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Issue 2 | 2012 Display until November | 31st 2012

East Africa Black Gold

| Discovery of Oil | Exploration Breakthrough | A Greasy Affair

East Africa’s Black Gold

nch n e r F sio Ver side In

What the Discovery of Energy Resources in EastAfrica means for the Region We Share Lake Victoria | We share Swahili Language | Now we share The Exchange 2012 I Issue 2 1

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Publisher

EXCHANGE TEAM Chief Editor Carol Karugu ckarugu@nse.co.ke Sub Editors Waithera Mwai wmwai@nse.co.ke Fanon Mwenda fmwenda@nse.co.ke French Translation Emma Wenani wenani.emma@gmail.com The Exchange Committee Members Joseph Kitamirike (Chairman, CEO - USE) Peter Mwangi (Member, CEO - NSE) Donald Ouma (Member - NSE) Jonathan Bushara (Member - USE) Emanuel Nyalali (Member - DSE) Celestin Rwabukumba (Member - RSE) Contributors Evelyne Ogutu Dr Issac Rutenberg Kinoti Gatobu Cathy Mputhia Sammy K. Waweru David Mugwe Moses Munene Ali Mohamed Design Kichimbi Brand Solution kichimbibrand@gmail.com Photography Shutterstock, Image Library Advertising Sales info@nse.co.ke Waithera Mwai wmwai@nse.co.ke TEL: 254 (020) 2831000

Distributed by Nation Media Publishing in Uganda, Tanzania, Kenya and Rwanda.

All rights reserved. Reproduction in whole or in part without written permission of the editor is strictly prohibited. The greatest care has been taken in compiling this magazine publication. However, no responsibility can be accepted by the publishers or compilers for accuracy of the information presented.

The Exchange Magazine is owned

by Nairobi Securities Exchange, Uganda Securities Exchange, Rwanda Stock Exchange and Dar es Salaam Stock Exchange.

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CONTENTS 10 | Regional Analysis How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.

19 | East Africa Black Gold What the discovery of energy resources in East Africa means for the region

21 | Discovery of Oil Importance of managing the oil resources for the community’s benefits

23 | A Greasy Affair What does it mean for the region with the discovery of oil and gas in East African

25 | East Africa Adventure Find out why several international firms are considering starting businesses in Africa

28 | Intellectual Property The untapped and unknown potential of intellectual property assets within organizations

30 | Exploration Breakthrough What exploration breakthroughs and increased mining activity means for the region

32 | Unfamiliar Business Why are familiy owned business synonymous with infighting over business control, finances and ownership

Why we cant wait & Since i got Listed

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contacts for tickets: bookings@fireaward.org

+254 726 848 964

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Chairman’s Note

Chairman’s Note

T

he discovery of potentially commercially viable energy and other natural resources in East Africa has created excitement amongst domestic and international investors. Our public markets could use this heightened interest to draw in and retain additional capital flows and grow our capital markets. The Dar-es-Salaam Stock Exchange (DSE) has commenced the registration of Nominated Advisors (NOMADS) for its Growth Enterprise Market Segment (GEMS); the market for growth enterprises. The Uganda Securities Exchange (USE) will shortly be launching their GEMS. In September, the Nairobi Securities Exchange (NSE) will be conducting training for entities interested in acting as NOMADS for GEMS. The NOMAD is an adviser, whose main task is ensuring that a company listed on the GEMS market meets continuous disclosures, enabling investors to monitor the performance of their shares in these high-growth, potentially riskier companies. The acronym GEMS is deliberate. East Africa’s economies are dominated by firms that are hungry for growth capital, that have the potential to transform the business landscape.

Successful GEMS would facilitate portfolio flows from domestic and foreign funds within East Africa, supporting the yet, undiscovered “unpolished gems” of our economies and boosting economic growth.

GEMS should offer the following benefits to target Enterprises 1. Access to capital for growth, both at the time of flotation and later through further issues; 2. Create a market for its shares, broadening its shareholder base and potentially giving existing shareholders the chance to exit; 3. Obtain an objective market value for its business; 4. For a EAC company, wishing to scale up its operations from its local market into the wider East African Community, enable it raise its profile; 5. Use its shares in place of cash for mergers and acquisitions; 6. Reward and encourage employees through the introduction of share incentive schemes.

Edward Burbidge CFA, Managing Director of Burbidge Capital writes in his July 2012 Eastern Africa Newsletter, “the Eastern Africa natural resources story is now moving at an astounding pace”. He noted that in Tanzania, “onshore” oil exploration has began at Lake Tanganyika through Australian firm, Beach Energy. AIM listed Shanta Gold is expected to shortly make an announcement concerning first gold at its

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New Luika Mine (in Tanzania). In Ethiopia, nine oil exploration companies are now operating, with drilling expected later in the year, and BHP Billiton expects to begin production of potash in 2014. In Kenya, Apache Corporation announced it is to begin drilling for the country’s first deep water oil in August and Marathon Oil of the United States agreed to acquire stakes in two of Africa Oil’s Kenyan blocks”. The majority of firms in the energy and natural resources sector are listed on foreign exchanges.

The mineral potential, tapped properly, can enable East Africans to build successful public markets with the following attributes:1. Large, domestic market capitalization highlighting the market’s ability to attract and retain deep pools of capital for its listed companies; 2. A large number of listed companies whose shares are traded; 3. A growing number of newly listed companies, highlighting its success in attracting new issuers; 4. Adequate liquidity - a high value of share trading, to facilitate an investor’s flexibility in entering and exiting the market with ease; 5. Continued market maker and financial analyst support will also support share trading.

