South Sudan: A Hard Road Ahead Over Its Oil

Via The Financial Times, an article on South Sudan:

Henry Odwar has a wonderful, but difficult job. The African politician must build up an oil industry in a country with proven reserves and a record of production.

Unfortunately, Mr Odwar hails from South Sudan, the world’s newest country, with nascent legislation, and an adult population with less than 30 per cent literacy. He and his small staff at the parliament’s energy and mining committee have to help decide not only how best to exploit the country’s oil wealth – it makes up 98 per cent of state revenues – but how the industry should be governed.

An added complication is that although three-quarters of the oil is produced in South Sudan, all the export pipelines run north to its former foe, Sudan.

Mr Odwar’s task is an extreme example of the challenge facing emerging nations who have the luck to have struck commercial quantities of oil and gas. The discovery is just the beginning of what is often an arduous journey.

Prospective petro-nations’ struggle to avoid the “resource curse” is not a new theme. Academics have long debated the theory that mineral wealth is not the blessing it might seem. A strong natural resources sector can stunt the rest of the economy, and encourage corruption to secure control of the revenues. With the energy industry forced to search ever harder for new reserves and a discovery boom across Africa, notably off the continent’s east coast, the question of how these nations can avoid the curse has come back to the fore.

There is no easy set of instructions for governments to follow. For decades the role model has been established producers in the Middle East, and Norway. The Norwegians have used their North Sea riches to set up a sovereign wealth fund, which is now one of the world’s biggest investors and a financial anchor for the country. They have also carefully husbanded their indigenous oil industry, building up an internationally competitive services sector.

The Norwegians have exported their knowhow to help countries benefit from oil wealth without falling prey to corruption and instability. East Africa is not Scandinavia, however, and there is renewed debate about how realistic it is for new oil and gas hotspots, many with severe financial, political and human capital constraints, to emulate the governance model of established producers.

Valerie Marcel, associate fellow at Chatham House and co-author of a new study on the issue, has researched the experience of 12 countries. Her study found a stronger history of both technical and economic success when human resources are initially concentrated in a single institution such as a ministry, a national oil company or an industry regulator. The Norwegian model is different, advocating a separation of powers early on. This needs a huge investment in terms of money, personnel and training, something not available in many of the new oil and gas states.

It is a point not lost on Mr Odwar, who cites an absence of industry expertise (on his committee of 16 people only three have university-level education), limited access to data and publications (there is no library) and the need for training as just some of the challenges he faces.

His counterparts in Mozambique and Tanzania are grappling with their own problems after an extraordinary spate of gas discoveries in the Rovuma Basin. So far, some 100tn cubic feet of gas deposits have been found off Mozambique and Tanzania – equivalent to nearly all of Iraq’s gas reserves. Interest in the region was underscored earlier this year with a bidding war between Royal Dutch Shell and Thailand’s PTT Exploration and Production for London-listed Cove Energy, attracted by its stake in the Rovuma Area 1 block.

Analysts say there is enough gas to support huge liquefied natural gas plants to export to energy-hungry Asian countries. Yet before any of this becomes reality, obstacles remain, not least questions over government capacity in east Africa to deal with such a huge development.

Each African country’s experience is unique, but what stands out for industry experts is that many governments have not done enough to build the capacity of their national oil companies. How to make these more effective and ensure the new-found resources have a ripple effect through the rest of the economy is vital.

For emerging producer countries, striking oil and gas is often seen as the biggest hurdle. Nothing will happen without those discoveries, but the rest of the journey is often much trickier to navigate. Setting realistic governance goals at the outset, as well as managing expectations, is key to ensuring ambitions are ultimately met.

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.