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Rush: The Dynamics of Kenya’s Oil Strike

April 5, 2012

By Ann Hollingshead

Ann Hollingshead is a Financial Transparency Coalition blog contributor, whose posts appear weekly. Formerly a Junior Economist at Global Financial Integrity, Ann is now pursuing a Master of Public Policy (MPP) from the University of California Berkeley. Follow her on Twitter: @AnnHollingshead.

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It’s an interesting time for east Africa. Until recently, no one believed it had much energy wealth at all—6 billion barrels, tops, compared to its western counterpart, which boasts at least 60. But the times they are a-changin’. At the end of last month, Kenya sent the world and the markets a buzz when the government announced Canada’s Africa Oil Corp discovered oil in the northern region of Turkana. Given the geographical proximity and similarities, this discovery also has implications for Ethiopia. And additional discoveries have already been made in neighboring Tanzania and Mozambique.

The oil strike in Turkana does have the potential to transform Kenya’s economy and propel its ambitions to become a leading regional power. But despite the almost-auditory-cheers echoing from Kenya’s leaders, the discovery is not all good news. Of course, analysts are already cautioning the country against falling victim to the resource curse. Many point to Uganda, another in the east African nation that recently joined the energy club, as an example of what not to do.

No one is going to start drilling tomorrow. For one thing, a worldwide rig shortage is delaying production. But in many ways, Kenya itself isn’t ready. The discovery was unexpected enough that the country does not have the experience or the regulatory framework to handle the oil sector. James Phillips, chief operating officer of Canada’s Africa Oil Corp., said “the company won’t…move ahead with its plans in the area until Kenya’s energy ministry develops rules that would determine how that gas could be produced and sold.” Kenya has insisted it is ready. Yet the country regulates oil and gas production and exploration with the Kenya Petroleum Act, a 13-page law passed around 1986. And Kenya’s leaders are on the verge of passing an exemption in its value-added tax for oil and gas exploration companies, in an effort to avoid the “cooling effect” that the tax would have on imports and purchases in the scramble.

These developments are troubling and betray an inability or an unwillingness on behalf of Kenya’s leadership to consider the situation with more complexity and patience. There are serious downsides to oil exploration that contribute to and are worsened by the resource curse and these must be taken into account.

Oil wealth is, first and foremost, both a product and a driver of corruption. U4 explains corruption in resource-rich countries is “political and bureaucratic…involving both abuse of office on the part of key decision-makers and corrupt acts among lower level officials tasked with policy implementation.”Alex Vines, Research Director of Area Studies and International Law at Chatham House, has noted Kenya displays early signs of problems and oil could prove to be a “further blight an already corrupted political class.”

Oil and gas exploration can have significant negative effects on local poverty, the environment, and can displace other industries, rendering an economy less diversified and resilient than before. Unfortunately for Kenya, some of these problems have emerged before it has even begun production. Kevin Mbwea Anyango points out in a recent Huffington Post article that Turkana is one of the poorest areas in Kenya and respective governments have “always neglected the area due to its dry condition and severe poverty.” He points out that since the area where oil has been discovered has “already been associated with politicians…this will not change.”

The classic, albeit oversimplified, example of how to manage oil is Norway. Its converse is Nigeria, which has become a cautionary example of oil’s corrupting effect. While there are many factors that prevent Norway from becoming Nigeria, one of the most pronounced and significant, is good governance. John Campbell, the former United States ambassador to Nigeria, notes that Norway is able to maintain a healthy relationship with its oil wealth because its sovereign wealth fund is characterized by “a high degree of transparency and its managers are directly accountable to democratic institutions.” Campbell also points out Norway was the first OECD country to “publish its oil-revenue figures as part of the Extractive Industries Transparency Initiative.”

Of course, I support Kenya joining the EITI. The country also needs to develop a systematic and comprehensive regulatory framework that addresses environmental impacts; fosters transparency concerning revenue and contracts; creates a mechanism for benefit-sharing between the national government and local governments so that the people of Turkana are not overlooked; and enforces high standards of accountability and responsibility among corporate and investing entities. These are means, important ones, to an end. But to accomplish any of them, Kenya must show a willingness to carefully consider the downsides of oil exploration and production and to proceed cautiously. There is no rush. The oil isn’t going anywhere.

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Disclaimer: Unless specifically stated to be the views of the Financial Transparency Coalition, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Financial Transparency Coalition.

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