Africa is set to experience an energy boom with the recent announcement by the South African government of the lifting of the moratorium on shale gas exploration and the recent discovery of oil in Namibia, Ghana and others. Nowhere is this more palpable than in East Africa. The discovery of gas in Mozambique and Tanzania, and rising estimates for oil in Uganda, Kenya, Ethiopia and Puntland in Somalia, are attracting the attention of global energy companies.

In July, European Commission president José Manuel Barroso and AndrisPiebalgs, European development commissioner, visited Mozambique and Tanzania to bolster financing in a region where European companies including Royal Dutch Shell, Cove Energy, ENI, GalpEnergia and BG Group are making inroads.

The same month, Brian Dames, CEO of South Africa’s Eskom, pledged to pursue more cross-border electricity projects with Electricidade de Moçambique. “East Africais a very exciting place to be, which is very positive for the region as a whole,” says Paul McDade, COO of Tullow Oil, an Irish company with a run of successes across the continent.

The focus now has to be on maximising the ease and speed of bringing this oil and gas into the market. Countries along the east African coastline have a distinct advantage with direct links to Asia and plans to build a liquefied natural gas terminal in Mozambique mean exports to the Asian market could begin by 2018. The upside estimates for discovered gas are around 100 trillion cubic feet, provoking energy behemoth Royal Dutch Shell to negotiate a US$2 billion (R16 billion) takeover of Cove Energy, currently the main player in Mozambique, although it lost the bidding war to PTT of Thailand.

Mozambique is also positioned to be a regional power exporter, providing gas to southern African countries as well as converting gas into electricity and selling across borders. Infrastructure constraints remain a distinct challenge with Mozambique’s government estimating that US$50 billion (R400 billion) will be required to develop export infrastructure.

Kenya is also well-poised to export oil, should commercial production be realised from recent discoveries in its Turkana region, which are potentially more substantial than Lake Albert’s oil in Uganda. Unlike Uganda, Kenya has access to the sea, quickening its route to export, although its neighbour may benefit too. Pipelines are key in this and Uganda could potentially connect to such a line if Kenya builds one.

Thisdevelopment is speculative as no decision about a pipeline has been made. Further to this, the region’s energy integration will hinge largely on progress in the creation of a port in Lamu – an island off Kenya’s northern coast. That development is a central component of Kenya’s Vision 2030 strategy, featuring a planned infrastructure project, the Lamu-South Sudan-Ethiopia Transport Corridor, connecting Ethiopia, Uganda and South Sudan. The latter could be a major supplier, although its oil reserves currently remain underground following a dispute withSudanover transit fees.

Oil constitutes 98% of South Sudan’s budget and the country an interest in accessing regional pipelines and infrastructure, offering an export route and minimising reliance on Sudan.

But while the development of regional infrastructure will greatly aid production, there are questions over the degree to which energy companies and governments will be able to work smoothly together. At the state level, bureaucratic inertia is considerable, and bilateral relations are not yet cordial enough to allow straightforward deal-making.Refining poses another challenge. Governments have been keen to ensure domestic oil can be processed within their countries, creating jobs and reducing imports. But refining involves significant scale economies and Africa’s rising producers are likely to have high-cost refining sectors. It makes much better business sense to export crude and give governments the opportunity to take direct profits. Uganda, however, has been clear: a refinery will be built.

Legal frameworks and legislation are both critical to ensuring consistent production and investment. A repeat of Uganda’s current situation cannot be allowed. In 2011, Heritage Oil, theUgandan government and Tullow Oil entered a three-way legal dispute over US$435million (R3.48 billion) of capital gains tax. The issue remains unresolved in British courts and has delayed Uganda’s commercial production.
Indications from Mozambique are encouraging for investors, with the government resisting the temptation to change its rules now that the full scale of its resources is known. A review of the country’s Petroleum Law is set to be concluded in 2013, and will not see any changes to the fiscal regime, instead focusing on emerging subsectors and gas infrastructure.

Even with solid legislation in place, there are macroeconomic challenges for the region. One concern is currency appreciation, which could affect the functioning of a regional common currency, should one ever emerge. As more big energy companies sink wells intoEast Africa, the continent’s oil and gas-rich geology will continue to bear fruit. An eye on Asian demand – still far from maturity – suggests a regional approach could benefit all involved.

Source: www.equities.com