C I V I L - M I L I T A R Y F U S I O N C E N T R E M E D I T E R R A N E A N B A S I N T E A M P R E S E N T S

Emerging Energy Resources In East Africa

Comprehensive Information on Complex Crises

September 2012 Maya Moseley Assistant Desk Officer mediterranean@cimicweb.org

Angelia Sanders Desk Officer, Northeast Africa angelia.sanders@cimicweb.org

This document discusses the oil and gas industries within East Africa1, regional plans to develop infrastructure to refine and export the oil and gas, and challenges faced in each country and within the region. Related information is available at www.cimicweb.org. Hyperlinks to source material are highlighted in blue and underlined in the text. All maps are hyperlinked to their source locations.

Introduction East Africa has become one of the worlds most active exploration areas since Anadarko Petroleum Corporation (APC) made the decades biggest gas discovery off Mozambique in 2010. Though exploration in East Africa is at its earliest stages, explorers to date have discovered more than 100 trillion cubic feet of gas, an amount that could meet US gas demands for four years, reports Bloomberg. The interest in the potential yields of gas and oil has caused a surge of companies into the region eager to explore. Cormark Securities, an independent investment dealer, reported in early 2011 that exploration in East Africa presented considerable risks but that it also offered huge potential rewards as many companies have been able to obtain large acreage positions with exposure to world-class oil prospects. For the countries involved there is now the possibility of oil and gas revenues that can be used for national socio-economic programmes. Within countries recovering from decades of civil war, such as South Sudan and Somalia, oil revenues can provide funding for reconstruction efforts and infrastructure development. Amidst the excitement and uncertainty, one thing remains clear, dialogue must continue on how to develop the infrastructure and governmental guidelines needed to manage the new discoveries. Theories on Gas and Oil Discovery According to the continental drift theory, the world was once a consolidated land mass called Pangea before splitting apart into the land masses we know today. Tullow Oil, a UK-based company, used this theory to develop an innovative practice of first discovering oil and then looking for geographical trends across the Atlantic and Indian oceans. This approach was first applied in West Africa following the discovery of the Jubilee fields in Ghana.2 The company applied the theory that a mirror image of the oil deposits off West Africa could be found in waters off of Latin America. This assumption was proved correct when the company discovered oil fields in the waters off French Guiana which could contain more than a billion barrels or more of recoverable oil. Tullow then applied their success in West Africa to East Africa. The East African Rift System is the largest continental rift system on the Earths surface and extends from Jordan to Mozambique. The system consists of two branches: the Eastern Rift Valley (often called the Great Rift Valley, or Rift Valley) and the Western
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Map 1: Rift Valley and Oil Trends

For the purposes of this report, the countries of East Africa include: Djibouti, Eritrea, Ethiopia, Kenya, Mozambique, Somalia, South Sudan, Uganda and Tanzania. 2 The Jubilee fields recoverable fields are estimated to be more than 370 million barrels, with an upside potential of 1.8 billion barrels.

