Can Developing Countries Notice Unnoticed Opportunities in Extractive Industry?

By Deo Kirama – National Audit Office Tanzania

It is a common phenomenon that people gets excited when they are exposed to good news of opportunities. Their excitement is not for nothing but built on expectations of gains that are likely to accrue from the opportunities discovered and anticipation of positive changes in life. From social perspectives, when the good news concerns the society in general, there is a great likelihood of society’s excitement. To the good number of people in the society who are excited, it does not matter whether the opportunity discovered is surrounded with complications or otherwise but provided it is the opportunity, it suffices the celebration.

In the recent past, extractive industry especially business of oil and gas has gained an attention from some of the developing countries. The attention over extractive industry has been created by explorations that have been ongoing for a more than a decade since early year 2000s and reported some success stories of oil and gas discoveries in 2010s. Some African Countries with good news of presence of oil and/or gas reserves includes Tanzania (Gas), Mozambique (Gas), Ethiopia (Gas) , Kenya (Oil), Uganda (Oil).

Why people get excited anyway? Is it because their countries are endowed with huge reserves of valuable resources as compared to others? Or may be their lands are blessed than others?. The answer to these questions certainly is a no and the clear reason is that people receives the resource discovery news with high expectation that their life is going to be updated to the better standards instantly. They think that time for quality education, better health services, better social and economic infrastructures as well as the general economic growth has come and think also that they will obtain employments and better social security schemes. This is not bad at all but how to get there?

But, is it true that oil or natural gas discovery is an immediate medication to all peoples’ problems? The answer to this question is yes and no. It is yes if the resources are well managed from exploration stage, development and production stages. If at all stages, the negotiations, contracting and management of revenue there from are done with high level of accountability, transparency and people’s concerns, there is a great deal that people’s standard of living may be improved. On the other hand the answer is no if negotiations of terms, contracting and management at all the value chains in the industry are done with limited skills, personal benefits and less concern of people.

It is a fact that money flow from oil and gas business takes time and due to cost recovery probably the time of enjoying benefits is pushed even further. Sunley, E (et al), 2002 note that revenue from oil and gas in form of royalty and taxes has great risk of maneuvering the tax/royalty base through transfer pricing and challenges of an appropriate method of valuation methodology of the extracted oil and gas used as a base for royalties and other taxes .

This article aims at clarifying opportunities available in oil and gas industry before even production starts which may be referred to as peripheral benefits. It is my belief that there is great wisdom in twisting the attention of the stakeholders in oil and gas that, in oil and gas business there are benefits beyond oil and gas product themselves. Many will focus on oil and gas to benefit, but the truth is that, the society can benefit very well through the local content requirements in the PSAs. Example Tanzanian regime under Model Production Sharing Agreement (MPSA) 2008, Article 18 emphasizes the priority of local goods, services and materials in contractors’ operations. This avenue alone in my view if worked on, serves a good platform for the growth of domestic suppliers, service providers and contractors in extractive industry’s requirements which means the growth of Small and Medium Enterprises (SMEs).

Have the countries thought of the economic benefits that societies can get by empowering and uplifting the standards of supplies and services to the extractive industry operations? Since the extractive industry creates the great market, then it is for the Governments to design programs that will enable growth of key economic sectors such as agricultural sector, fisheries industry, animal husbandry, transportation sector, security services and eventually introduction of small scale and medium factories that gradually graduate into big factories.

Training obligations and capacity building programs that are financed by contractors, if well managed are likely to support the provision of desired quality education and eventually facilitate the development of good learning infrastructures which in turn produces competent alumnae that can be employed in various sectors. In Tanzania for example, the training obligations and the capacity building programs are done in response to the requirements of the MPSA 2008 Article 19.

While oil and gas industry brings monetary benefits, it is also important to contextualize benefits in more derived benefits . Oil and gas is a reliable source of energy which is needed by various industries. It is also important to understand that with sound energy, the industry could do even more to support jobs, grow the economy, and improve the finances of millions of citizens. In this case the focus of policy makers need another way of looking at things instead of focusing on counterproductive tax increases on the industry can think of taking advantages of its capacity to create more jobs and produce more revenue to the Government. Tanzania is one of the Countries which is benefiting with natural gas in production of electricity which stimulates other economic activities. Although huge reserve is yet to be commercialized, currently Tanzania enjoys a total of 620 MW of electricity produced from natural gas .

Enhancement of community participation in extractive industry operations is a way that enhances the benefits of resource development that flows directly into their communities. The benefits of supply chain participation for example have become particularly apparent in Indigenous communities where companies have entered into contracts with indigenous groups aiming at enabling greater indigenous economic participation committing to support the development of Indigenous owned enterprises.

What is the relevant way forward?
Now that we have explored opportunities that surrounds the extractive industry operations before even the product itself is brought on the surface, Countries endowed with such resources need to gear up towards realization of the peripheral benefits in extractive industry as the same ranks cheaper in cost than waiting for the economic benefits of subsurface resources which costs substantial amount of capital investment and time. Building capacities of local people to do business with investors by observing required standards of quality, quantity and sustainability of supplies and services is a work of the state machineries and it should not be left without ownership. Countries need organized programs that will be implemented with efficiency and subsequently monitored step by step with frequent evaluations. Have the countries considered how much companies spent on goods and services through the sister companies and booked as recoverable costs? But what if the spend was through the local “local” companies. Would these transactions mean the same to countries’ economies? This need to be looked at and decided upon.

[1] Although Ethiopia has not announced oil discovery, there are some territories that offer significant potential, especially in the western region of Ogaden, on the border with Somalia, where the Malaysian group Petronas has found gas, but still in quantities insufficient to consider export programs (Augé, 2015).

[2] See the Paper prepared for the IMF conference on fiscal policy formulation and implementation in oil producing countries, June 5-6, 2002. Revenue from the Oil and Gas Sector: Issues and Country Experience by Emil M. Sunley, Thomas Baunsgaard and Dominique Simard(2002)

[3] http://www.api.org/news-policy-and-issues/news/2011/07/25/economic-benefits-of-oil-and-gas visited on 17/1/2017

[4] https://en.wikipedia.org/wiki/List_of_power_stations_in_Tanzania visited on 17/1/2017

 

References
• Esteves, A.M and and Barclay,M.A (2011), Enhancing the benefits of local content: integrating social and economic impact assessment into procurement strategies, Impact Assessment and Project Appraisal Journal, Vol.29, Issue 3
• http://www.api.org/news-policy-and-issues/news/2011/07/25/economic-benefits-of-oil-and-gas visited on 17/1/2017
• https://en.wikipedia.org/wiki/List_of_power_stations_in_Tanzania visited on 17/1/2017
• Model Production Sharing Agreement (MPSA) 2008, United Republic of Tanzania
• Augé,B (2015) ,Oil and Gas in Eastern Africa: Current Developments and Future Perspectives. Accessed on 20/1/2017 from https://www.ifri.org/sites/default/files/atoms/files

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