Recently and quite unexpectedly to myself, I got sucked into a discussion about the East African Crude Oil Pipeline (EACOP). The $5 billion pipeline is primed to transport oil from the Hoima oilfields in Uganda to the Tanzanian coastal city of Tanga. The 897-mile (1,443 kilometer) oil pipeline is billed as the longest heated pipeline in the world. The project is sponsored by the China National Oil Corporation and French energy conglomerate TotalEnergies, alongside the Uganda National Oil Company and is expected to start transporting oil in 2025.
It’s a major project, and it’s natural that it generates a lot of discussion in Uganda. What I didn’t know when I inadvertently stepped in that discussion with a Twitter repost of the African Business article critical of this project (https://african.business/2022/06/energy-resources/environmental-backlash-mounts-as-lenders-shun-east-african-crude-oil-pipeline/) was how heated the discussion was. There are two very opinionated and vocal groups, one supporting the project and the other objecting to it. Both groups trade ideological accusations and even insults, the most common of which is “racist”. The group supporting the project accuse their opponents of being racists or colonialist stooges because supposedly they deny Uganda access to oil revenues for development, which were so critical for development of the former colonial powers. The group opposing the project hurls the same accusation on the grounds that project supporters doom Uganda to decades of fossil fuel dependency at the mercy of big capital originating from the same former colonial powers.
It is sad that an objective analysis of the costs and benefits of oil production is replaced with ideological labels and mutual insults. Ugandans have every right to know and discuss the pros and cons. It also appears to me that the focus of the discussion between the supporters and opponents of the project is misplaced. Whereas it has so far focused on the possible negative effects related to the project implementation (such as population displacement, environment degradation, etc.), the real focus should be on the impacts of project operation. Will the project become a development boon for Uganda, as many hope? This depends not on the project itself but rather on the capacity of the Ugandan government to fully utilize its development potential and avoid the failure of translating growth into development.
This short piece analyzes some common misconceptions about the role of natural resources (oil specifically) in development and points to some risks that should be considered carefully in any discussions of EACOP. It is inspired and informed by two books that I read at the moment: Africa’s Long Road Since Independence by K. Somerville and Mythes et paradoxes de l’histoire economique by P. Bairoch. I owe Professor Bairoch the use of the word “myth” in the title.
Myth 1. Oil is a stable source of national revenues for development
Like any other commodity, oil is vulnerable to sharp price fluctuations. As the chart below demonstrates, the price of oil fluctuated anywhere between $20 and $120 for barrel over the past decade, a six-time difference. This makes oil a rather poor source of revenue because of the forecasting challenges. Over reliance on future oil revenues (or revenues from other commodities) may easily culminate in over indebtedness and even default when a country cannot service its debt due to a sudden and sharp drop in export revenues. Ghana faced a similar situation with its key export commodity, cacao, in the 1980s: as the cacao price dropped precipitously, Ghana’s debt servicing shoot to 48.9% of export earnings. Whereas there were many reasons for the collapse of the Soviet Union in 1991, the sharp drop in oil prices from $88 per barrel in 1980 to $26 per barrel in 1986 played an important role in its demise. Moreover, as the developed world intensifies its efforts to transition to clean energy, the future of the project is very uncertain. Europe, in particular, is committed to an accelerated renewable energy transition. This, rather than anything else, may be behind the hesitance of capital providers.
Furthermore, oil production means not only revenues but also costs. These are costs of accommodating the population that have been affected by oil production and transportation (3,648 persons in Uganda), environmental costs as well as the costs of land reclamation after the end of the project. Since Uganda is part of the EACOP consortium, it will bear at least some of these costs.
Myth 2. Western countries have built their wealth on hydrocarbons, why can’t we do the same?
