil Sector Officer at the African Development Bank and has previously held technical, managerial and business development positions in research institutions, petroleum industry and strategic management consulting. He holds a PhD and MSc in Petroleum Engineering from Clausthal University of Technology in Germany and an MBA in Oil & Gas Management from Robert Gordon University in the UK. He earlier obtained a first degree in Petrochemical Engineering from the Rivers State University of Sciences and Technology in Nigeria. Views expressed in this interview are personal.

How would you encourage the creation of African joint-ventures and partnerships to boost the African regional content?

It is important to promote development of infrastructure and value chains with regional scope and encourage partnerships amongst entrepreneurs and businesses. Nodes of the chains should be developed in different countries based on their competitive and comparative advantages in the region and the continent. These infrastructures are natural platforms for integration and collaboration amongst suppliers and services providers in the region or sub-regions.

For instance, a country with easy sea access could be the export logistic and refinery hub in an oil value-chain where resources are more important in neighbouring landlocked countries, which would naturally develop crude oil production nodes. Crude oil will be transported to the export hubs and the refinery through a pipeline and petroleum products would be transported to the landlocked countries through another pipeline. There instances of such constellation in East Africa with Kenya, Tanzania, Uganda and South Sudan and in West Africa with Niger, Mali, Benin, Senegal. These countries are exploring optimal models that would benefit each of them and their subregions. Many countries in the Central African subregion and the Gulf of Guinea, including Equatorial Guinea would also be strategic crude oil refinery and mini-LNG hubs for petroleum products and gas supply for the subregion and neighbouring countries. They offer opportunities to develop co-owned and shared infrastructure.

Similar layouts would work for gas projects to enable landlocked countries to export their gas and all resources-rich countries to support lighting up and powering Africa. Resources-rich countries can collaborate with resources-poor countries to develop co-owned or shared infrastructure that support production and transportation of gas to end-users. This is another opportunity to develop regional value chains with strategic nodes in different countries. Nigeria stands in a strong position with its estimated 210 trillion cubic feet of gas reserves, to supply neighbouring countries and export through pipelines that exit on the Mediterranean Sea and the Senegal coast on the Atlantic Ocean for instance. The West African Pipeline is an initiative in this direction and its completion will be a marked advancement of cooperation in energy infrastructure. Mozambique could also export to South Africa or Zimbabwe, and Tanzania to Uganda and other neighbours. These projects are natural platforms for integration and collaboration amongst suppliers and service providers from countries they are covering. Policies and regulations in these countries should be able to facilitate such collaborations.

Businesses and entrepreneurs from different countries should join their forces based on their competitive and comparative advantages to develop different types of joint-ventures and strategic alliancing. It is important to have policies that make it easy for all Africans to invest and create businesses in all parts of Africa in partnership with local companies. Policies and regulations should encourage the formation of joint ventures and different types of strategic alliancing.

My experience with alliances is that they help in a less cumbersome way than Joint ventures, to tap resources and seize opportunities that only one company would be able to. Encouraging alliancing with specialists’ type would enable experienced suppliers and service providers from countries with mature oil and gas industries like Nigeria, Egypt and Algeria to collaborate with new suppliers and service providers in countries with emerging oil and gas industries like Uganda, Senegal and Tanzania – to seize opportunities and facilitate the transfer/acquisition of technology and capabilities. In addition, with advantaged network of producers and suppliers type of alliancing, which is very well developed in the car and aviation industry, an oil & gas majors like Total or Shell or a major service company like Schlumberger or Halliburton may act as a “system integrator” to orchestrate alliances and contractual relationships involving suppliers and services providers with the aim of reducing costs and timelines and ensuring access to crucial inputs and technologies.

What can upcoming producers like Senegal and Uganda do to plan for future oil & gas production and ensure these resources benefit their local industries that have never worked in the sector before?

Traditional African oil producers must analyse challenges and opportunities for larger economic beneficiation in general and local industry beneficiation in particular. Local and regional content needs to be one of the pillars of the oil and gas strategy, and the oil and gas strategy itself must be well integrated in a national development strategy that is aligned with the African Union’s Agenda 2063, the United Nations’ Sustainable Development Goals and the Paris Agreement. That’s a big conundrum for nascent oil and gas industries. It comes with the dilemma of developing a full-fledged oil and gas industry looking at a fifty years’ horizon at least, or accelerating revenues accrual through rents to diversify the economy, looking at a horizon of 20 to 30 years with peak oil around mid-2030s. I would advise to cut the pie into two. Production can be used to generate rents to invest in infrastructure and improve the business environment, provide energy to support industrialisation and accelerate economic diversification – this would also require developing some aspects of the industry to add value to support diversification, and where the country sees a comparative advantage. For instance, hydrocarbons can be used to manufacture fertilisers to support agricultural development.

This said, these emerging producers must first make sure that their projects get off the ground and oil and gas start flowing. Financing is becoming increasingly challenging for oil and projects. They should make sure, especially with the COVID-19 outbreak, that FIDs and other financing streams are secured or maintained in the pipeline. They should improve certainty in their legal and regulatory frameworks and be innovative and prompt to renegotiate certain terms of existing agreements, bearing in mind that the overarching principle governing long term contracts is “balancing the risk and reward” throughout the contract’s lifecycle. They also have to ensure transparency and accountability to improve governance. They may introduce e-governance and enhance collaboration amongst stakeholders with information technology – this may reduce the influence of political economy, bearing in mind that political linkages develop very fast as the industry is maturing.

