Tuesday, April 03, 2012

Looking Beyond Oil Discovery

Oil Well Field Turkana
The recent news of oil discovery in the arid Turkana area of Northern Kenya is really good news. The discovery rewards the long search for oil.  It also comes at a time when the country is geared for long term investment projects in areas of infrastructure including roads, railways, oil pipelines, cities, airports and seaports. The recently launched Lamu Port-South Sudan-Ethiopia Transport Project (Lapsset) is the largest infrastructure project to be undertaken in Eastern and Central Africa. The Lamu Port is expected to act as the main gateway to Africa's Great Lakes region that includes the Horn of Africa, eastern Africa and central Africa. The project will include the construction of a superhighway that will link Kenya and Ethiopia and the creation of an oil pipeline from Juba in South Sudan to Lamu. The discovery of the oil will benefit from this giant infrastructural construction linking Turkana to Lamu port.

Once the size of the catch is confirmed, it will be time to look beyond the discovery to the future of Kenya as an oil producing country. Oil discovery in Africa has become a curse rather than a blessing. Instead of using the oil resource for the benefit of the country and its people in order to alleviate poverty and raise standards of living, the political elite in cohort with multinational oil corporations have plundered the resource for their own benefit. In order to avoid this path of pillage, Kenyan authorities must look beyond the discovery and envisage a future of abundance and prosperity for all Kenyan people, including the local Turkana population.

Oil revenue management is the key to prosperity. This entails transparency and avoiding deals that undermine peoples’ authority to benefit from the resource. The authorities must strike favorable agreements on resource and revenue sharing between the people and the oil companies. They must ensure that most of the revenue from the sale of oil remain and benefit the country. In other words, the government should avoid greed and act fairly for the benefit of the people.

For good managed of the oil revenue, the government should look and emulate success stories from oil producing countries, especially Norway. When Norway discovered its first oil, it was among the poorest countries in Europe. Since then, it has wisely used the oil revenue to provide its citizens with the highest living standards in the World.

The secret is to use part of the oil revenue for social and economic development and the other part for investment and revenue generation through the Norwegian Oil Fund. The oil fund was founded in 1990, and formerly known as “The Petroleum Fund Norway” before it was named “The Government Pension Fund Global” in 2006. It is managed by Norges Bank Investment Management (NBIM), and subject to ethical guidelines laid down by the Petroleum Fund’s Advisory Council on Ethics. The aim of the fund was to ensure a sustainable use of the income from the petroleum sector.

The rationale for establishing the fund was that the return on financial assets was expected to be higher and less variable than the return on oil in the ground. The first payments into the fund were made in 1996, and from then on the fund has accumulated rapidly. In 2011, the fund was the world’s largest sovereign wealth fund overtaking the Abu Dhabi Investment Authority (ADIA). It has nearly NOK 3,100 billion (roughly USD 570 billion) in the fund today.  The fund was set up to give the government room for maneuvering in fiscal policy should oil prices drop or the mainland economy contract. It also served as a tool to manage the financial challenges of an ageing population and an expected drop in petroleum revenue. The fund was designed to be invested for the long term, but in a way that made it possible to draw on when required.

Looking beyond oil discovery to transparent and sound oil revenue management is the only way to ensure that oil discovery becomes a blessing and not a curse.  It can be done, what is required is political will and a people oriented approach as the Norwegian case reveals.

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