East Africa is undergoing a major transformation to become a new world-class player on the energy market. By 2025, East Africa is expected to experience an incremental production growth of nearly 1 million barrels of oil equivalent per day (boe/d), led by Mozambique and Tanzania.
With the highest number of gas discoveries between 2010-2013 in East Africa, accounting for more than 25 percent of added reserves worldwide --and as the largest contributor, with over 50 percent of total regional M&A (mergers and acquisitions) value in 2013 - the region comes to the fore of international openness to investment, boosting its attractiveness and competitiveness, according to new analysis from IHS Inc. (NYSE: IHS), the leading global source of critical information and insight.
Despite the high potential for further growth, East Africa has suffered major setbacks with lack of local infrastructure in place, institutional capacities, regulatory framework and an adverse geo-political situation overall.
“East Africa is the new hot spot”, said Stanislas Drochon, director Africa oil & gas at IHS Energy. “The region is going through a major transformation and it has huge potential to play a crucial role in driving the region’s future growth, while still operating in risky business environment where the regulatory framework and infrastructure are not in place.”
Drochon said that the regulatory framework and lack of institutional capacities in a context of very high expectations for socio-economic transformation will not only bring challenges for a growing role of large IOCs (integrated oil companies), but also for governments within the region.
Pioneering gas discoveries
Over the past five years, Mozambique and Tanzania have seen the region’s most significant gas discoveries, with more than 80 percent of them located in Mozambique. “East Africa remains under exploration and there is more to be discovered, including in other countries such as Ethiopia or Comoros, but there is more to be done,” Drochon said. “The large infrastructure developments and financing are crucial to ensure that all the investments can materialize. The development of gas reserves and associated power generation are necessary to support the transformation of the region, by providing cheaper and reliable energy, key conditions currently missing for the industrialization of the region.”
Hydrocarbon production on the rise
Within the next decade, East Africa, driven by LNG projects in Mozambique and Tanzania, is expected to form the largest hydrocarbon production, accounting for nearly 1 million boe/d according to IHS Energy. Additionally, by the end of the decade, landlocked Uganda is also expected to contribute to this growth.
“Gas and LNG production will become a dominant revenue generator in East Africa. The accelerated growth in the gas sector will outsize the previously important coal sector, but we are unlikely to see an immediate increase in employment opportunities and local supply chain expansions,” said Natznet Tesfay, head of Africa at IHS Country Risk. “The massive investment followed by the infrastructure boom will transform the northern Mozambican provinces, allowing the local governments to get involved. We expect that this will facilitate and attract the entry of foreign investors, exploring not only the opportunities in the energy sector, but also other areas, such as chemical, power, manufacturing and mining. The transformation of East Africa, however, will set its own pace”.
Openness to investment triggers M&A activity
According to the IHS Petroleum Risk Manager Indicator, more than one third - 26 out of the 71 countries - rated with a top score for international openness to investment, are located in Sub-Saharan Africa. This reflects the accessibility of the region to foreign investment, not only targeting the more mature areas like Tanzania and Mozambique's Rovuma basin, but also new frontiers like Kenya’s Lokichar Basin.
East Africa represented approx. 50 percent of total M&A regional value in 2013, growing from a negligible share prior to 2009 and eventually overtaking West Africa. Since 2010, M&A deals in East Africa have been focused on three countries, Mozambique, Tanzania and Uganda, with some emerging M&A activity in Kenya, according to IHS Energy.
“East Africa represents the primary opportunity sector for M&A activity. In the past four years, the top three largest M&A deals in the region were in Mozambique with the transactions done by Asian based NOC’s (national oil companies),” said Drochon.
As African growth is expected to remain strong for the next 10 years, the new East African gas discoveries and growth in incremental hydrocarbon production will attract new international investors and increase regional openness for further developments and further M&A activity. Yet, the pace of East African transformation and further growth depends on critical infrastructure investments to ensure security of supply and modernization of resources, geopolitical stability and sufficient regulatory framework, IHS Energy said.