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Rift Valley. Tullow used the discovery of oil in Uganda in 2006 to look for similar rift valley analogies in Kenya and Ethiopia. This same method has been applied to the 24 billion barrels of heavy oil resources found along the coasts of Madagascar since Madagascar shares similar geographical patterns with Kenya and Mozambique from when the island was theorized to be connected to the coast 145 million years ago. Explorers also looked for similarities between the Darin and Nogul Basins in Somalia and the Masila and Marib-Shabwa Basins in Yemen. The two basins in Yemen are the main contributors to the countrys current daily production rate of over 400,000 barrels of oil and it is hoped that the success in Yemen highlights the potential for Somalia. Gas and Oil Resources by Country Djibouti Djibouti does not currently produce oil or natural gas. According to British-based Oyster Oil and Gas Limited, the country is still in the early stages of oil exploration activities. The most promising locations within the country are the Guban Basin and the Red Sea Basin. Despite Djiboutis current lack of oil production, the country has a strategic role in oil exports since it hosts a major port with a storage capacity reaching 1.26 million barrels of oil. Oyster Oil is the only company operating in Djibouti and holds three onshore blocks and one offshore block. Eritrea Eritrea does not produce oil or natural gas, according to the United States Energy Information Administration (EIA). Eritreas natural resources have been underexplored due to the war with Ethiopia but prospects of offshore and onshore oil and natural gas exist. During the 1960s, oil exploration began in earnest but oil companies ceased activities in 1977 largely due to disappointing results and insecurity. In 2008, the Eritrean government entered into a joint venture with Chinas Energy Alliance Company, creating the Defba Oil Share Company, obtaining offshore rights to the Bahri and Defnin Blocks. Ethiopia Though there are indicators for the existence of oil and gas systems in parts of Ethiopia, the country is not currently producing. As of 2009, Ethiopia has proven 0.4 million barrels of oil and 4 trillion cubic feet of gas, according to Cormak. Oil exploration began in Ethiopia in 2000 led by American company, Hunt Oil. According to the Ethiopian Ministry of Mines, nine oil exploration companies are currently operating in Ethiopia, investing USD 2.4 billion in exploration activities; the exploration operations are reportedly occurring in Gambella, South Omo, Somali, Afar and the Ethiopian Rift Valley region. The Ogaden Basin is the largest proven hydrocarbon basin to date in Ethiopia; however, the basin is relatively underexplored thereby limiting available data. The Ogaden Basin has been divided into 21 blocks, with licenses for 17 already awarded. The Ethiopian government supports exploration projects and private investment and petroleum operations fall under the countrys 1986 Petroleum Operations Proclamation. Kenya Petroleum exploration in Kenya began in the 1950s in the Lamu Embayment region, which is Kenyas largest basin and encompasses onshore and offshore deposits. Despite several indications of oil and gas, the original 10 wells were never fully evaluated or completed for production. Drilling conMap 2: Kenyan Oil Discoveries tinued to have little success until early 2012, when Kenya announced the discovery of at least two profitable oil sites in the northern Turkana region which borders Uganda and South Sudan. On 22 August, the Vancouverbased company Africa Oil Corp. announced that an updated assessment of its exploration properties showed that Blocks 9 and 10A, which lie in the Anza Basin, have a prospective gross best estimate of 1,287 and 588 million barrels, respectively. Blocks 10BA and 10BB contain a prospective gross best estimate of 9,885 and 3,132 million barrels of oil, respectively. The light crude oil discovered in northwest Kenya is considered to be high-quality oil that will yield more gasoline and diesel per barrel than some other crude discoveries in Africa, reports al Jazeera. The oil is considered high-quality because it is light and waxy, has a low density and flows freely at room temperature, thereby making it less expensive to refine and export. The waters off Kenya have traditionally been considered a
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gas-prone region; however, it wasnt until 10 September 2012 that explorers made the first major offshore discovery of gas in Kenya. Companies in Kenya have primarily targeted oil discoveries since gas requires very large and expensive liquefied natural gas (LNG) infrastructure to make it commercially viable. In July 2012, Apache Corporation and Tullow Oil began oil drilling in Kenyan waters and now estimate that deep water Block L8 may contain 230 million to 2.8 billion barrels of oil. As of July 2012, all 46 oil blocks, including the nine in the deep sea, have been leased to exploration companies. National Oil, Kenyas state corporation under the Ministry of Energy holds 100% of the Kenyan governments shares. Mozambique The EIA reports that Mozambique does not produce petroleum although the country is believed to hold an estimated 100 trillion cubic feet of natural gas. In 1948, multi-national oil companies began extensive exploration primarily onshore; however, exploration declined due to political instability in the 1970s. While activity resumed in the 1980s, extensive drilling was not conducted until 2003 which resulted in the production of wells in the Pande/Temane Block and the discovery of the Inhassoro Gas Field. The National Petroleum Institute (INP) is the government body that manages petroleum operations in Mozambique and in July 2012, the INP revised the countrys Petroleum Law. In 2012, the country increased the maximum share holds in oil blocks for the national oil company, Empresa Nacional de Hidrocarbonetos (ENH), from 25% to 40%. Companies operating in the Offshore Area 1 of the Rovuma Basin include those based in India, Japan, United Kingdom, United States and ENH. Somalia Somalia does not currently produce oil or natural gas; however, estimates of onshore and offshore reserves go as high as 110 billion barrels of oil. The countrys semi-autonomous Puntland region is believed to have rich oil deposits in the Dharoor Valley in the north and the Nugaal Valley in the south. AccordMap 3: Somalia Oil Blocks ing to Cormark, the valleys are believed to be extensions of the Marib-Shabwa and Masila Basins of Yemen. Signs of oil were confirmed in Dharoor Puntland in 2012 but further tests are needed to determine the quality; furthermore, there may be vast reserves of natural gas offshore. The autonomous region of Somaliland contains geological basins similar to those in Yemen and Uganda where millions of barrels of oil reserves have been discovered; however, Somaliland is considered to be under explored since only 21 wells have been drilled as of April 2012. Due to widespread instability since 1991, all companies that operated in Somalia prior to the war closed their operations.3 Somalias government stated that it will recognise permits issued prior to 1991, but it remains unclear if post-1991 concessions will be recognised. The governments Petroleum Law of 2007 dictates the fiscal terms for petroleum operations in the country. South Sudan4 According to a United States Institute of Peace (USIP) report, Oil and State Building in South Sudan, oil was discovered in Sudan in the late 1970s; however, oil production did not begin until the 1990s due to violence and human right violations that prevented large scale investment. Once China, Malaysia and India began to invest in the countrys oil sector, oil output increased from 2,000 barrels per day (bpd) in 1993 to 490,000 bpd in 2009.5 Before South Sudan seceded from Sudan, Sudan held 0.5% of the worlds proven oil reserves and was considered a minor oil producer. On 09 July 2011, South Sudan became the worlds newest independent country. Upon independence, South Sudan gained ownership of 75% of Sudans oil production, as the majority of oil fields are located within the boundaries of the new country. According to the International Monetary Fund (IMF), 98% of the Government of South Sudans (GoSS) revenue comes from oil, yet oil production has already decreased from its
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Map 4: South Sudan Oil Fields

