Current oil market dynamics, where demand and supply are out of sync and an oil price super-cycle lasts for the short- to medium-term, place the Namibian government in a better bargaining position to increase its take of 10% in resource projects to a higher level. This is a recommendation from a report released this week by local stock brokerage Simonis Storm Securities (SSS).
Two recent oil discoveries offshore Namibia has seen government, through the National Petroleum Corporation of Namibia (Namcor), secure a 10% stake in both 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%). Except for the recent dip in oil demand due to Covid-19, oil producers are enjoying higher prices that come with increased consumption.
Weighing in on the government’s increased stake, Olayinka Arowolo, CEO of oil & gas explorer Nabrim agreed that while market dynamics could play a part in government having another conversation with operators about more equity, this does “not give the government an automatic cause and effect disposition”.
“What government can or cannot do is governed by what’s been agreed to vis-a-vis the petroleum agreements. The very nature of these agreements is such that both parties don’t adversely benefit from each other, up or down, and there is fair compensation for risk,” said Arowolo.
Meanwhile, the SSS report, compiled by economist Theo Klein, proposes a detailed case study of other African and overseas developing country petrostates, who he says should provide Namibian policymakers with sufficient lessons.
“The government should hopefully also learn from mistakes made in past mineral and natural resource contracts, as benefits of mined commodities did not largely benefit civil society”.
In the report, SSS commended the government for establishing a sovereign wealth fund ahead of time, saying this is a tool used to achieve greater transparency of oil revenue allocations. Policymakers have pledged savings from future oil revenues and green hydrogen operations to the Welwitschia Fund, which SSS views as a positive.
“This would benefit government finances in the long run. While demand for oil might last until 2050, Namibia will have to move swiftly if it is to benefit from oil revenues in a decarbonising world,” the report reads.
SSS added that transnational oil companies are needed, given that specialised skills are required to operate in the capital-intensive sector that can rarely be supplied by African host countries.
However, SSS cautioned “while transnational companies allowed more transparency and accountability than state-owned oil companies in other countries in the past, appropriate terms and conditions should be bargained for in the contracts signed with them”.
SSS also believes the estimated oil revenues might entice government to be more proactive in improving the ease of doing business, implement special economic zones, remove policy uncertainty and improve immigration access to skilled foreigners.
The stock brokerage is convinced these structural reforms could come about speedily at the demands of transnational oil companies prior to oil production taking place. As a result, this could lead to the development and advancement of other industries because these reforms will not only make it more attractive for oil companies to establish operations in Namibia, but will attract foreign investors in other sectors.
The report reads: “We believe Namibia could avoid the resource curse only if the above-mentioned structural reforms are implemented. The economy has not diversified away from primary economic activities over the last 30 years, so what will change when oil revenues are added to the picture? However, structural reforms will allow alternative sectors to increase their shares of employment and GDP over time”.
According to a World Bank report (2006), in most cases, oil discoveries have led to the destruction of local communities and anarchy in oil-producing, developing countries. “In most instances, Western communities and oil producers derive more benefit from oil discoveries, compared to oil producers in the global South. This is evident when looking at GDP per capita data. Namibia (a non-oil producer) has the second-highest GDP per capita when compared to oil producers in Africa. However, Namibia has a much lower GDP per capita compared to oil producers in advanced economies,” the SSS report noted.
The World Bank also cautioned that countries which depend on oil revenues exhibit higher levels of corruption as resources are typically misappropriated. These valuable resources are not typically spent on crucial services like education and health, which in turn results in low Human Development Index (HDI) scores.
SSS pointed out that oil-producing countries in Africa and the Middle East typically spend a smaller proportion on education and health, compared to Western oil-producing countries. Through this, citizens in oil-producing countries do not benefit from oil revenues.
“What is interesting to note is that Namibia spends a greater proportion on education and health, compared to oil-producing countries in general. However, the quality of public spending is not controlled for here, but remains a crucial factor to be aware of, which we omit for now. One can easily argue that public spending on education in Namibia has a low quality, for example,” the SSS report reads.
SSS recommended that oil revenuse should be used to create sustainable and diverse investments for long-run benefits for future generations. This, the firm stated, should go through a sovereign wealth fund while addressing challenges such as healthcare, food insecurity, environmental pollution and infrastructure, amongst others.