Impact of AfCFTA on oil and gas industry

Africa suffers from an energy deficit which is unfortunate for a continent that is so rich in resources. Africa’s problem lies in the inability to utilise these resources for domestic benefit, and the hope is that the AfCFTA helps achieve this goal.

To attain such regional socio-economic development, governments need to have a strong commitment to tackle corruption and make firm commitments to developing their own countries to ensure the booming trade and supply of oil and gas. If the continent pivots from an extractive exportation structure with oil and gas, it can secure more sustainable and inclusive trade that is not dependent on the fluctuation of commodity prices on the international market.

The continent has countries rich in oil and gas and the capacity to have a firm footing on the sector with the assistance of the AfCFTA and more favourable trading terms intra-regionally. Nigeria has already set its intentions on becoming the largest oil refining hub on the continent, while Angola hopes to export gas to its neighboring countries.

The AfCFTA will facilitate trade and the evolution of existing commerce lines within Africa and not necessarily radically revolutionise the space. However, in sectors like oil & gas, where corruption is rampant, this evolution will be crucially determined by transformations of existing governance structures and infrastructure. For as long as corruption is a continuing practice, the gains from domestically trading our natural resources might not be as significant as they could be.

Furthermore, the AfCFTA will trigger substantial investment in the oil and gas industry from countries overseas such as the United States and other European countries, mainly because the AfCFTA changes investors’ value proposition by providing a larger market with lower risk.

Firstly, the AfCFTA expands the market by providing a single market with reduced cross-border barriers. Investors can thus undertake larger revenue projects on a regional scale rather than a national scale. Before AfCFTA, approximately 25% of all intra-African exports in 2017 were for oil, gas, and electrical energy. With the effectiveness of the AfCFTA, the economies of scale are available for regional power solutions, Africa can reasonably expect the power export market to expand markedly.

The anticipated prospect of regional power solutions is already attracting increased investment in African power projects, which would have been unfeasible before AfCFTA. For instance, Botswana and Namibia are developing a substantial 5000MW solar project to provide and trade power with 12 neighbouring countries, supported in part by Power Africa and other World Economic Forum members. This heavyweight project will create investment opportunities for every aspect of goods and services along the program’s value chain.

In this respect, the AfCFTA will provide a protocol for the reasonable resolution of investor-state disputes. This protocol should make the investment with African countries, particularly in capital-intensive oil and power projects, less risky for the investors and African countries. Before AfCFTA, in addition to regular business risk, investment in Africa’s oil and power industries was subject to a host of additional risks, ranging from contract regulation to outright expropriation.

The current coronavirus pandemic has stalled the effective implementation of the AfCFTA, delaying the potential positive impacts of the free trade area. Also, acknowledging the continuous threat of global warming in the Paris Peace Agreement requires the oil and gas industry to innovate its operations, requiring extractive procedures that will not damage the communities where oil and gas is sourced. The oil and gas industry needs to look beyond itself to fully achieve the gains of the AfCFTA and overcome those challenges.

To conclude, the AfCFTA holds excellent potential for Africa. The benefits of improved efficiency on the continent and encouragement of competition on the markets will be significantly felt on the continent and boost development. Besides, the potential influence towards creating solutions to regional challenges through regional economies of scale is one of the most significant advantages of successfully implementing the AfCFTA. This would be a potential game-changer for the oil and gas industry and African commerce overall.

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Shantel Mufandaidza is Associate Attorney, Centurion Law Group