Explainer: Why does oil matter for Namibia?

A finaL investment decision (FID) by TotalEnergies on its proposed offshore development would move the Namibian economy into an entirely new phase.

The size of Namibia’s economy makes the prospect particularly interesting.

The same investment can have very different consequences depending on the economy receiving it.

A major offshore development would introduce a large investment cycle into a relatively small market, allowing its effects to travel well beyond the petroleum sector and into areas such as logistics, infrastructure, skills development, finance and business services.

“A project of this scale does not enter an economy quietly,” Rand Merchant Bank Namibia group head of oil and gas strategy Angelique Peake says.

“Long before first production, capital is being committed, companies are positioning themselves and investment decisions are being made in anticipation of what comes next. In many respects, the economy begins adapting before the industry formally arrives.”

Moving a discovery into development requires years of engineering, procurement and construction, with companies contracting suppliers and committing capital throughout that period.

Fiscal revenues associated with production come later.

The earlier economic effect comes from the investment required to build the project.

The effect will spread unevenly.

Offshore petroleum demands considerable capital and highly specialised expertise, much of which will initially come from established international markets.

Direct employment, therefore, tells only part of the economic story.

A development project also buys services. International companies entering Namibia need premises, employees and local advisers.

Contractors procure locally where the required standards and capabilities exist.

Namibian companies winning work may need equipment, additional staff or finance.

Employees spend income in the domestic economy.

One large investment decision begins to influence many smaller ones.

The ultimate economic benefit, however, depends not only on the size of the investment, but on how much of the resulting activity can be supplied, financed, staffed and supported from within Namibia.

It can create pressure too. Scarce technical skills may become more expensive as industries compete for the same people.

Concentrated demand can affect property markets and the availability of services.

Some businesses will invest too early or build capacity against demand that arrives more slowly than anticipated.

“We should expect an industry of this scale to create pressure, as well as opportunity,” Peake says.

“Significant new capital changes demand and investment decisions. In some areas, it will change the economics of doing business.”

For several years, Namibia’s offshore oil story has been defined by geological and commercial questions: the discoveries, appraisal results and the economics required to develop them.

A positive FID would move part of the story into the economy itself.

The investments in oil exploration that have been made so far give Namibia an early glimpse of capital moving during exploration and appraisal.

Development would test something much larger: how much economic activity a new investment cycle can generate as the country moves from finding oil to building the industry required to produce it.

“The defining question is not simply whether a major investment can influence a small economy. It can. The more important question is how much lasting capability, business activity and economic value Namibia can create from that investment over time,” Peake says.

– RAND MERCHANT BANK

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