It is true that manufacturing (which is energy demanding by definition) was critical for achieving prosperity in the West. Coal had been the main source of energy for industry in the 18th and 19th centuries (when Western countries actively industrialized) before the advent of oil and gas technologies in the 20th century. However, no Western country achieved this level of prosperity by exporting hydrocarbons (coal, gas and oil). Many European countries (Netherlands, Sweden, Switzerland, Italy, Russia among others) were net importers rather than net exporters of coal. Even when a country exported large amounts of coal (as was the case with Great Britain in the 19th century), it never amounted to more than 5% of all export earnings. Furthermore, such countries exported excess coal after all needs of domestic industries had been met. The US was a net exporter of oil throughout almost the entire 20th century (this is why it was hit so hard by the OPEC oil imports embargo in 1973), which didn’t prevent it from becoming the lead world economy. On the other hand, many regions in the world had access to coal (most notably, China) and did not industrialize until the late 20th century.
Supporters of EACOP accuse Europe of hypocrisy and colonialism for the continued use of oil and gas and even starting new pipelines, such as the Baltic pipeline between Norway and Poland commissioned in October. But it is important to consider that the new pipeline is there to replace the capacities lost after the destruction of the Nordstream pipeline and will not increase the total use of gas used in Europe.
Myth 3. Ugandans will have access to cheap fuel, and the prices of other goods will also fall
The price of oil and gas is determined on international markets, not nationally. Due to the miniscule share of the world production from the pipeline, the project will be a price taker, not a price setter. Furthermore, it is not crude oil that matters for consumption but oil products, such as petrol, diesel, kerosene and others that are used to drive cars or operate machinery. Since there are no oil refineries in Uganda, the country will have to import these products at international prices (they would be sold at international prices anyway even if there was a refinery). Of course, Uganda can introduce oil subsidies from the oil export revenues it will receive but this means less revenues available for development interventions. As for the price of other goods and services, it may indeed fall because one notable outcome of a rapid and dramatic exchange in a country’s foreign exchange earnings is appreciation of the exchange rate. In other words, the value of the national currency increases relative to currencies in foreign exchange markets. This phenomenon is known as “Dutch disease”. An appreciation of the national currency makes imports of all goods and services relatively less expensive. This is the good part of the story. Unfortunately, it ends here for two reasons. Firstly, domestic producers face tougher competition and lose market share to imported products with consequent labor displacement and unemployment. This may totally destroy infant industries with disastrous longer-term consequences for the country. Secondly, as you can buy more foreign exchange with the same amount of national currency, more foreign exchange is required to pay for anything produced domestically. This means that your export products also become less competitive internationally, and the country may lose its share of the international market.
Myth 4. But if anything, oil revenues will contribute to GDP growth and increased welfare of all Ugandans
This is an old myth about “the rising tide lifting all boats”. There is no straightforward correlation between the GDP growth and an increase in general welfare (measured, for example, by poverty rates). Nigeria is one example. Between 1965 and 1973, oil earnings increased federal revenues more than fivefold. In 1972, half of all revenues was from oil; it was 87% by 1987. High oil prices enabled the Nigerian economy to grow 7.5% annually through the 1970s, but this didn’t lead to development or the raising of the living standards of the millions living in poverty. Imports surged and local consumer related manufacturing grew (textiles, brewing, soft drinks, soaps) but agriculture contracted with food and export crop production volume. Furthermore (this is another myth), sale revenues don’t go directly to the government coffers. Despite Nigeria’s ever-increasing oil revenues, more of its people were living in absolute poverty in 2013 (61%) than in 2004 (55%), and this was vastly worse than the figures before the oil boom. Between 1970 and 2000, the number of Nigerians in poverty increased from 19m to 90m.
Rather than improving the lives of many, there is a risk that the project may increase inequality and hence result in more social tension. A recent study for 42 Sub-Saharan African (SSA) countries over the period 1998–2018 (https://www.emerald.com/insight/content/doi/10.1108/IJDI-02-2022-0036/full/html) has found that natural resource rents from mining activities have a negative and statistically significant effect on income inequality. The results reveal a negative and significant effect of natural resource rents on income inequality in all sub-regions except Southern Africa.
The revenues will go to the EACOP Company where the Uganda National Oil Company (UNOC) participates with 15% capital. The controlling stake is with Total Holdings International B.V. (62%), which will have full control of the operation. Government revenues will be just a share of the project revenues consisting of the royalties and profits proportioned to UNOC.