With unprecedented huge amounts of funds anticipated to flow in these countries through oil and gas investments, it will be very daunting to prevent resources curse and the symptoms of the Dutch Disease. What I will advise is for the countries to put in place policies and regulations that will help to maximise in-country value creation, foster domestic linkages and quick economic diversification. First of all, oil and gas production should help satisfy all domestic needs for petroleum products, electricity for homes and businesses, and power for industrialisation. Part of the oil and gas production should also be used as raw materials for fertilisers and inputs for chemical industry in the countries. These industries may have a regional or sub-regional scope to access a larger market and contribute to regional integration.

Hydrocarbons production should also help improve the quality of lives by supporting development of physical infrastructure (shared infrastructure), creating direct and indirect employment and promoting development of human capital through transfer/acquisition of technologies and capabilities that can be used in other sectors of the economy.

Oil and gas exploitation should align with Paris Agreement. The industry should minimise its carbon footprint by ensuring zero flaring and venting at oil and gas fields. This implies domesticating and monetising flare gas, from which LPG can be extracted and used as cooking fuel to replace firewood and reduce diseases and deaths associated with indoor air pollution caused by using firewood.

Where do you think multilateral development banks can play the biggest role in the development of a robust gas industry across Africa?

Support from financial institutions should be aligned with their priorities, and such support should aim at using natural gas resources to steer economic development and improve the quality of lives of the people. For instance, natural gas should be used to provide electricity and power for homes, businesses and productive use. It should also be used as raw material to produce fertilisers for agricultural development and as cooking fuel to replace firewood. These institutions should preferably fund projects that favour economic diversification, drive sustainable development and help reduce carbon footprint of the industry by promoting gas utilisation and domestication to eliminate flaring at oil and gas fields and processing facilities – in a bid to help African countries to meet their NDC commitments under the Paris Agreement. They should strongly advocate for projects and value chains with regional scope and help to broker dialogue amongst stakeholders to facilitate layout and implementation of these projects and value chains.

In addition, their supports should be accompanied by ancillary supports that would play a catalytic role in achieving desired outcome and impacts. These include:

  • Advising with policies that promote sustainable development of the natural gas resources and maximise in-country value;
  • Advocating for social inclusion, enhanced transparency and accountability, and participation of all stakeholders including the civil society;
  • Building capacity of local suppliers to facilitate access to funding to help them seize business opportunities;
  • Building capacity of institutions and policymakers, lawmakers and regulators to improve benefits derived from the gas, ensure environmental and social safeguard and overall good governance of the industry.
  • Improving legal and regulatory framework and contract negotiation capabilities.

Looking forward and across the various African energy markets, where do you see most opportunities to create local value through energy investments?

Creation of local value is increasingly becoming an important criterion to secure financial institutions’ buy-in. Renewables are rising fast and there is growing consensus that oil and gas will still make important shares of energy mix for the next decades. Value will be created through investing in renewable energy as well as in oil and gas, but with right strategies and policies. Renewables have the potential to create more jobs and easily provide electricity in remote places through standalone systems and mini-grids than oil and gas. Also, enhancing in-country value creation in oil and gas projects, will help provide energy for industrialisation and facilitate fuel-switching in domestic cooking, where firewood can be replaced by electricity and LPG.

It will be important to build resilient value chains with highly localised/regionalised supply chains by developing and empowering suppliers on the continent. As the world is embracing renewable energies and moving towards low carbon economies, it will be important to ensure that African countries maximise in-country value creation and use their renewable energy resources to complement oil and gas and accelerate economic diversification. In this sense, renewable energy value chains or important part of them should be localised in Africa.

Solar and wind energy technologies for instance use minerals that are present and abundant on the continent. Photovoltaic cells are made of silicon and platinum, and concentrated solar power parabolic troughs of silicon and metals. Wind turbines also use rare earth minerals – neodymium and dysprosium, of which the demand is fast rising. They have been used in about one-third of wind turbines installed globally in 2018. It is projected that with the growing demand for green energy the demand for rare earth minerals will more than double by 2030 compared to 2018 volumes.

Electric vehicles are quickly penetrating the market thanks to advancements in Li-ion batteries based principally on Lithium and Cobalt, which are abundant on the continent. The increasing demand for electric vehicles will accelerate the demand for Lithium, cobalt and rare earth minerals that they also use. African countries should make sure that mining of lithium , cobalt and rare earth minerals does not follow the same paths as that of oil and gas and industrial minerals such as iron ore and bauxite – coming with resources curse and associated so called Dutch disease. All or part of the raw materials should be refined locally, and battery manufacturing industries should be developed on the continent.

In fine, it is very important to encourage development of local financial markets and participation of local investors and financial institutions in the energy sector. Local and regional financial institutions can synergise to develop syndicated loan facilities for energy projects on the continent. Policies and regulations must be able to support this.