Oil Price Slump, Exploration Intrigues And Power Play

Amama Mbabazi .Photo/AFP
Amama Mbabazi .Photo/AFP

I am quite intrigued by the recent decline in oil prices and what impact it will have across East Africa. For consumers, this should be good news, whether for personal fuel bills, food prices (because they are influenced by transport costs), or anyone running generators.

Hell, even KPLC knocked down that fuel surcharge – It’s still a mystery to me how KPLC gets to pass through all those items to their retail end clients. It should also be good news for airlines, so maybe we will get some good travel offers to Kenya – if tourists are not too worried about their safety?

Or maybe this might not all happen: There is obviously the mystifying factor that retail fuel prices have a lot more upward momentum, and get oddly sticky when any downward trajectory should happen.

The oil marketing firms are selling their old, expensive stocks pretty much until the prices go up again, if they are to believed. I have also read somewhere that Kenya (and the rest of the region) doesn’t have enough storage facilities to take advantage of the current slump in prices, so there is that. And the effect on food prices might be offset by the lack of rains.

However, what am really intrigued with is the impact on oil exploration and the wider political fallout.

Consider Uganda: So much excitement when the country first learnt that it had commercially viable reserves of oil. And with money on the horizon, it all went a bit pear-shaped. All the usual suspect and their sidekicks tried to get in on the game. I think the tipping point was roughly when ENI, an Italian oil major, was trying to prevent Tullow in exercising its pre-emptive rights on the purchase of Heritage’s 50 per cent in their joint blocks.

And then Museveni started the long stand-off with the oil firms regarding the refinery: most industry experts say that only a small topping plant for domestic consumption made sense, Museveni, however, kept insisting on a large refinery and the export of only refined fuel. Add to that the legal squabbles over the Tullow-Heritage capital gains tax, and the whole venture has been pretty much stuck.

Onshore refining is expensive to start with – and with oil prices where they are now, not really viable in Uganda. It probably doesn’t help that Uganda has just decided to award the tender for the refinery to a Russian company with insufficient cash and expertise. This is still in negotiations, but unlikely to yield results soon. While there is no export pipeline, nobody on the corporate side is really interested. So, a stalemate there.

Two to three years ago, I would have argued that this would be a political headache for Museveni who really doesn’t have anything new to offer to his tired electorate – save oil. Of course he will need to spend a good bit of money to win the next election and oil revenues would have come in handy for that, but thankfully – for him – the opposition in Uganda is conveniently fragmented.

He recently ousted Amama Mbabazi who may decide to run against him, but with no real chance of success. The opposition looks at the longtime Museveni loyalist with suspicion, so it’s highly unlikely that they will come to an agreement.

Even if Kiiza Besigye would run against Museveni yet again, we all know that he can’t, and won’t win this, because nobody can win an election against Museveni – but the current state of affairs in Uganda certainly makes it easier for mzee.

So, that oil sits there, and will probably sit there for a few years longer. Right now, it’s estimated that oil production will start in 2020, but all previous predictions have been pushed back time and time again, so don’t hold your breath. Where this remains a little inconvenient for Museveni is that the persistent delays in oil revenues limit his scope to tell donors to fly a kite.

Kenya was a bit smarter about this, at least in the beginning, and is till making mostly all the right noises. Like Uganda, Kenya lacks the infrastructure to get its oil to markets – but at least its oil sites are a little bit closer to the coast; that helps.

Hiccups in Kenya include the underdevelopment, marginalisation and insecurity of Turkana – a bigger challenge than what the oil firms had anticipated. Another issue is the security situation around Lamu, the proposed site where the pipeline would reach a sea port. It appears that the government is too casual about the local resentments, both old and new, and the security implications that this will have.

And then the draft legislation has met significant opposition from the industry over capital gains tax and revenue share agreements in particular. So, Kenya still looks more on track than Uganda (which, really, isn’t difficult), but there are brewing issues, and the oil price slump is bound to dim everyone’s enthusiasm.

Again, as industry people emphasise, this are temporary things – but if it’s temporary for, say, two years, what does that mean for Kenya’s Eurobond repayments, and its ambitious infrastructure investment programme? The external debt and public finance implications are unlikely to receive much attention from the electorate, but will a slowdown in oil exploration and development efforts also lead to a lull in some of the tensions in the North and at the Coast?

The writer is an independent country risk analyst.