Myth 5. Uganda will receive all revenues from oil extraction.
EACOP is part of a larger oil production project, which includes two upstream production sites (Tilenga and Kingfisher) and the pipeline itself. Production Sharing Agreements (PSAs) between the Government and international oil companies guide the sharing of proceeds from the crude oil. However, revenue from EACOP is linked to the total upstream projects revenue because the pipeline is an enabler. As discussed before, oil production is useless by itself unless the oil is delivered to foreign buyers because it is not designed for the domestic market. The Ugandan Government participates with 15% capital in the EACOP company through the Uganda National Oil Company (UNOC). The controlling stake is with Total Holdings International B.V. (62%), which will have the full control of the pipeline’s operation. The details of the PSA have not been made public but it appears that the government’s share of oil proceeds does not exceed 30%. Hence, government revenues will be a relatively small share of the project revenues consisting of the royalties and profits proportioned to UNOC minus the operating costs and transit fees paid to the Tanzanian partner. This is not to say that Uganda will not benefit from the revenues but the windfall will be much below the public expectations, and the vagaries of international oil prices may make it even less.
Myth 6. The project will give a boost to Ugandan industries by creating demand for more inputs and more outputs.
A characteristic feature of oil projects in developing countries is their weak linkages and domestic value added. In other words, the principal sector is often an enclave in the domestic economy, and more closely linked to external providers of inputs and processors of outputs. The “backward linkages” or the production of inputs for the principal sector may be strong when large amounts of capital equipment and inputs are used but this is not the case of Uganda. All inputs for EACOP will come from highly industrialized countries. Likewise, many processing activities will take place in industrialized countries that have diversified manufacturing sectors producing capital equipment and consumer durable products. There is also risk that the EACOP project will perpetuate and strengthen Uganda’s dependency on external markets at the expense of developing its own economy. Whereas the supporters of EACOP accuse their opponents of “colonialism”, this argument can be easily turned against them: do they wish Uganda to stay forever within the colonial dependency system reduced to a source of raw materials for the global North?
Myth 7. Project this big will create many jobs for Ugandans
The construction phase is indeed likely to create many jobs but these are temporary jobs for as long as the construction continues. Modern gas and oil projects are highly capital intensive. The long-term jobs for oil production and extraction are highly mechanized, and don’t require a large work force. The result is that relatively few jobs are created directly on the oil field. Furthermore, 80% of the pipeline is in Tanzania, which also hosts four pumping stations (compared to two in Uganda) where some staff will be required for monitoring and maintenance. Since Uganda lacks specialists in the oil and gas sector, it is likely that specialized jobs will go to foreign specialists, at least in the short to medium term.
Some final thoughts
Is EACOP an economic evil that should be fought tooth and nail? No, not necessarily (provided of course that all environmental and social risks are taken care of). There are ways to mitigate the economic risks and turn the project into a development asset. However, this will not happen by itself. Opening of the pipeline does not mean that Ugandan lives will improve automatically. Nor does it mean by itself that Uganda will be able to perform the kind of structural transformation required for its sustainable accelerated development. The challenge of translating the benefits of increased revenues from oil into development is a real challenge, and as this piece shows, many African countries have failed on this road. A smart policy to maximize the use of oil revenues for development is critical to avoid the pitfalls that many other developing countries have suffered with oil and gas projects.
At a minimum, this policy should include the following:
- Adequate financial arrangements that protect Uganda’s affected population and environment, including land reclamation at the end of the project.
- Making sure that the backward and (especially) forward linkages are fully utilized and that the project contributes to the development of domestic high tech upstream activities around oil processing.
- Linking the increased supply of energy to new energy-consuming projects around the country, particularly in agricultural processing, fertilizer production, and manufacturing.
- Development of local and national investment policies and plans that would direct oil revenues to real sector investments in line with Uganda’s development priorities.
- Establishing a strong and reliable mechanism to prevent the fraud and misuse of oil revenues, including special allocation and reporting procedures in the annual budget.
- Clear and realistic strategy to transition to renewable energy and shun the use of hydrocarbons as a source of energy.