Oil-producing Senegal: challenges and opportunities (Bertrand Tchanche)

Senegal officially became an oil-producing country on Tuesday 11 June 2024, with the announcement that the first barrel of oil had been extracted by a foreign company from the Sangomar field (Sangomar Project). Operator Woodside, an Australian company based in Perth, holds 82% of the shares and Société des Pétroles et du Sénégal (Petrosen) 18%. According to the Multiannual budgetary and economic programming document (DPBEP) 2025-2027 published in June 2024 by the Ministry of Finance and Budget, the Senegalese government is forecasting rapid economic growth in 2024, which could reach 7.3%, thanks to oil production from the Sangomar field, located around 100 km off the coast of Dakar. The country hopes to earn 30 billion US dollars over 30 years from the exploitation of hydrocarbon deposits.

Bertrand Tchanche studied the energy system and the energy consumption of Senegal. It explains the benefits and risks of oil development for Senegal, and how these can be mitigated.

What benefits do you think Senegal stands to gain from exploiting its oil and gas resources? Could you break them down in terms of overall economy (GDP), public (tax) revenue and jobs?

There are inevitably advantages for a country in exploiting its natural resources, but it all depends on the governance in place and the forces at play. The geopolitical context is also important. There have been many discoveries in Africa in recent years: in Niger, Uganda, Mozambique, Côte d'Ivoire... the African continent is very rich.

However, these discoveries coincide with "the energy transition" that developed countries are trying to push through or impose on the rest of the world. A transition that is not in fact one, because the figures show quite the opposite... Fossil fuels are still on the increase and will still have a bright future ahead of them. According to data from the International Energy Agency based in Paris, France, demand for fossil fuels is still growing. Demand for oil has risen from 70 million barrels per day in 2000 to around 100 million barrels per day in 2023. The same upward trend is seen for gas (2600 to 4200 billion cubic metres and coal (3200 to 5600 megatonnes of coal equivalent (Mtce)).

In terms of revenue, it is around 700 billion FCFA per year (nearly 1.147 billion US dollars). In the short term, the government has announced revenues of around CFAF 576.3 billion over the period 2025-2027, broken down as follows for the next three years: CFAF 127.7 billion in 2025, CFAF 205.4 billion in 2026 and CFAF 243.2 billion in 2027.

One of the advantages will probably be the long-term rebalancing of the trade balance and the budget, which are in deficit with new revenues from the exploitation of gas and oil deposits. However, it appears that the budget deficit is very high, close to CFAF 800 billion (3% of GDP). The start of oil production coincided with pressure from the International Monetary Fund (IMF) for African governments to abolish hydrocarbon subsidies.

It should be noted that part of the budget deficit is due to these subsidies, which enable a degree of social justice to be maintained. Obeying the IMF's injunctions would mean giving priority to debt servicing and increasing inflation, with the corollary of a high cost of living, with its harmful effects on the population and the social tensions that would ensue. Nigeria is currently plunged into an unprecedented economic crisis as a result of a similar measure adopted by the new president, Bola Tinubu, who was elected in March 2023. The majority of Nigerians have plunged into poverty, with an inflation rate of over 30%.

There will be a small effect on direct employment where a few thousand people will be recruited, but this is a drop in the ocean. It should be noted that the unemployment rate in the population is 22% but much higher when it comes to youth employment.

We can expect investment in various sectors, particularly those deemed to be priorities such as health, education, energy and sanitation. However, the new government still needs to work on defining the projects and including them in a multi-year programme. There is a visible lack of investment in sectors such as health, transport and education.

What are the other advantages?

There are political advantages: new partners, more resources for foreign policy, increased attractiveness of the country. Regional geopolitics are also being altered by the sharing of certain fields with neighbouring countries such as Mauritania. Senegal will have a role to play in the international sale of liquefied natural gas and the possible connection to a potential gas pipeline from Nigeria to Europe.

The exploitation of oil and gas can also constitute a real motive for claiming or asserting sovereignty. It is in this light that we must understand the renegotiation of contracts sought by the new leaders. In the background, there is the question of the CFA franc, because without a central bank, it is difficult to implement any policy. You need the key to the safe.

An important question is: how can a country cope economically with a lack of monetary sovereignty? Remember the devaluation of the CFA franc in 1994. Overnight, a devaluation was imposed, and since then the economies of countries in both zones have been weakened. Trade deficits have widened across the board. It was a blow to the economic development of these countries, which had just undergone the Structural Adjustment Programme (SAP).

How long will it take for these benefits to be fully realised? And why will it take so long?

The benefits can be rapid. It all depends on government policy. If we ask people to wait when the first barrels are already here, it's like asking the Senegalese not to count on oil. We don't have to wait, there are plenty of urgent matters to deal with. We need to put in place mechanisms to enable the profits to be reinvested in the economy and the modernisation of the country.

However, it should be pointed out that oil production is starting up in a country with a large budget deficit of around 1.2 billion euros. The government has already planned to borrow up to 3.5 billion euros a year over the next three years. In this context, there is a risk that the expected revenues will be channelled into debt servicing to the detriment of investment.

What economic risks is Senegal likely to face as an oil and gas exporter?

There is no risk! You allude to the resource curse theory. But look at the countries of the Persian Gulf, Norway and Russia: there is no real risk in exploiting their oil. The curse is what we want to put in the minds of Africans. We need to understand one thing: life is a struggle and there is no day of rest. We have to learn how to manage our resources and defend our interests. So far, this has not been the case.

What do you think of the way countries like Gabon and Congo-Brazzaville manage their oil wealth?

Most African countries are not making the most of their natural resources. The examples are everywhere. Speaking of oil, we can cite the cases of Libya, Nigeria and Congo. The same applies to uranium, as in Niger, or gold in Mali or Burkina Faso. In the global economic architecture, Africa and the countries of the South in general have a role of their own, that of supplying raw materials to the factories of the developed countries, which have taken on the role of manufacturers. As a result, everything is in place to ensure that this imbalance persists, and it is at this price that capitalism survives.

What policy measures can Senegal implement to manage or mitigate these risks?

If we're talking about the risk of war, political tensions internally or with neighbouring countries, or misappropriation of revenue, this should come as no surprise. Because there is a huge windfall at stake and the protagonists will fight to take what they want. It is up to the politicians and all the internal forces to put the country's interests first. It is through cohesion and unity that the Senegalese people will be able to benefit from the resources of their subsoil.

Faced with the nation's higher interests, the internal players must be able to understand what is at stake and stand united. It is in unity that a nation can face its enemies, and no external force can impose itself without internal complicity. Many of the conflicts over the control of resources are caused by external actors acting through proxy groups to destabilise and plunder territories.

Source : The Conversation