American company Conoco carried out oil exploration in the Nugaal and Dharoor valleys in Puntland prior to the 1991 conflict. The company has claimed its rights to blocks that have since been acquired by Africa Oil. If Conoco takes legal action over its claims the outcome remains uncertain. 4 For an in-depth discussion on South Sudans oil industry please see CFC Report: Sudan and South Sudans Oil Industries: Growing Political Tensions May 2012. 5 Following the 1997 imposition of sanctions by the United States on Sudan and deteriorating diplomatic ties with other Western countries, the relationship between China and Sudan strengthened and enabled China to enjoy a monopoly of Sudans oil industry.

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2009 peak of about 360,000 bpd. If there are no new discoveries or improvements in recovery methods, South Sudans oil reserves are expected to halve by 2020. South Sudanese officials have stated that South Sudan loses 40% of extracted oil due to inferior technology. South Sudan currently produces approximately 300,000 bpd and since independence has contracted oil sales worth USD 2.14 billion, reports the Sudan Tribune. China is currently the leading investor in South Sudans oil sector. ONGC Videsh Ltd (OVL), the overseas investment arm of Indian state-run Oil and Natural Gas Corporation Ltd (ONGC), discontinued crude oil production in South Sudan and reduced production in Sudan since the beginning of 2012 in response to the geopolitical dispute between South Sudan and Sudan. Malaysias Petronas has continued operations in South Sudan. Tanzania Multi-national companies have been exploring for oil in Tanzania since the 1950s. To date 35 exploration and development wells have been drilled, according to the Tanzania Petroleum Development Corporation (TPDC).6 According to EIA, while the country does not produce petroleum, it does produce natural gas. Promising gas discoveries have been made at Songo Songo and Mnazi Bay locations. In June 2012, the countrys estimated natural gas reserves almost tripled, reaching as much as 28.7 trillion cubic feet, according to Energy Minister Sospeter Muhongo.7 The discoveries are likely to result in Tanzania becoming a regional energy hub. In September 2012, the country will hold an oil exploration licensing round for 16 offshore blocks, informs Reuters. Five onshore blocks will be opened for licensing, separately from the offshore process. Companies seeking exploration contracts apply through the TPDC which grants rights via Production Sharing Agreement (PSAs). PSAs are on 11year terms, with an obligation to return half of the block if exploration activities are not conducted within three years. As of 28 July, at least 18 global energy companies had spent nearly USD 920 million on oil and gas exploration in the country, stated Muhongo. Uganda At least 2.5 billion barrels of oil reserves were discovered in Uganda by Tullow Oil in 2006 but the fields have not yet reached the production stage. Oil is expected to reach market next year but, according to Tullow spokesman George Cazenove, production will not be at full speed until 2016. The oil is located in the Lake Albert Basin region underneath forests and lakes along the border with the Democratic Republic of the Congo (DRC). Though the oil is considered waxy, difficult to pump and expensive to refine, it is expected that Uganda will be able to pump about 200,000 bpd. Oil revenues could reach almost USD 2 billion a year a significant amount for a country where nearly 40% of the population lives on less than USD 1.25 a day.

