Case study: Ethiopia's long-awaited but nascent oil and gas sector

On 16 February, officials from Ethiopia and Djibouti signed a memorandum of understanding (MoU) to build a pipeline that will transport gas extracted in southern Ethiopia's Ogaden region, in the Somali Regional State (SRS). The MoU confirmed that Ethiopia's nascent oil and gas sector was finally picking up pace. It also underscored China's growing influence in both Djibouti and Ethiopia.

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However, this was not the first time the two countries had reached an agreement to a USD4 billion project which includes a gas pipeline that will transport 12 billion cu m of natural gas, a liquefaction plant, and a gas treatment plant at the port of Djibouti before the commodity would be exported to global markets. About 10 billion cu m of gas will be exported to China according to current estimates. Once completed, the pipeline will generate an initial USD1.2 billion annually in revenue for the Ethiopian government; when it operates at full capacity, projections suggest the government could get USD7 billion yearly. The government owns a 15 per cent stake in a production-sharing agreement in the Calub and Hilala gas fields through its Ethiopian Minerals, Petroleum and Bio-Fuel Corporation a state-owned enterprise (SOE). Chinese SOE China Poly Group Corporation Limited (Poly-GCL) will operate the pipeline, which is being built by U.K.-based professional services company Turner & Townsend. Poly-GCL estimates the total gas reserves to be at 226.5 billion cu m. Finally, Poly-GCL will build a gas treatment centre at Djibouti's port at Damerjog to export liquefied natural gas (LNG). The pipeline, which will transport gas from the Calub and Hilala oil and gas fields in the Ogaden basin, will add to oil extraction test activities which POLY-GCL began at Hilala in June 2018. The company has drilled three wells, but the minimal production of 450 barrels per day (bpd) primarily destined for the Ethiopian market has been suspended by Ethiopian authorities as the company allegedly lacked a licence to sell the commodity on the local market. Construction of the pipeline, which has been delayed multiple times, has yet to begin, with Poly-GCL expecting gas exports to begin in 2021. However, there are multiple political risks and security threats that are likely to delay its completion over the next two years.

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ANALYSIS 

Security risks: the restive Somali Regional State (SRS) A morphing and potentially worsening security outlook in the SRS means there is a moderate to elevated risk the project is delayed again. A key indicator over the next year is the progress made in terms of disarmament, demobilisation, and reintegration (DDR) of former fighters of the Ogaden National Liberation Front (ONLF)  which the government de-listed as a terrorist organisation along with Patriotic Ginbot 7 (PG7) and the Oromo Liberation Front (OLF) in July 2018. The ONLF is a non-state armed group (NSAG) that had been fighting for the self-determination of Ogaden (the informal name given to the Somali region in reference to the Somali clan residing there) since 1984 prior to the peace agreement. 

Also Read: [Snapshot] Al-Shabaab attack in Nairobi highlights terror risks to hotels and business travellers Although the ONLF has been largely inactive over the past decade, it has specifically threatened and targeted foreign companies (energy companies in particular) and individuals it perceives as close to the government. Among its most significant attacks figures an ambush on 24 April 2007 in the remote town of Abole. About 200 ONLF fighters attacked an oilfield there, killing at least 74 people, including Ethiopian security forces and Chinese oil workers. They also kidnapped nine Chinese workers who were employed by Chinese state-owned Zhongyuan Petroleum Exploration Bureau (ZPEB), a subsidiary of China Petroleum & Chemical Corporation, commonly known as Sinopec. In response, the administration of then-prime minister Meles Zenawi launched a fierce crackdown, including carpet bombings of several human settlements and a series of other human rights abuses.

Despite the slump in attacks over the past decade, ethnocentric nationalist sentiment continues to be strong in SRS

However, Prime Minister Abiy Ahmed, an Oromo, has made significant strides in the stabilisation of the region, with clear attempts to make peace with the group. In February, they held a first formal meeting, two months after ONLF leaders returned to Ethiopia after years in exile. On 9 February, the ONLF signed a peace deal with the SRS government, agreeing to co-operate to promote human rights and development. The peace process has certainly enjoyed tailwinds through Addis's rapprochement last year with the government of Eritrea, which Ethiopia has historically accused of sponsoring the ONLF.

Also read: Election Watch: DR Congo's political transition signals continuity Despite the slump in attacks over the past decade, ethnocentric nationalist sentiment continues to be strong in SRS as evidenced by a series of inter-communal mass fights in multi-ethnic cities, such as Dire Dawa and the state capital, Jijiga, in August 2018. The fights have primarily opposed Oromo and Somali Ogaden clans in those cities. The Ogaden clan is a sub-clan of the Darood clan family, one of the largest in the Horn of Africa. At least 29 people died in the episodes of unrest, which ended after the military took control of key transport routes and arrested the SRS president, Abdi Mohamoud Omar, and 40 other senior SRS officials. This included senior commanders of the Liyu Police, a paramilitary security force created in 2009 which has been accused of serious human rights abuses, including forced recruitment or conscription, including among Ogaden clans. Civil unrest: increasingly bad droughts could fuel further unrest The presence of Poly-GCL in Ogaden could also signal mounting insecurity down the line. The company has earned a reputation for poor respect for human rights. That Somali communities, in Ethiopia and the diaspora, expressed dismay at the beginning of oil extraction last year indicates that both the central government and the company lack buy-in from local communities, some of which have accused the government of zoning land for construction without their consultation. In the medium term, such allegations are likely to fuel protests and possible blockades of transport routes and Poly-GCL operations. Should the central authorities resume their repressive response to such incidents of dissent in the coming year, this could fuel more extreme responses from local communities, who could attempt to block operations through protest or direct attacks on assets or personnel as a way of raising international awareness and putting pressure on the government.

Should the central authorities resume their repressive response to incidents of dissent, this could fuel more extreme responses from local communities
In addition, the costs of such operations are likely to grow as Poly-GCL and related service providers will need greater security provisions in order to continue to carry out their operations, thereby reducing their potential long-term profits, and the sustainability of the operations. Further, that the oil exploration will bring employment to the barren region, as Abiy has promised, is also in doubt in the longer term as natural resource extraction typically produces few spill-over effects, particularly in developing economies. With governance in Ethiopia being poor, albeit improving, conditions that favour corruption and other cases of impropriety mean that the compliance burden for involved parties is likely to remain high. Political risks: slowing economic growth in China and profit warnings But threats are also coming from the outside, as Poly-GCL earlier this year...