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Energy exploration in East Africa has uncovered significant finds for international oil companies (IOC). But locating the energy assets is only the first step. The next challenge is monetizing the new reserves.
Although they are experts in the application of below-ground processes, IOCs must focus on the risks above ground, including policies, regulations and political pressures faced by host governments.
From deepwater gas fields off the shores of Mozambique and Tanzania, to commercial quantity oil finds in Uganda, IOCs have good reason to be excited about East Africa. What's more, onshore hydrocarbon deposits are believed to exist in Ethiopia and Eritrea.
With such promise, domestic expectations are on the rise as well. Governments hope to develop the energy sector in a way that yields economic prosperity.

These hopes have an impact on the investment environment for IOCs. For both government and investors, the key to success is aligning the expectations of IOCs with those of the host state, which can pose both challenges and risks.
Host governments want more than the monetization of assets from their IOC partnerships. They want to determine the pace of production and to compel companies to invest in mid- and downstream infrastructure. They also frequently insist on local content provisions, which earmark a portion of project work to indigenous companies, a common practice everywhere from Brazil to Iraqi Kurdistan.
Key for governments is to establish policies that promote the development of their resources, rather than restrain it. In cases where domestic human resources are inadequate to the task, this can be difficult to achieve. In fact, the challenge of accommodating stakeholder needs has been a key factor in protracted hydrocarbon legislation debates, resulting in regulatory uncertainty, delayed projects, higher costs and greater risk.
Despite these difficulties, local expectations regarding immediate and more distant economic benefits remain high. But a lack of community engagement by stakeholders can fuel grievances regarding unequal distribution of wealth and livelihood displacement that can lead to unrest. IOCs face increased risk of targeted disturbances and reputational damage when locals feel sidelined.
Early alignment with East African host governments' expectations can help IOCs manage the challenges of developing the region's rich resources, especially in light of falling prices. Failure to do so exposes them to the risk of the rise of unrealistic expectations. To succeed in this task, IOCs must grasp the immediate needs of stakeholders, and how they might change over time. With this knowledge, they can understand the investment environment and secure their long-term interests.
Raad Alkadiri is managing director, petroleum sector risk, IHS Energy
Natznet Tesfay is senior manager, Africa, IHS Economics & Country Risk
Posted December 15, 2014

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