Map 5: Uganda Oil Fields

Currently, Uganda continues to remain attractive to investors since the countrys oil discovery rate is at 90%. Under agreements with oil companies, the government is to receive roughly 33% of revenue from oil production until the oil companies recover their investments in the fields then government revenues would increase to about 80%, reports the New York Times. Investors have been cautious of becoming too involved in Uganda following the governments year long delay in approving Tullows farm-down deal8 and Ugandas decision to name the company liable for outstanding tax owed by its partner, Heritage Oil. The dispute delayed exploration and development activity in the Lake Albert region. Following resolution of most of the issues in early 2012, Tullow Oil sold one third of its oil assets in the Lake Albert region to Frances Total and China National Offshore Oil Corporation (CNOOC).9 Tullow has invested over USD 1 billion and it is expected that the three companies together will invest over USD 10 billion. Tullow has also stated that it plans to drill more than eight wells between March 2012
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The TPDC is entirely state-owned, with all shares held by the National Treasury Registrar. Offshore reserves are estimated to be 21 trillion cubic feet and onshore fields are estimated at 4.27 to 7.77 trillion cubic feet. 8 Farm-down refers to when a licensed exploration company sells a share in its rights over an oil discovery to other companies. This is a common practice among small exploration companies since it enables the company to share with others the investment costs and technological challenge of getting the oil out of the ground and on to world markets. 9 There continues to be issues surrounding the construction of a refinery in Uganda (see below section) which has caused Uganda to delay approving the companies development plans and has continued to push back the planned start of production, reports the Wall Street Journal.

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and 2013. Other international companies have also expressed interest in Ugandas oil sector. In 2005, Uganda and Norway signed an agreement to provide for support through the Norwegian Agency for Development Cooperations (NORAD) Oil for Development10 programme to Ugandas oil and gas sector. Regional Infrastructure Development With the recent discoveries in gas and oil comes the need for infrastructure in order to refine and transport the products for domestic and international consumption. Most oil companies prefer to find crude oil reserves rather than natural gas because it is cheaper to produce and supply. Gas must be chilled and liquefied before shipping which requires higher investments in LNG plants. Companies exporting gas from Tanzania and Mozambique will need to spend at least USD 50 billion on export plants. Crude oil on the other hand can be loaded on tankers and shipped worldwide from remote fields at significantly lower cost. Once production and refinery systems are in place, countries can provide for their domestic consumption rather than importing expensive energy from abroad. Mr. Honey Malinga, the Assistant Commissioner Geophysics in the Petroleum Exploration and Production department at the Ministry of Energy and Mineral Development in Uganda, believes that oil discoveries within East Africa can help the region by enabling countries to share ideas and infrastructure from a wider perspective. African states need to unify in order to negotiate regional agreements with the oil and natural gas firms. According to Abayomi Azikiwe, editor of Pan African News Wire, states would benefit their people more by taking hold and controlling the majority stakes within these investments; since left to itself, the oil industry creates few local jobs and little wealth sharing. In various oil producing countries in the world, there is a growing trend towards resource nationalism and the growth of stronger National Oil Companies (NOCs). Though strong NOCs can be used to ensure governments receive fair portions in oil deals and drive national development, as seen in Angola and Algeria, they can also be a source of corruption and inefficiency, as is the case in Nigeria, reports This is Africa. Gas Infrastructure The two main gas producing countries in the region are Tanzania and Mozambique. In 2011, China provided a USD 1.2 billion loan to Tanzania for the construction of a gas pipeline from Mtwara to the port of Dar es Salaam. Tanzania will use part of USD 757 million in non-concessional loans it expects to take in 2012-13 to pay for its portion of the construction costs. Construction on the project began in July 2012. Orca Exploration operates a gas processing facility on Songo Songo Island (SSI) that supplies natural gas to one Map 6: Tanzania Songo Songo Gas Field onshore and one offshore pipeline. The company Songas then produces electricity from the natural gas at the Ubungo power plant. Tanzania-based Oilcom Limited is working on the creation of LNG storage, handling and distribution facilities in the country. Currently, the company has an oil storage facility at Dar es Salaam harbour. Houston-based Anadarko Petroleum Corporation and its partners are currently designing an onshore LNG facility in Mozambique that will have the capacity to process 10 to 30 million tonnes of natural gas per year. The final investment decisions on the plant will be made in 2013 and production is expected to begin in 2018. In June 2012, UK-based Aggreko and South African investment company Shanduka, announced plans for a gas-fired power plant that would supply electricity to South Africa and Mozambique. Sasols Temane gas field will fuel the plant. A pipeline at Mozambiques Maputo Port was constructed to allow ships to unload gas at the port.11 Mozambique lacks LNG plants, requiring the importation of gas overland from South Africa. Swaziland has expressed interest in a pipeline from Mozambiques Maputo Port to the country; however, all gas currently produced in Mozambique is consumed domestically and by South Africa. The recently discovered fields will not be in production until 2018 at the earliest, meaning any pipeline into Swaziland will have to wait.

