Opportunities and Challenges for Senegal in Oil and Gas Production: Lessons Learned from Other New Producers
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Senegal, with significant reserves of natural gas, appears to be on the verge of becoming a significant hydrocarbon producer. This resource wealth presents the country with opportunities, but also risks. NRGI's new paper reviews the recent experience of other “new producers”, mainly in Africa, and attempts to draw lessons for Senegal on how to make the most of its hydrocarbon resources, taking into account both the changing context due to the coronavirus pandemic and the ongoing transition to renewable energy.
Senegal, with significant reserves of natural gas, appears to be on the verge of becoming a significant hydrocarbon producer. This resource wealth presents the country with opportunities, but also risks. NRGI's new paper reviews the recent experience of other “new producers”, mainly in Africa, and attempts to draw lessons for Senegal on how to make the most of its hydrocarbon resources, taking into account both the changing context due to the coronavirus pandemic and the ongoing transition to renewable energy.
Countries face a number of challenges in managing revenues from natural resources. This brief focuses on some of the challenges affecting countries as they prepare for production from oil and gas finds. First, international experience has shown that a number of countries have succumbed to the “presource curse, where overoptimism regarding the future benefits from the sector undermines government policies and ultimately leads to disappointing outcomes. As such, it is important to manage public expectations around what the finds will mean for the economy, and resist pressure to embark on unsustainable borrowing, public spending or investment plans based on overly-optimistic forecasts of the revenues that will flow from these resources.
There are also challenges around putting in place an appropriate governance framework to prevent revenues from being lost to tax avoidance/evasion and mismanagement. In the context of the coronavirus pandemic, these challenges are particularly difficult, as countries grapple with fears of losing out on investment, and weigh whether to use resource wealth to finance temporary spending needs to stabilize the economy.
There are also challenges around putting in place an appropriate governance framework to prevent revenues from being lost to tax avoidance/evasion and mismanagement. In the context of the coronavirus pandemic, these challenges are particularly difficult, as countries grapple with fears of losing out on investment, and weigh whether to use resource wealth to finance temporary spending needs to stabilize the economy.
Key messages
- Countries embarking on large-scale oil and gas production face a number of pitfalls. Senegal can learn from the experience of other “new producers” in Africa.
- Senegal faces a risk of inflated expectations, which may lead to political pressure for high levels of spending. All stakeholders have a role to play in contributing to informed public debate on natural resources.
- Senegal’s prospects for oil and gas revenues are uncertain due to the possibility of production delays and volatility in prices. Senegalese officials should consider multiple scenarios and plan conservatively for future spending.
- Senegalese authorities (particularly the Ministry of Finance and Budget and the National Assembly) should continue to refrain from granting tax cuts for projects that have already reached final investment decision and should carry out rigorous cost audits.
- Senegalese authorities (particularly the presidency, the Ministry of Petroleum and Energy, the Ministry of Finance and Budget and the National Assembly) can use the years prior to production to build strong oversight of spending and investment from resource revenues (e.g., through strengthening the governance of the sovereign wealth fund) and commit to a fiscal rule, which would govern the shares of resource revenues to be consumed and invested.
- The Senegalese government’s “gas-to-power” plans have the potential to provide the country with cheaper, cleaner and more accessible energy. But they also carry a risk of the country becoming “locked in” to gas, which could undermine fiscal sustainability (through “take-or-pay” contracts), and prevent the country from taking full advantage of increasingly attractive renewables.
Authors
William Davis
Senior Economic Analyst
