East African governments are pushing to get more out of ‘Big oil’ than just tax dollars

As oil and commodity prices have dropped foreign direct investment to Africa has slowed down.
As oil and commodity prices have dropped foreign direct investment to Africa has slowed down.
Image: Reuters/Njuwa Maina
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African governments in oil-producing states are done with watching multinational oil companies rake in profits while importing their own workers and supplies and wreaking havoc on the environment and local economy. If companies are going to drill, governments say, they’re also going to help them develop the country.

This is certainly the case with the east African governments of Kenya and Uganda, who are in the early stages of developing their oil sectors. Rather than just seeing the multinationals as a source of tax revenue, these governments are keen for major oil companies to take a ‘development’ role and help with training, skills transfer, building local infrastructure and employment for citizens in the oil-producing areas.

“The main way they thought to benefit was the revenue from petroleum. If they got that money and they reinvested it well, it would benefit people at large. It never worked that way in practice,” said Jesse Salah Ovadia, a lecturer at Newcastle University in the UK, who has studied this new push by governments.

“[Now] the government’s perspective is ‘If extracting these resources doesn’t help our people, then why don’t we just leave them in the ground’?”

After decades of an often-deserved reputation as boogeymen and a thirst for the oil offshore and underground, companies know they have to play ball.

“There is already a long blacklist against us. We have to not only balance that blacklist, we have to go a bit further to show we’re doing the right thing,” said Alex Budden, vice president of external relations for Africa Oil, which is exploring for oil in northwest Kenya with partner Tullow Oil.

Across the continent, petroleum regulations are being updated to reflect new discoveries and this new attitude.

Since the beginning of this decade various African governments have passed rafts of requirements for companies to go local. Taxes to bring in revenue remain, but they’re joined by requirements that a certain percentage of the workforce, services, and equipment come from within the country over a certain period of time. Requests to bring in expatriate workers often have to be accompanied by a plan to phase in local workers over time.

The buzzy term is “local content” and it’s on everyone’s lips. After decades focused on tax dollars, governments realize that companies could be delivering skills, technology, and auxiliary industries too.

“This wasn’t the case for the longest time before, and there wasn’t a large degree of negotiation. It was largely one-sided,” says Varsha Venugopal, subnational lead at the Natural Resource Governance Institute, indicating that companies used to hold most of the power.

“In general countries are more aware and governments more aware of the potential transformative benefits of the resources they have—but also the fact that it’s only a [one-time] opportunity and they have to get it right.”

That’s where it trips up, particularly since the oil price plummet of the last year. The push for local content began amid oil prices much higher than what they hover at today.

Cautionary tale

For these governments, Nigeria is a cautionary tale. Oil exploration brought so little to the local population, with most of the profit siphoned up to the central government, that it spawned a violent separatist movement that severely disrupted oil operations and lost companies substantial revenue. When former president Goodluck Jonathan was elected, the local content regulations were the first act he signed, according to Ovadia. His government launched an expensive amnesty program to stop militants from sabotaging oil operations and paid leaders to keep their fighters in line—one received $9 million a year to pay off the 4,000 fighters he oversaw. according to a WSJ report from 2012.

For east African governments, trying to avoid the mistakes of a country like Nigeria, they also have to manage the expectations of citizens, who want to know when they’ll get rich. They need to deliver on their promise to harness the oil sector as a development tool. But exploration is slowing down, at least temporarily, causing jobs to dry up as well as willingness to invest in training programs. Companies are frustrated by what they perceive as the government’s unwillingness to understand how much low oil prices have lowered their capacity.

“There is incredible pressure on the Kenyan government to ensure they don’t lose out,” Budden said. “[But] it’s not like we’re a company coming in that knows from day one there be a revenue flow. We’ve invested $1 billion with absolutely no guarantee we’re going to get any of it back.”

“You don’t want to do it to such a degree that you scare away investment in the first place.”

Ovadia warned that the regulations also open up a new avenue for corruption in a sector rife with it. Many of the percentages set by companies for local workers or local equipment are impossible to meet by the deadlines because countries lack the workforce and even the curricula in universities and vocational schools

When this comes up, governments often grant waivers—a process left entirely in the hands of individuals.