The Oil for Development initiative aims at assisting developing countries with petroleum resources (or potential) in their efforts to manage these resources in a way that generates economic growth and promotes the welfare of the population in general, and in a way that is environmentally sustainable. 11 In 2007, South Africas Petroline was granted permission to construct an oil pipeline linking Mozambique to South Africa but suspended the project in 2011.
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Petroleum Infrastructure There is debate about the best way to provide oil-related infrastructure in East Africa, particularly in South Sudan, Kenya and Uganda. Though South Sudan has the ability to produce and export oil, it is dependent on Sudan for the pipelines, refining and export infrastructure located in the north. Disagreements between the two countries on the fees to be paid by South Sudan for the use of this infrastructure resulted in South Sudan shutting down all of its oil production in January 2012. At the beginning of August, South Sudan agreed to pay Sudan an average of under USD 10 per barrel and offered a USD 3.2 billion package to compensate Sudan for the loss of most of its oil fields to South Sudan. Sudan, however, has stated that a border security agreement is requisite before oil flows resume and according to South Sudans oil minister, it could take up to six months for the countrys Upper Nile oil fields to resume production. For the oil fields in Unity state, it could take between ten to twelve months because of damage caused to the facilities during fighting in April of this year. In order to reduce South Sudans dependency on northern oil infrastructure, South Sudan signed a memorandum of understanding (MOU) with the Kenyan government to build an oil pipeline from South Sudan to the Kenyan port of Lamu. Within East Africa and the Horn of Africa, only Kenya has its own refinery, which is located at the port of Mombasa.12 The refinery can process 70,000 barrels of oil Map 7: LAPSSET Planned Infrastructure per day although it is currently working below capacity at about 35,000 bpd.13 The Lamu refinery is part of the greater Lamu Port and Lamu Southern Sudan-Ethiopia Transport Corridor (LAPSSET). LAPSSET will include the construction of an initial three berths of the planned thirty-two berths at the Lamu port making it five times larger than Mombasa; an oil pipeline connecting South Sudan and Ethiopia to the Lamu port; an oil refinery at Lamu with a capacity of 120,000 bpd in order to refine oil products for Kenya, South Sudan and Ethiopia; a heavy transportation highway; and a standard gauge railway line between Kenya, South Sudan and Ethiopia. LAPSSET is expected to cost USD 23 billion with the first stages completed within four years. Initial costs will be paid by the three governments with plans to attract international investment.14 In other regional developments, South Sudan also signed a MOU with Ethiopia and Djibouti that would enable a pipeline to be built connecting South Sudans oil fields to a pipeline ending at the port of Djibouti. Debate surrounds the construction of a refinery station within Uganda. Upon discovering oil, Uganda decided that in order to boost economic growth, the country would refine its oil domestically rather than export it in crude form. Prior to the discovery of oil in Kenya in 2012, Uganda held talks with neighbouring East African countries to establish a joint venture to build the refinery. The idea was to have East African countries buy a stake in the Ugandan governments share as the refinery would be a public-private partnership. The refinery is expected to cost approximately USD 1.5 billion and have the capacity to refine 20,000 bpd. Tullow, Total and CNOOC had agreed to help fund the refinery; however, Uganda now wants the companies to build a larger facility capable of producing around 150,000 bpd, reports the Wall Street Journal. Now that Kenya has discovered its own oil, this original plan is likely to change and there is discussion whether it is logical for Uganda to continue with plans to build the refinery when Kenya already has one in Mombasa. Those who support Ugandas refinery argue that the Ugandan refinery would be initially used for domestic consumption and then for regional export.15 Additionally the region will soon produce more than Kenyas refinery can manage as the regions total demand is estimated at 164,000 barrels per day and yet the region has only one 70,000 barrel refinery at Mombasa that is also operating at half capacity, according to Ms Irene Batebe, the Petroleum Officer-Refining at Ugandas Ministry of Energy and Mineral development. Because Uganda has crude waxy oil, transport of unrefined oil to the coast would be expensive since it requires a heated pipeline. Lastly, the current oil exploration in the DRC side of Lake Albert creates
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The Assab oil refinery in Eritrea has a capacity of 17,500 bpd but was closed in 1997 for economic reasons. The Mombasa port is often congested and is unable to keep pace with increasing trade demand, reports Bloomberg. The ports maximum depths and narrow layout also restricts the size of the vessels that can safely enter the port. 14 Toyota Tsusho Corp, a unit of Japans Toyota Motor Corp., has bid USD 5 billion to build the planned pipeline. State-owned China National Petroleum Corp has also expressed interest. 15 2010 oil consumption in Uganda was at 21,000 bpd which can become expensive and unreliable for the country since it must be imported.

