The search for alternative energy supply has been rapidly developing over the last decades. Developed economies have already based their budgets on alternative oil and gas assets in order to preserve the ecology and sustain natural environment. The crises associated with the lack of energy resources is quoted by the media on a daily basis. As Deutsche Welle (2013) describes, it is evident that more developed countries like Japan will switch to alternative energy resources in the future.
However, due to the fact that oil and gas serve nowadays as valid and acceptable resources, there are many critical factors to the application of alternative energy and risks associated with the process of transformation into alternative energy supply. The majority of the present energy resources is based on standard supply models and is already running within the well-known scheme of energy consumption and distribution. Developing countries are gradually following the trends existing in North America and Europe in terms of energy supply and distribution.
The aim of the essay is to provide the risk assessment associated with the alternative energy development in the East African region compared to the existing models of oil and gas resource development. The types of risks as well as risk models are examined, and the conclusions regarding the opportunities with the gas assets found in the East African region are provided.
Discussion of Energy Risk
The basic question with the newly discovered assets and alternative energy supply is whether the consumers and households are able to bear the risks associated with the development of these assets. As Roodbol (2013) quotes Inglesi-Lotz, ‘in a country such as South Africa where solar energy is abundant, the sustainability of its usage through solar geysers and solar panels is unquestioned’. However, the application should be conducted only during daylight as these alternative energy sources cannot be stored, unlike the typical forms of energy supply accepted worldwide.
But even for a country like South Africa the application of newly discovered and applied energy sources is already a risk. In East Africa, where the development of the economies is at a significantly lower level, the application of gas assets might present a huge risk for both households and energy suppliers.
However, despite the risk, some major gas companies have already opened a dialog with the East African government in order to acquire access to the 33 trillion cubic feet of natural gas that has been discovered recently in Tanzania. The overall quantity of gas is estimated at the level of 100 trillion cubic feet while the ‘potential resources are significantly higher’. As Alic (2013) states, ‘in late February, BP execs descended on Tanzania with a request to pursue natural gas investments and try their luck in a venue that has become one of the biggest gems in the region’. Therefore, it can be concluded that the gas assets in East Africa, despite the risks associated with their development, present a solid investment opportunity.
The Economist (2013) believes that ‘large finds off the coasts of Mozambique and Tanzania have turned those countries into major players in the world gas market’.The amount of skepticism that is presented in the news is based on the so-called ‘Dutch disease’ that is associated with the assessment of risk factors for the gas asset development in the region. The observation of the critical factors allows the following risk consideration: impact on the economy in terms of export structure, political interests of the regional government, domestic competition on the market of the East African countries, and legislation problems related to bad contracts renegotiation, which might lead to a resource crisis in the region. At the same time, government corruption and the difficulties associated with the development of foreign investment projects in the region remains a stable issue and presents a major threat for gas asset development in East Africa.
Risk analysis involves identification of the following risk categories: operational risks, technical environment risks, infrastructure risks, and resource and supplier risks. The classification of the risks which have been identified allows to define the following issues: a need to conduct qualitative risk factor assessment due to the existence of judgments present in risk evaluation, a difficulty in the examination for risk taking and mitigation due to the unparalleled factor linkages and correlation. These issues have direct impact on the investment opportunities in the region. It is also essential to mention the mutual interest in the gas assets development for both African countries in the region and international gas suppliers.
Moreover, as The Economist (2013) implies, ‘the new discoveries provide an opportunity to boost those sectors, but there is a fear that capital will instead be diverted to the gas sector’. Control Risk (2012) also reveals high security risks in the sea shore of Tanzania. This also could be a potential factor of the existing infrastructure risk for the gas assets development in the East African region.
For this reason, two risk-profile diagrams have been developed in terms of impact versus likelihood. Such analysis allows including the qualitative data from factor analysis and the evaluation criteria based on the existing risk categories mentioned above.
The primary risks associated with the development of gas assets in the East African region are the infrastructure risks and the business risks such as export structure, competition in the countries of the region, and various political and security issues which may undermine the project. Therefore, for its successful implementation, the security measures are to be introduced at all stages of project development. Even after the risk mitigation measures are applied, as seen from the diagrams, risk monitoring is required to ensure project completion.