Market dynamics

Market dynamics justify greater interest in discoveries… Namibia can avoid the resource curse by learning from others

The current dynamics of the oil market, where demand and supply are not synchronized and where a super oil price cycle lasts in the short to medium term, puts the Namibian government in a better negotiating position to increase its share of 10% in resource projects for a higher level. This is a recommendation from a report released this week by local brokerage firm Simonis Storm Securities (SSS).

Two recent oil discoveries off the coast of Namibia enabled the government, through the National Petroleum Corporation of Namibia (Namcor), to secure a 10% stake in the two exploration areas. The first is operated by a joint venture group which includes TotalEnergies (40%), QatarEnergy (30%) and Impact Oil and Gas (20%). The second discovery is operated by Shell (45%) and Qatar Energy (45%). With the exception of the recent decline in oil demand due to Covid-19, oil producers are benefiting from higher prices which come with increased consumption.

Weighing in on the increased government stake, Olayinka Arowolo, CEO of oil and gas explorer Nabrim, agreed that while market dynamics could play a role in the government having another conversation with operators on more d Fairness does not “give government automatic cause and effect”. arrangement”.

“What the government can or cannot do is governed by what has been agreed vis-à-vis the petroleum agreements. The very nature of these deals is such that the two parties do not profit from each other, up or down, and there is fair compensation for the risk,” Arowolo said.

Meanwhile, the SSS report, compiled by economist Theo Klein, offers a detailed case study of other oil states in African and foreign developing countries, which he says should provide Namibian policymakers with enough lessons.

“The government should hopefully also learn from the mistakes made in contracts over mineral and natural resources, as the benefits of the extracted products have not largely accrued to civil society.”

In the report, SSS praised the government for creating a sovereign wealth fund in advance, saying it is a tool used to achieve greater transparency in oil revenue allocations. Policymakers have pledged savings from future oil revenues and green hydrogen operations to the Welwitschia Fund, which SSS sees as a positive.

“It would benefit public finances in the long term. While demand for oil could last until 2050, Namibia will need to act quickly if it is to benefit from oil revenues in a decarbonizing world,” the report says.

SSS added that transnational oil companies are necessary, as specialized skills are required to operate in the capital-intensive sector which can rarely be provided by African host countries.

However, SSS cautioned “while TNCs allowed for more transparency and accountability than state oil companies in other countries in the past, appropriate terms should be negotiated in contracts signed with them.”

The SSS also believes that the estimated oil revenues could prompt the government to be more proactive in improving the ease of doing business, establishing special economic zones, eliminating political uncertainty and improving access to immigration for foreigners. qualified foreigners.

The brokerage firm is confident that these structural reforms could materialize quickly at the behest of transnational oil companies before oil production takes place. As a result, this could lead to the development and advancement of other industries, as these reforms will not only make it more attractive for oil companies to establish themselves in Namibia, but will also attract foreign investors in other sectors.

The report reads: “We believe that Namibia can only avoid the resource curse if the aforementioned structural reforms are implemented. The economy has not diversified away from primary economic activities over the past 30 years, so what will change when oil revenues are added to the picture? However, structural reforms will allow alternative sectors to increase their share in employment and GDP over time”.

According to a report by the World Bank (2006), in most cases oil discoveries have led to the destruction of local communities and lawlessness in developing oil-producing countries. “In most cases, Western communities and oil producers benefit more from oil discoveries than oil producers in the South. This is evident when looking at GDP per capita data. Namibia (non-oil producer) has the second highest GDP per capita compared to oil producers in Africa. However, Namibia has a much lower GDP per capita than oil producers in advanced economies,” the SSS report notes.

The World Bank has also warned that countries that depend on oil revenue have higher levels of corruption because resources are generally misappropriated. These precious resources are usually not spent on crucial services like education and health, which in turn leads to low Human Development Index (HDI) scores.

SSS pointed out that oil-producing countries in Africa and the Middle East generally spend a smaller proportion on education and health, compared to Western oil-producing countries. In this way, citizens of oil-producing countries do not benefit from oil revenues.

“What is interesting to note is that Namibia spends a higher proportion on education and health, compared to oil-producing countries in general. However, the quality of public expenditure is not controlled here, but remains a crucial factor to take into account, which we omit for the moment. It can easily be argued that public spending on education in Namibia is of poor quality, for example,” reads the SSS report.

SSS recommended that oil revenues be used to create sustainable and diversified investments for long-term benefits for future generations. This, the company said, should go through a sovereign wealth fund while tackling challenges such as healthcare, food insecurity, environmental pollution and infrastructure, among others.

2022-07-15 Edgard Brandt

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