East Africa: the next gold rush?

An article in this week’s Economist brings to attention the surge of oil and gas finds that are now happening in East Africa, almost seemingly on a daily basis.

These discoveries have the potential to attract billions in foreign investment to develop rigs, pipelines, LNG terminals, and other infrastructure. Exploitation of these new hydrocarbon findings may also support broader economic growth, especially if it contributes to reductions in fuel and electricity costs in the once energy-poor region.

A recap: On March 26th,  Kenya learned it has oil, as a British oil firm, Tullow, announced a big oil strike near Kenya’s borders with Uganda and South Sudan. While the scope of the find is not yet known, Tullow, which also discovered some 2bn barrels in Uganda in 2006, compared the find to the North Sea discovery of the 1960s.

The finds in Kenya and Uganda are not blips, but fit into a clearly forming trend. In the last month alone, East Africa had several other finds, in Tanzania and Mozambique.

In Tanzania, Britain’s BG Group found 3.4tn cubic feet of natural gas off the coast. This was on the heels of a 5tn cu. ft. discovery by Norway’s Statoil in February.

In Mozambique, Italy’s ENI found 10tn cu. ft. of offshore gas, while Texas-based Anadarko scored new finds in its offshore bloc, raising the estimate for the zone, dubbed “Prosperidade,” to 17-30tn cu. ft. Both finds were reported in the last two weeks.

Meanwhile, in Ethiopia, the government has ordered construction of a series of dams on the Blue Nile, the biggest of which will generate 5,250MW hours, quintupling the country’s electricity production – which, as noted by the Economist, has the potential to  dramatically lower electricity costs and therefore help country to develop manufacturing industries. (It is notable that Ethiopia is the only emerging market with over 80mn people that was not included in Goldman Sachs’ “BRIC” or “Next 11” groups).

All these finds suggest a surge of foreign investment may be in store for East Africa. The Ethiopian dams will require $8bn, and they may be accompanied by another big investment to exploit newly discovered gas finds in Ethiopia’s restive, ethnic-Somali Ogaden region. A Chinese company, PetroTrans, wants to invest $4bn in this project – a big commitment for a zone with serious political and security risks.

Uganda and Kenya are already talking about building refineries to exploit their newly-discovered oil resources. China’s government just lent $1bn to Tanzania to build a pipeline to bring its offshore gas to land. Surely, there will be many more investments.

In 2010, East Africa received $5.8bn of FDI, or just 0.5% of the world total, according to data from the UN Conference on Trade and Development (UNCTAD). This paltry sum pales in comparison to that received by Africa’s top energy exporters, Angola and Nigeria. Angola alone collected $9.9bn in in 2010, while Nigeria received $6.6bn.

The FDI now likely headed to Ethiopia, Kenya, Uganda, Tanzania, and Mozambique will change the East African numbers. As these and more investments fall into place, they could have a significant impact on one of the world’s most impoverished regions.

A good sign for foreign investors is that doing business may be relatively less painful in East Africa – these five countries’ average Ease of Doing Business Ranking is 122, compared to 138 for all African countries, 133 for Nigeria, and 172 for Angola.

Only time will tell the full impact of these finds. But from today’s vintage point, it appears the once-sleepy countries of East Africa have a great opportunity to attract billions of dollars in foreign investment, which they may use to foster economic growth.

Written by David Gates for Emerging Markets Blog

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1 Response to East Africa: the next gold rush?

  1. Pingback: Africa’s new oil and gas finds: the good, bad, and the ugly | Emerging Markets Blog

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