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When, in February, Somalia’s ambassador to Kenya found himself bundled aboard a direct flight to Mogadishu after hasty instruction from the Kenyan government, it was clear that the long-standing Indian Ocean border dispute between Kenyan and Somalia had reached a new low.
With both sides laying claim to a 100,000sq km triangle containing potential offshore oil and gas, the long-standing row – which was taken to the International Court of Justice (ICJ) in 2014 – was triggered once more after Kenya accused Somalia of auctioning off four contested blocks to bidders during a conference in London earlier this year.
While the Mogadishu government strongly denies this claim, Kenya’s foreign affairs principal secretary, Macharia Kamau, hit back by saying:
“This unparalleled affront and illegal grab at the resources of Kenya will not go unanswered and is tantamount to an act of aggression against the people of Kenya and their resources.”
As diplomats and ministers continue to trade blows, accusing one another of undermining national sovereignty and threatening regional stability, the standoff reminds the region of its lucrative hydrocarbon reserves and the high stakes involved in their exploitation.
Substantial discoveries made over the past decade have drawn the focus of large international oil companies (IOCs) – some of whom are beginning to produce at established sites along east Africa’s India Ocean seaboard – and have triggered the interest of a flurry of smaller exploration companies and eager parastatals looking to pioneer the next big find.
Africa’s Indian Ocean sits directly opposite the energy-hungry Asian markets of India, Southeast Asia and China.
With liquefied gas able to ship directly from source to port across the ocean, the positioning acts as a huge draw for investors looking to minimise their transport overheads and reach their Asian customer base.
With industry experts believing the relatively unexplored region may hold significant oil and gas reserves, the lucrative sector could fast-track development if governments are able to capture, realise and democratise the profits.
Ed Hobey-Hamsher, senior Africa analyst at global risk consultancy Verisk Maplecroft, argues that oil and gas potential in the region is vast.
“I don’t think anyone wants to be left behind,” he says.
“It’s not an easy place to do business but that certainly doesn’t mean that IOCs can afford to overlook it.”
Regional potential
Darren Woods, CEO of Texas-based ExxonMobil, the world’s largest publicly traded oil company, stunned industry observers last year when he announced plans to spend more than $200bn over the next seven years to increase his firm’s production of fossil fuels, along with investing in petrochemicals and refining.
This announcement came against a backdrop of modest capital expenditure in oil and gas by industry majors since the price of crude tanked in 2014.
As oil prices tentatively rebound, with Bank of America Merrill Lynch’s energy outlook for 2019 expecting Brent crude to settle at around $70 – although the risk of price volatility is high in the context of global trade disruptions – many IOCs are looking to ramp up output and increase profits.
ExxonMobil is banking on increased demand, despite global efforts to diversify the energy mix, and frontier markets like East Africa’s Indian Ocean will come to represent an ever-increasing share of industry portfolios, say analysts.
Two substantial discoveries over the last decade – gas in northern Mozambique and oil in Uganda – have directed the industry spotlight towards the East African and Indian Ocean regions, with many believing these finds are just the tip of the iceberg.
Workers on a rig in Mozambique’s offshore Coral Field. The Coral natural gas field located in Area 4, offshore Mozambique, is being developed by Eni as the operator.
Italian oil major ENI along with US explorer Anadarko (which was acquired by Chevron in April for a total cost of $50bn) made a series of discoveries in Mozambique’s Rovuma Basin in 2010, in what was billed as the biggest natural gas find in recent decades.
With proven reserves of 100 trillion cubic feet (tcf), and resource estimates of 150 tcf, the Rovuma field holds enough gas to supply Germany, Britain, France and Italy for 15 years.
If these reserves are exploited effectively, experts predict that Mozambique could become the world’s third largest exporter of liquefied natural gas (LNG).
In 2006, Uganda discovered oil in the Albertine Rift Basin near its border with the Democratic Republic of Congo (DRC).
Reserves are estimated at 6bn barrels, with production expected to begin in 2022 and plateau at 230,000 barrels per day (bpd).
Although this pales in comparison with Nigeria’s capacity of 2.5m bpd, the ability of Uganda to kickstart production by partnering with large companies – in this case French major Total and China National Offshore Oil Corporation – is regarded as a prototype for the region.
Matthew Richmond, owner of Dar es Salaam-founded Samaki Consultants, believes the success or otherwise of these two projects will ultimately determine the overarching appetite for investment in oil and gas throughout the region.
“All eyes are on how it will work out with Uganda exporting their crude and how it will work out with Mozambique exporting their liquefied natural gas,” he says.
“Those are the two benchmarks on what happens in eastern Africa.”
After considerable industry to-ing and fro-ing following setbacks that include instability in the region and Mozambique’s hidden debt scandal, Maputo is awaiting final investment decisions (FIDs) from Anadarko and ExxonMobil – the two largest stakeholders in its gas fields – amounting to $20bn and $30bn respectively.
ExxonMobil’s Darren Woods has stated that the firm’s decision will be made later this year, as the company evaluates bids submitted by groups competing to build a pair of mega-liquefaction trains to liquefy gas in Mozambique’s north-eastern Cabo Delgado region – home to the Rovuma Basin.
Anadarko’s decision may come earlier, with chairman Al Walker saying they are “very close” after having secured a sales and purchase agreement (SPA) with India’s Bharat Petroleum Corporation, which has undertaken to purchase 1m tonnes per annum (tpa) of LNG for 15 years.
This brings the total number of locked-in gas sales to 8.5m tpa out of a 12.88m tpa capacity – a level Anadarko has previously said would allow it to make the investment.
Anadarko, an LNG and Africa novice, was forced to secure export destinations before it was able to secure finance and ultimately commit to the project.
ExxonMobil, with its large balance sheet and global network of buyers, along with extensive experience on the continent, is able to commit with far fewer stipulations from its partners.
While the FIDs signal the biggest steps yet towards unlocking Mozambique’s gas potential, Verisk Maplecroft’s Hobey-Hamsher emphasises that the two fields aren’t predicted to come online until 2024, meaning that stakeholders – particularly the Mozambican government – shouldn’t expect dividends anytime soon.
“If you talk to the government, they are still talking about LNG coming online in 2022 and that’s just not feasible,” he comments.
“We expect the fields to come online in 2024 but in terms of the government revenues that will be 2027.”
This, he argues, represents significant political risk for Mozambique as there are “massive discrepancies” between what the government is promising and what it will be able to deliver.
Other hindrances that continue to blight the country’s investment climate include the discovery of $2bn worth of hidden public debt in 2016, which saw the IMF cut funding and confidence in Mozambique plummet.
Al-Shabaab affiliated militants also continue to wreak havoc in Mozambique’s Cabo Delgado region, with an attack on Anadarko LNG infrastructure earlier this year resulting in the death of a company contractor.
Such political and security risks mirror issues in other resource-rich areas across the continent and are often the deciding factor in whether governments can capitalise on their natural wealth or not.
