By Guillaume Doane, CEO Africa Oil & Power
The African Continental Free Trade Area (AfCFTA), a flagship project of the African Union’s Agenda 2063, will liberalize intra-African trade, eradicate tariffs and synergize existing regional economic communities.
For Africa to translate its huge resource wealth into welfare gains for its growing population, regional integration and cooperation are paramount. The purpose of the African Union’s planned African Continental Free Trade Area (AfCFTA) is to create a single market for goods and services in Africa, implementing a single set of rules for trade and investment. Among other benefits, this will provide legal certainty for traders and investors through the harmonization of African trade regimes.
African energy projects such as Mauritania and Senegal’s Grand Tortue Ahmeyim gas development and the Mozambique-South Africa gas pipeline are useful templates for cross-border collaboration. There should be a dozen more projects just like them. State entities and private companies in the energy sector will be able to make huge strides forward if African nations can liberalize their continental trade in raw materials, goods and services.
As of December 2018, 49 countries had signed the AfCFTA agreement. With a projected market size of 1.7 billion people and cumulative consumer and business spending of $6.7 trillion by 2030 – should all African countries join – AfCFTA has massive potential to drive intra-African trade and the structural transformation of economies, and thereby transform the petroleum and energy sectors. If successful, Africa will have created the largest free trade agreement since the creation of the World Trade Organization 70 years ago.
Signing the agreement is only the first step; in order for the AfCFTA to come into fruition, 22 countries must ratify it. The AU predicts a reduction in export tariffs and an increase in intra-African trade of over 52 percent – a huge improvement from the current 10 to 16 percent – should the AfCFTA become a reality. Moreover, improved market access will create economies of scale, which, when combined with adequate industrial policies, will drive diversification.
Commodities form an important part of African trade, with 28 percent of the continent’s oil production used in the continent, according to a report by Tralac Trade Law Centre. Nigeria is the biggest intra-African oil exporter, accounting for 73 percent of intra-African oil trade in 2016. South Africa imported the largest share of African oil, with 58 percent of total imports. Algeria is the largest exporter of natural gas, with a 64 percent share of intra-African trade. Three quarters of Africa’s gas is imported by Tunisia, Morocco and Egypt collectively. For the oil and gas sector to reach its full potential and for the largest number of countries to reap the rewards of Africa’s abundance of natural resources, intra-African trade in petroleum sector goods and services must rise in tandem with continental commodities trading.
Perceived risk and instability of legal regimes, as well as corruption, have held African petroleum sectors back in the past. The AfCFTA is set to tackle these challenges and would rely on new institutions to enforce rules and standards. The liberalization of African trade would itself promote the implementation of common, global-standard policies and frameworks to govern the energy trade and other sectors. Greater standardization and cross-border trade would facilitate new cross-border energy infrastructure projects and reduce investment risk.
Looking to the future, total energy demand is forecasted to increase to 8.7 billion barrels of oil equivalent in 2030, an increase of 60 percent from 2014. Hydrocarbons are set to play an increasingly significant role in satisfying Africa’s energy needs, with major gas finds – such as those in South Africa, Mozambique, Nigeria, Angola, Tanzania, Senegal and Mauritania – establishing the key position of gas as a catalyst for economic growth. As African economies expand, African hydrocarbons consumption will increasingly drive the narrative for the continental petroleum sector.
AfCFTA encourages transitioning from reliance on extractive commodities to a more balanced and sustainable export base. This is an agenda that is supported by the leadership of the African Petroleum Producers’ Organization. Free trade will be good for the African petroleum industry in the long term, as greater opportunity and competition reshape local sectors. And ultimately, by pivoting away from extractive exports and focusing on getting more in-country value from oil and gas, the AfCFTA will help Africa secure a more sustainable and inclusive trade that is less dependent on the fluctuations of commodity prices.