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the possibility that a refinery in Uganda would provide the DRC with a closer and cheaper alternative to have its oil refined. Those against the building of the refinery argue that the East African Communitys (EAC) decision to support Ugandas plans for a refinery was made in 2007, before oil was discovered in Kenya. Uganda lacks the funds to finance the refinery and the amount of oil discovered so far would only last between twenty to thirty years thereby making the refinery a risky investment. It is also believed that key oil players that are operating in many of the East African countries will not want to finance the building of a refinery in Uganda and yet another one in Kenyaassuming Kenyas oil reserves prove profitable. Additionally, as Somalia becomes more stable and the likelihood of oil exports becomes a reality, there is more incentive to build-up the infrastructure already in place in Kenya since oil could be ferried from Somalia to Kenya. Lastly, South Sudan has already signed an agreement with Kenya to build a pipeline that would transport South Sudanese oil to the Kenyan coast for refining and international export. National and Regional Concerns There are inherent risks associated with the new discoveries of oil and gas. The continued insecurity in the region will remain one of the main concerns to foreign investors. Various causes of insecurity can effect oil and gas exploration in the region. Some of these include the presence and activity of rebel groups, cross border conflicts, and piracy.16 Additionally, political disputes over the ownership of resource rich areas and endemic levels of corruption in many countries continue to impact investment. Insecurity Within Ethiopia, insecurity in the Ogaden region is problematic due to the Ogaden National Liberation Front (ONLF) rebel groups twenty-eight year campaign for self-determination. In April 2007, there was an attack on an exploration site operated by Chinas Zhongyuan Petroleum Exploration Bureau and in September 2011, an attack was reportedly carried out on a PetroTrans convoy. Some are concerned that increased exploration will provide rebel groups with new targets and strengthen the resolve of groups against the government. South Sudanese rebels operating in Unity and Upper Nile states have threatened the proposed construction of a pipeline to Kenya because, according to the rebels, the decision was taken without adherence to democratic principles. Current instability in Somalia prevents large-scale investment in the oil industry as it faces potential attacks by the al Qaedalinked terrorist group al Shabaab. Companies are increasing security in preparation for trouble following al Shabaab internet and Twitter warnings that Somali oil carries death. Kenya has experienced a recent wave of violence in Mombasa in response to Kenya sending troops into Somalia to fight al Shabaab. Aid workers and tourists have also been kidnapped from Kenya by al Shabaab. Within the Turkana region of Kenya where oil was discovered, there is a history of gun-violence traditionally associated with cattle rustling. Cross border conflicts have recently occurred between Djibouti and Eritrea, and between South Sudan and Sudan. Tensions have been high between Djibouti and Eritrea since the end of the war in 2000 and most recently since 2008 when Eritrea staged incursions across the border into Djibouti. In the neighbouring countries of South Sudan and Sudan, fighting broke out from late March to early May 2012 in the areas surrounding the Heglig oil fields. Both countries claim ownership of the fields, though BBC reports that Heglig is internationally recognised as Sudanese territory. The fighting brought the countries to the brink of an all-out war and there are conflicting reports on the number of deaths incurred by both sides. According to the Satellite Sentinel Project (SSP), a Harvard University humanitarian initiative, there was evidence of destruction of key oil pipeline infrastructure in Heglig. Sudan and South Sudan have yet to define their borders and both have accused the other of supporting rebel groups in the others country, thereby continuing insecurity along their shared border. Piracy off the coast currently prevents the offshore exploration of hydrocarbon reserves within Somalia. Piracy also causes delays for onshore operations as companies face difficulties in transportation of equipment. On a wider scale Somali piracy in the Gulf of Aden and north-western Indian Ocean affects world-wide oil shipping, as pirates target international shipping lanes, hijack vessels and hold them ransom for millions of dollars. Pirates are
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Terrorism is also a concern in East Africa, with the Wall Street Journal reporting in July 2012 that the United States is providing trucks, communications gear, rifles and drones to the region as part of a USD 41.4 million package of military aid. Eight drones will be provided to Kenya to be used to target al Shaabab in Somalia and other al Qaeda supporters.

