Senegal Breaks Through

In 2015, Senegal’s economy grew faster than its West African neighbours, driven by gains in agricultural output. In 2016, economic growth is expected to reach 6.6 percent, one of the strongest predictions in sub-Saharan Africa. The development of an oil and gas industry is expected to build on this success. Revenues will have a positive impact on Senegalese finances once reserves go into production, anticipated in 2019. The government still runs a budget deficit of around 5 percent of GDP, which must be reduced to 3 percent by 2018 in line with targets to harmonise fiscal policy within the West African Economic and Monetary Union. A new source of tax revenue will allow continued capital investments for growth, while fiscal discipline is maintained. 

More importantly, the development of the oil and gas industry should relieve the greatest supply side constraint on the Senegalese economy, the country’s expensive and unreliable electricity supply. This is estimated by the World Bank to have reduced Senegalese growth by as much as 2 percent annually since 2006, with the country dependent on expensive imported fuel for more than 90 percent of its electricity. With installed capacity far lower than rapidly growing demand, only the rental of emergency generators has averted recurrent supply crises since 2010, with as many as 270 days of load shedding in a year. Looking ahead to a future era of cheaper, cleaner energy derived from natural gas, recently-constructed heavy fuel oil power plants can be converted to gas at a low cost, and further investment in gas to power projects will be supported by the World Bank, as well as the US Power Africa scheme. 

Of course, there are challenges to overcome. In the immediate term, since Kosmos’ major finds lie across the border with Mauritania, the two governments will have to agree a revenue-sharing formula and a joint development plan for major, capital-intensive infrastructure requirements such as FPSOs (Floating Production, Storage and Offloading) and LNG (Liquefied Natural Gas) trains. Bilateral relations have improved, pioneered by Senegal’s President Macky Sall and Mauritania’s President Mohamed Abdel Aziz, and in 2014, an agreement was signed for the joint production of electricity. Yet, for Mauritania, the stakes of the negotiations are particularly high. Aziz will need to secure the highest possible revenue share of the fields, since the resource-dependent Mauritanian economy has been affected by a long-term downward trend in prices. Further, Aziz will not want a second false dawn–revenues from existing oil production have been disappointing, as output has contracted year on year, falling from 31,000 barrels per day to only 7,000. 

Whilst Senegal’s stable political environment will give confidence to investors, there is considerable uncertainty regarding the country’s regulatory environment. As a small-scale producer since 2008, Senegal’s ‘simple and business-friendly’ 1998 Petroleum Code has been praised, although a consultancy process to upgrade it has recently begun. Should this last for longer than a year, it could be frustrated by a change of government, following the presidential election due in 2019. 

In spite of such diplomatic and political challenges, Senegal’s oil and gas institutions are relatively well-equipped to handle an oil and gas boom. Having engaged in exploration (and limited production) since the 1960s, the country has developed its management capacity. As a trained geologist and former head of PETROSEN, the state-owned oil company, Sall’s personal expertise should improve the government’s ability to manage regulatory reform, and negotiate with international investors and Mauritania alike.