Facilitating African energy, oil and gas intra-regional trade with AFCFTA.
Strong Gross Domestic Product (GDP) growth rate in recent years, driven essentially by favourable commodity prices, before the COVID-19 pandemic, boosted economic performance of Africa. Moreover, Africa made good progress by creating regional frameworks for trading, with eight trade agreements already signed. Trade between these regional blocs showed a compound annual growth rate of 10 percent since the 1990s. Africa is, therefore, increasingly becoming a fascinating continent where the old narrative of being disconnected from the global economy is increasingly changing. There is a new wave of transformation in the continent, powered by dynamism and ingenuity of Africa’s emerging entrepreneurs that is advancing Africa from a marginal to a global player. Through policy reforms and the need to internalize development, the region’s abundant world-class innovation and talent are increasingly being harnessed to create wealth and improve the economic welfare of the people.
The African Continental Free Trade Area (AfCFTA)
One of such transformations that is taking place in Africa is the launching of the African Continental Free Trade Area (AfCFTA) agreement which, aside from the World Trade Organisation (WTO), will create the largest global free trade community by the number of participating countries. The agreement brings together about 1.3 billion people across 55 countries with a combined Gross Domestic Product (GDP) valued at US$3.4 trillion. The magnitude of AfCFTA is huge and it will reduce tariffs among member countries and cover policy areas such as trade facilitation and services, as well as regu¬latory measures and technical barriers to trade within the continent.
The implementation of AfCFTA would reshape regional markets and economies across the continent and enhance productivity in the services, manufacturing, and natural resources sectors. AfCFTA would also significantly boost African trade, particularly intra-regional trade in manufacturing and services. Intra-African exports would increase by 81% while the increase to non-African countries would be 19%, improve wages for skilled and unskilled workers alike.
Creating a continent-wide market will require a determined effort to reduce all trade barriers and attendant costs. This will require legislation to enable goods, capital, and information to flow freely and at easily across borders. Countries that do so will be able to attract foreign investment and increase competition that can increase productivity and innovation by domestic firms. Governments will also need to develop the capacity of their labour force to take advantage of new opportunities with new policies designed to reduce the costs of job-switching that will be made possible by the AfCFTA.
AfCFTA and Regional Trade in Energy, Oil and Gas
Africa is a natural resource rich continent which unfortunately suffers from a huge energy deficit. On average, the energy, oil and gas producing countries in the continent derive over 70 percent of their foreign exchange from the exports of their oil and gas resources. The continent’s problem lies in the inability to employ these resources for the domestic value added and the hope is that the AfCFTA helps achieve this goal. To attain such regional value added and socio-economic development, governments need to have a strong commitment to tackle inconsistent economic policies, infrastructural deficiencies. Also, there is need for firm commitments to domesticate the use of the energy, oil and gas resources to promote a dynamic intra-African trade in oil and gas.
If the continent transits from an extractive exportation structure with oil and gas, it can secure a more sustainable and inclusive trade that is not dependent on the fluctuation of commodity prices on the global energy, oil and gas market. The COVID-19 pandemic has seriously exposed the vulnerability of the oil and gas sector to the vagaries of the global market for the products. However, in critical sectors like oil and gas, this evolution will be crucially determined by transformations of existing governance structures and infrastructure. For as long as social and economic infrastructure continue to be binding constraints, the gains from intra-African trading of energy, oil and gas resources might not achieve the desired outcome.
With the AfCFTA, African oil and gas producing countries could have the capacity to have a better hold on the sector 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 neighbouring countries. AfCFTA will facilitate trade and the growth of existing trade arrangements within Africa. Angola is the largest exporter of gas on the continent and stands to benefit much from the domestic supply of gas to neighbouring countries. However, the infrastructural deficiency in Angola has constrained the country from supplying its neighbours with gas. The only way the AfCFTA would positively impact the oil and gas intra-regional trade in the continent is by promoting significant investments in roads, ports, and other physical infrastructure that are grossly inadequate in Africa.
Moreover, the AfCFTA will generate substantial investment in the continent’s oil and gas industry, mainly because the AfCFTA changes investors’ value proposition by providing a larger market with reduced risk. AfCFTA will expand the regional market by providing a single market with reduced cross-border barriers. Therefore, investors can 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 energy, oil and gas.
Furthermore, effective implementation of the AfCFTA will lead to economies of scale for regional power pools which can significantly expand power export market. Currently, the electricity market is highly fragmented which has made investment in the power sector to be unstainable. The anticipated prospect of an efficient regional power pool, to be facilitated by AfCFTA is already attracting increased interest and investment in African power projects, which would have been unfeasible before the agreement.
An example of the positive effect of the continental free trade agreement is the development of 5,000MW solar project by Botswana and Namibia to provide and trade power with 12 neighbouring countries. This project which is supported by Power Africa and other World Economic Forum partners will create significant opportunities for private investment and economic activities along the power value chain. AfCFTA will provide a mechanism for the reasonable resolution of investor-state disputes and make investment with African energy, oil and gas producing countries, less risky for domestic and foreign investors in the capital-intensive sector. Prior to AfCFTA, in addition to regular business risk, investment in Africa’s energy, oil and gas projects were subject to a host of additional risks, ranging from contract regulation to outright expropriation which often discourage investors from investing in the sector.
There is a great potential for Africa to boost trade and economic development through the effective implementation of the AfCFTA agreement. The enlargement of regional market and transformation of policies through the agreement will bring benefits of improved efficiency and encouragement of competition and efficiency of the regional market. Furthermore, the agreement will create regional economies of scale for the African oil and gas industry, particularly intra-Africa trade in energy, oil and gas products and services.
For AfCFTA to positively impact trade and economic transformation of Africa and the continent’s producers of oil and gas resources, there is need for the resolution of the perennial problem of infrastructure deficit in the continent. African governments must be serious about developing the regional infrastructure and finance the investment needed to make AfCFTA contribute efficiently to trade and commercial activities in the region. They should mobilise the necessary financial resources for financing infrastructure projects. They should also continue to pursue the development of the institutional and policy support measures to promote local content initiatives that will increase local value addition to boost industrialization and overall economic development of the continent.
AMETRADE has, over the five years, been organizing the African Local Content Sustainability Conference (ALCSC) to help oil and gas producing countries develop the policies, institutions, and capacity to support local content projects and programmes. The Conference has been contributing to the promotion of local industries and technical innovation that are stimulating local value added, local capacity development and foreign exchange savings in these countries.
Article written by, Dr. Babafemi O. Oyewole, Lead Oil & Gas Industry Expert, Ametrade Ltd