Lifting the resource curse from Kenya’s nascent oilfields

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Since the first discoveries of substantial oil reserves in Kenya’s Lokichar Basin in 2012, the country has been caught in a seemingly interminable battle to implement the infrastructure, legislation and mechanisms necessary to turn that vast potential into cold hard cash.

It appeared that a breakthrough had been reached late last month when the government signed an agreement with major oil firms Africa Oil Corp, Total and Tullow Oil to construct a processing facility capable of handling up to 80,000 barrels of crude oil per day. Along with the proposed construction of an 820km export pipeline from Lokichar to Luma, the development is expected to cost a cumulative $3 billion, making it the largest single private investment venture in the country’s history.

However, any optimism engendered by the announcement of the deal was quickly quashed the very next day when Tullow Oil revealed that they would defer making a Final Investment Decision (FID) until 2020 at the earliest. The company cited concerns over nepotistic contract allocation, insufficient community input and flimsy legislation. Despite the initial uproar, there are plenty of other reasons why the postponement of the launch might actually turn out to be a good thing for the Kenyan people.

Inoculating against the Dutch disease

One needn’t look far to observe how mishandled windfalls from ostensibly beneficial resource discoveries can cripple countries. Nigeria is the textbook example, with corrupt officials syphoning off as much as $400 billion in the 50 years since oil was discovered in the country in 1956. Factor in the destabilizing effect that an influx of oil money has on the rest of the economy and the climate of turbulence caused by political and religious insurgency and it’s clear that while Nigeria might enjoy the largest GDP on the continent, its populace are enjoying very few of the benefits.

Closer to home, Mozambique could provide plenty of interesting lessons of its own. A US energy company announced they would be ploughing $20 billion into a liquid natural gas export terminal on the Afungi peninsula last month, potentially creating 50,000 jobs and doubling the national GDP. However, as an impoverished country with underdeveloped infrastructure, rampant corruption and a history of conflict, Mozambique is a prime candidate to develop the so-called Dutch disease, otherwise known as “resource curse”. A Corruption Perceptions Index ranking of 158/180 and an estimated $5 billion lost to political graft between 2002 and 2014 means that the stage is set for the dreaded curse to strike again.

Botswana and Senegal: Blueprints for success?

This is not to say that the situation is hopeless – but Kenya needs to internalize the lessons of some of its more successful peers before oil money starts gushing into the government’s coffers.

Take Botswana, which has done an excellent job of bucking the African trend, allowing privatization of the diamond industry to take the load off the government when it comes to investment, as well as ensuring revenues are managed sensibly and fairly. What’s more, strong trading bonds with surrounding countries such as South Africa have allowed other industries like agriculture and manufacturing to flourish even in the face of the diamond boom, as well as providing strong backing for its fragile currency. These factors, alongside the introduction of judicious measures to ensure long-term and diversified growth, have made Botswana the exception to the resource curse rule.

Although there is still plenty of time for the wheels to come off, Senegal may also represent a success story when it comes to their own handling of a fossil fuel find. In President Macky Sall, Dakar has one of the few African leaders with a background in the petrochemical industry. The president pushed for multiple reforms in the oil sector: Senegal is a member of the Extractive Industries Transparency Initiative (EITI), and has been taking advice from external actors (including the Netherlands on legislative reforms, the World Bank on its energy policy and the US-sponsored Power Africa Initiative on its Gas Master Plan). As a result, the country has moved up on Transparency International’s rankings, from 94 in 2012 to 67 last year. Dakar’s commitment to restoring resource ownership to the people rather than the politicians also spells encouraging signs for its future.

While recent accusations against Sall’s brother might temper that optimism, to his credit the President has opened up a full investigation into the issue as he seeks to reassure foreign investors.

Long road ahead for Kenyan populace

Taking into account all of the lessons mentioned above, one thing is abundantly clear: Kenya itself is not ready yet to accelerate the exploitation of oil and turn that black gold into genuine prosperity. Given that the mining sector currently accounts for less than 1% of GDP and that the industry’s first legislation was only passed three years ago, it’s clear that there’s a dearth of both infrastructure and regulation.

Having said that, there is scope for hope. The drafting of a Sovereign Wealth Fund bill is a worthy undertaking, and Kenya can look to examples from countries as diverse as Norway, Singapore and China for inspiration on how its inner workings might function. And with an estimated earning potential of $140 billion, Kenyans can dare to dream that the sector could provide a lifeline for the economy. When viewed in a positive light, the most recent delays could provide just the incentives needed to introduce more reforms, boost transparency and lay the foundations for an industry that will benefit everyday citizens for generations to come.