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Will oil discovery spur economic growth in region?

By Stephen Kuria and Benard Ayieko | January 13th 2016 at 00:00:00 GMT +0300

The oil and gas market has been shaken and stirred by a raging storm. Some multinationals are actually abandoning the rigs, especially offshore.

The US rig count numbers have gone down by 31 to 760 rigs on a month-by-month count. In some cases, exploration programmes have been put on the back burner.

Analysts have argued that only the rich Arab nations have sufficient financial muscle to weather this raging storm.

According to the Daily Telegraph – a British Daily published in London but distributed globally, only Saudi Arabia’s pockets are deep enough to weather the current oil slump.

audi Arabia derives 80 per cent of her total revenues from the sale of black gold.

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Even with such financial muscle, the Arab nations have also diversified to other areas to help them even out such odds.

Recent efforts by the Organisation of Petroleum Exporting Countries (OPEC) to kill off the US shale have sent oil prices further south. What this situation has done is to make East Africa’s oil and gas prospects bearish.

But why is East Africa the new frontier for oil and gas? The recent discovery of huge oil reserves in Kenya and Uganda tells the story.

Tanzania too has discovered natural gas. It is estimated that Kenya has found over 600 million barrels while Uganda has over 6.5 billion barrels of oil reserves.

Tanzania, the largest country in East Africa by geography has discovered 50.5 trillion cubic feet of gas, which is among the largest in the World.

Kenya and Uganda are expected to start the process of oil commercialisation in 2017 while Tanzania’s dream of producing gas is expected to kick-off in 2019.

These discoveries are vital to the region and could help these countries to earn billions of dollars useful in paying our foreign debts, earn foreign exchange and help in balancing current account deficits.

The discovery of oil and gas is important to the East Africa region as it has the potential of speeding up economic growth and development by attracting investments in roads, rails and other infrastructure projects.

The Lamu Port South Sudan Ethiopia Transport corridor estimated to cost $23 billion is such a key project involving the construction of network of roads, railways and pipelines linking Kenya, Ethiopia and South Sudan.

This feeds into the regional economic integration and opens up space for intra-Africa trade

The only anathema to this positive forecast is the falling oil prices.

It is not the timing that’s poor but it has also made it difficult for investors in the oil exploration sector to recoup their initial investments in the associated infrastructure.

The emergence and sudden increase in the supply of shale energy – a rapid growing trend in the US where domestic energy exploration and production of petroleum and natural gas is obtained from fine-grained sedimentary rocks, is not making the situation better.

Analysts Wood Mackenzie and Verisk Maplecroft, based in UK, concludes that Iran has the world’s third-largest oil and gas reserves, behind Russia and Venezuela but ahead of the US and Saudi Arabia.

McKinsey & Company believes Africa is expected to increase its oil production output from 13 per cent to 15 per cent by 2025. If it goes as planned, Kenya and Uganda could play a key role in growing this oil output in Africa but Africa should focus on growing its demand by utilising oil and gas produced within African borders to fire up power stations.

In fact, it is cheaper to utilise gas power stations than diesel. In Nigeria it costs $157 per megawatt hour to generate electricity whilst it only costs $55 through gas fired thermal generation.

The East African dream is valid and will persist but we have to get the fundamentals right to generate change.

Perhaps, there is an opportunity for the region to learn from Australia’s success story in the extractive sector so that we can unlock the hidden potential that the sector has on job creation, income generation and poverty alleviation.


oil drilling mining industry McKinsey & Company
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