Economic experts at Simonis Storm Securities have detailed a cocktail of policy reforms and remedies that are critical for government to avert the resource curse that may come with the recent discoveries of oil off the coast of Namibia.
Oil discoveries were made at the Graff-1 and Venus Wells off the coast of Namibia in the Orange Basin in early 2022.
According to consultancy firm Wood Mackenzie, the recent findings might be Sub-Sahara Africa’s biggest oil discovery to date and estimates over US$ 3.5 billion annually in taxes and royalties for the Namibian government. The firm also expects Namibia to be the third largest oil producer in the region within 10 years, producing 250,000 bpd in its first phase. Namcor estimates US$ 5.6 billion in annual oil revenues according to a recent Bloomberg interview.
In a report titled Namibia’s oil resources: lessons from African petrostates released last week, Simonis Storm highlights that it is vital for government to impose policies and regulations to avoid becoming complacent on oil revenues in future.
“Oil revenues in Namibia should be used to improve education, skills and expertise to enhance development and activity in other sectors such as manufacturing, agriculture, ICT, healthcare, water management, research and development and energy transition,” the report reads in part adding that the estimated oil revenues might entice government to be more proactive in improving the ease of doing business in Namibia, implement special economic zones, remove policy uncertainty and improve immigration access to skilled foreigners.
“These structural reforms could come about speedily at the demands of transnational oil companies prior to oil production taking place in Namibia. These structural reforms will not only make it more attractive for oil companies to establish operations in Namibia, but will attract foreign investors in other sectors of the economy, leading to the development and advancement of other industries as well. 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,” the firm further states in the report.
In the report, the firm also suggested that strict laws and penalties should be in place against quasi-criminal conduct, corruption and crimes such as pipeline vandalism, fraud and oil bunkering as these have proven to be a direct influence on economic growth and collective wealth in oil producing countries. On the other hand, revenue generated from crude oil sales and taxes paid by multinational companies should be channelled toward the provision of quality education, healthcare and infrastructure that will benefit the citizens of Namibia while job creation and involvement of communities in the safeguarding, maintenance and monitoring of oil pipelines should be incorporated into the social responsibilities of oil companies. Adequate and timely compensation must be made to affected communities, with swift remedial activities when oil spills occur.
However, and while Namibia’s governance, corruption and socioeconomic status ranks more favourably than existing African petrostates, Simonis Storm says, civil society has not kept government accountable in the past and remains fairly passive.
“This is evident given that trust in government wanes and social stability remains intact. While Namibia maintains relative high levels of freedom of speech in the media, a weak civil society could worsen the institutional mechanisms due to a lack of accountability. If this does not change, the chances of avoiding the resource curse with oil revenues are low to modest.”
In view of anticipated revenues from oil proceeds, the firm noted that risks to revenue estimates being achieved include Namibia not being able to sign contracts with foreign firms in a reasonable time and allowing these firms to construct the necessary infrastructure to extract and export oil.
“Given our ease of doing business scores, this process could be delayed. As stressed before, Namibia’s oil revenue pursuit is time sensitive given global decarbonisation strategies. Also, Namibia is dependent on foreign firms with the know how to establish oil facilities and transfer skills to locals. At the same time, major global oil companies – such as TotalEnergies – have started investing more aggressively in renewable energy technologies and aim to significantly reduce their oil operations or revenues as a percentage of their total earnings between now and 2050. This remains a challenge to Namibia, especially given TotalEnergies’ interests in the Venus well,” the firm said in the report.
In conclusion, the firm said that it believed that if the current oil market dynamics persist, where demand and supply are out of whack and an oil price super cycle lasts for the short- to medium-term, it places the Namibian government in a better bargaining position to increase its take of 10% in resource projects to a higher level.
“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 decarbonizing world. Transnational oil companies are needed, given that specialized skills are required to operate in this capital-intensive environment that can rarely be supplied by African host countries.
“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. 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,” Simonis Storm said.