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known to openly operate in Puntland, despite the establishment of a Puntland Maritime Police Force. While the number of attacks have recently dropped, piracy remains a threat to global shipping and represents a humanitarian tragedy for hijacked seafarers and kidnapped hostages. Political Disputes Tanzania and semi-autonomous Zanzibar have been in a longstanding dispute over the sharing of potential oil and gas revenue, preventing exploration off Zanzibars coast. Shell is currently working with both governments to negotiate a compromise. The national government is also in a fifty year-old territorial dispute with Malawi over Lake Malawi, known in Tanzania as Lake Nyasa. Malawi claims that the entire lake belongs to the country, while Tanzania claims ownership of half of the lake. In October 2011, Malawi granted oil exploration licenses to UKbased Surestram Petroleum. Tanzania has requested that Malawi halt the exploration activities amid fears that the discovery of oil and gas would cause an escalation of conflict between the two countries. Somalias interim federal government is working on a new constitution seeking a petroleum law under which license agreements with foreign investors would be controlled by the national government, while regional governments would receive a cut of the profits. Puntland is likely to disagree with the legislation as they entered into agreements with Africa Oil and Range Resources directly thereby bypassing the federal government. According to Mark Bradbury, director of the Rift Valley Institute, there is clearly potential for dispute between the relatively stable Puntland and the rest of the country. The positive end would be a federal government put in placethe negative, a Somalia being divided up by international military forces. According to Range Resources, the discovery of oil in the territory held by Somaliland would likely prevent any future hope of the re-unification of Somalia. The fragmentation of the country is furthered by the dispute between Somaliland and Puntland over the Sool, Cayn and Sanaag regions, where approximately twelve, mostly unlicensed blocks are located. Overlaps in the granting of blocks have occurred, leaving companies unsure of the validity of their licenses. Somalia and Kenya also disagree over their boundary line in the Indian Ocean; particularly problematic are legal claims to sell rights for exploration and collect revenue from any discovery. In July 2012, Kenya awarded four offshore blocks in contested waters: L21, L23, and L24 were awarded to Italys Eni, while Block 122 was awarded to Frances Total. Abdullahi Dool, Somalias Deputy Energy Minister said that government planned to report the dispute to the United Nations. Corruption Countries within the Horn of Africa and East Africa need to fine-tune their legal frameworks in order to appeal to both investors and public interests. According to Robert Besseling, Senior Africa Forecaster for Exclusive Analysis, a London-based risk consultancy firm, within East Africa the major risks facing investors is entrenched corruption in Kenya and Tanzania [and] arbitrary taxation in Uganda. In mid-October 2011, Ugandas Parliament voted in an emergency session to freeze all oil contracts and begin investigations of the countrys prime minister, internal affairs minister and foreign minister on allegations of accepting money from Tullow Oil, allegations Tullow denied. The investigation led to the resignation of three senior Ugandan government officials. The Ugandan Parliament is still considering crucial new oil laws that will set the parameters for how the countrys oil sector will be governed, covering the allocation process, transportation and refinement and how revenues from the sale of oil will be managed. The laws under consideration by Parliament give extensive discretionary powers to the Minister of Energy and Mineral Development with responsibility for oil, but do not guarantee transparency over key documents and provide virtually no role for Parliament. Only limited information on petroleum contracts are shared with Members of Parliament and the public. Furthermore, according to Global Witness, the petroleum sector is shrouded in secrecy and marred by strong central government control, corruption allegations and international tax disputes. Table One (below) show rankings of East African countries on Transparency Internationals Corruption Perception Index17 and whether the country is a member of the Extractive Industries Transparency Initiative18.

Transparency Internationals Corruption Perception Index ranks countries/territories based on how corrupt a countrys public sector is perceived to be. Scores range from 0 (highly corrupt) to 10 (very clean). 18 Extractive Industries Transparency Initiative (EITI) is a coalition of governments, companies, civil society groups, investors and international organisations that which promotes transparency in the oil and mining sectors.
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It is hoped that the challenges experienced by Uganda can serve as lessons to neighbouring countries now trying to establish their own laws. According to Mohamed Abshir Waldo, an expert on Somalia, the discovery of oil in the Puntland region of Somalia has the potential of bringing corruption and curses to a country if not handled well. Other analysts also highlight the governments poor record of financial management as well as lack of expertise in doing business with international oil companies. In Kenya, government officials signed an agreement with British Gas Group in May 2011 that the country would write gas rules within twelve months; however, the rules have yet to be established and government officials and the National Oil Corporation have asked the World Bank for help in drafting a gas policy. Kenyas Lamu district is one of East Africas most beautiful and relatively unspoiled environments along the Indian Ocean and includes a cultural heritage site on Lamu island, reports BBC. Lamu residents complain of a lack of transparency surrounding the port project. Save Lamu, a coalition of local civil society organisations, claims that an environmental impact assessment (EIA) by independent experts and consultations with the community have not been carried out. Similar concerns have been expressed regarding the Turkana Basin of northern Kenya, the location of some of the richest early hominid sites on the planet and home to nomadic herders who risk being displaced from their land.
Table One: Corruption Perception and Membership in EITI

Country Somalia Kenya Uganda Eritrea Ethiopia Mozambique Tanzania Djibouti South Sudan

Corruption Perception Index (0-10) 1 2.2 2.4 2.5 2.7 2.7 3 3 N/A

Member of EITI No No No No Expressed intent Yes Yes No No

Conclusion Oil interest in East Africa is huge. That whole area is of enormous interest to junior and medium-ranked companies. In fact, it has been a long time since so many oil companies that size were so active exploring a region, says Tara OConnor, Managing Director of Africa Risk Consulting. In a region where large percentages of the population live on less than USD 2 a day, these new discoveries could provide huge opportunities for East African countries. Revenues from oil and gas can be used to boost on-going and future socio-economic planning, in addition to attracting foreign investment into infrastructure development. However, in order for these prospects for regional development to be achieved, comprehensive legislation is needed to ensure that governments are transparent in their dealings with companies and that the needs of all stakeholders are taken into account at each stage of gas and petroleum development. With proper planning, transparency and stability, East Africas recent oil and gas discoveries could usher in a new era for the region.

September 2012

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