Oil and Gas prospects in East Africa present an opportunity for the region’s exchanges to grow to another level of capitalization; as in the case of the Toronto Stock Exchange (TSX), the largest stock exchange in Canada, the third largest in North America and the seventh largest in the world by market capitalization. Based in Canada’s largest city, Toronto, it is owned by and operated as a subsidiary of the TMX Group for the trading of senior equities. The Toronto Stock Exchange is the leader in the mining and oil & gas sector; more mining and oil & gas companies are listed on Toronto Stock Exchange than any other exchange in the world.

If Tullow’s plans to list on the Uganda Securities Exchange are followed by the listing of other major actors in the region’s oil sector on the main investment market segments, market capitalization can be expected to grow by large leaps. Tullow Oil plc, the global oil and gas exploration company headquartered in London, was founded in 1985 in the Republic of Ireland as a gas exploration business operating in Senegal. Its largest activities are in Africa, where it has discovered new oil reserves in Ghana, Uganda and Kenya. Its primary listing is on the London Stock Exchange and it is a constituent of the FTSE 100 Index. It had a market capitalisation of approximately £12.5 billion as of 23 December 2011, making it the 30th largest company on the London Stock Exchange. It has secondary listings on the Ghana Stock Exchange and Irish Stock Exchange.

Tullow Oil’s success has laid down a marker and has set the pace for other companies that have now entered the region’s oil sector. Apache Corporation is an American independent oil and gas corporation. In 1969, Apache Corporation shares were listed on the New York Stock Exchange.

Apache is a large multinational company, with regional offices and operations in the United States, Argentina, Australia, Canada, Egypt and UK North Sea. In 2012, Apache’s market capitalization was approximately $35 billion. Beach Energy Limited is an oil and gas exploration and production company based in Adelaide, Australia. It is a component of the S&P/ASX 200 index of major Australian companies. Marathon Oil Corporation is a United States-based oil and natural gas exploration and production company. Its principal exploration activities are in the United States, Norway, Equatorial Guinea, Poland, Angola and Iraqi Kurdistan. Its principal production activities are in the United States, the United Kingdom, Norway, and Equatorial Guinea. It is not listed.

In addition, the region has the opportunity to capture listings for the GEMS from companies that are supplying the oil sector. GEMS should also be attractive to companies like Shanta Gold to list and raise capital locally. Getting it right would attract more capital, boost share trading and boost analysts’ coverage. This would attract more listings, and the role of capital markets in supporting economic growth would be solidified.

JOSEPH S. KITAMIRIKE CHAIRMAN

EAST AFRICAN SECURITIES EXCHANGES ASSOCIATION

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A Greasy Affair for the Region produced by the World Bank, you will soon realise that energy is not the major cause of high business costs in the region.

Instead issues like complicated bureaucratic procedures, cross-border delays, non-tariff barriers play a critical role in increasing the cost of doing business in the EAC. To answer you more directly, in the short to medium term, cost of doing business as result of these discoveries will not go down, as matter of fact, the cost could increase as firms attempt to recoup from their investment in these sectors. However, in the medium to long term, given the implementation of sound policies and proper exploitation of these resources, we could start to see the cost of energy falling and perhaps cost of doing business too.

Q3. As an economist who has specialised on regional integration, what policies do you think the government should put in place in regards to the oil and gas discovery?

By: Evelyne Ogutu

A greasy Affair for the Region Q1. What does it mean for the region with the discovery of oil and gas in the East African region?

The recent finds of oil and gas in the East Africa region comes as no surprise to many.

Rather, it is confirmation that the region harbours significant energy potential in terms of natural gas and oil, in addition to the vast hydropower and geothermal power already being produced in across the region. In terms of attaining and securing energy sustainability for domestic and industrial consumption, these finds could not come at a better time, given the wave of economic expansion that is taking place across the five EAC Partner States.

Furthermore, if one is to consider the exploitation of the natural and oil in particular for the export market then one would conclude that these finds are likely to bring with them great prospects of investment, employment, wealth creation, economic growth and development, and poverty reduction. On the flip side, we need to consider the environment in which these resources are being exploited, and so it could become more of a political rather than an economic agenda.

Overall, I think these discoveries in the region are the beginning of a new wave 8

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of optimism for the region and perhaps the EAC can be the beacon that shines to the rest of the continent of how to exploit natural resources for the good of the citizenry. Finally, the discoveries and successful exploitation of the natural gas and oil is likely to benefit the already thriving industry in the region and reduce its dependence on the importation of energy.

Q2. Does it mean the cost of doing business in region will go down?

This is the million dollar question and is the hope of businesses and government alike.

I think domestic consumers would also be crossing fingers in the hope the cost of things like cooking gas, petrol, electricity will fall as a result of these discoveries.

It is important that we keep the consumer, domestic and industry, expectations in check especially when discussing the cost of energy.

I say this because, in Kenya for example, we have only just discovered deposits of oil, and this does not translate to oil production potential. In addition, we have not yet fully embarked on exploiting hydro, geothermal, and natural gas as energy sources.

I will say here that the cost of doing business in the region is hinged on several things apart from the energy. If you look at the latest doing business in the EAC

I think there is a critical need to distinguish between what the government needs to do at the national level and what it needs to do at the regional level, that is, the EAC level.

At the national level, there is a lot the government needs to think about. For example, should there be an independent ministry that deals with oil, natural gas, hydro, geothermal, and nuclear power?

Or should this stay within the existing ministries of energy? In addition, these discoveries bring with it potential environmental impacts. The government needs to position itself to address the spill over effects and avoid environmental disasters like those experienced recently in Japan, USA, and Nigeria. This is a critical issue given the changes in global climate conditions. Further, there needs to be better transparency on the uses of revenues collected from the exploitation of the oil in particular as this could be a source of great instability nationally.

At the regional level, it is vital that the five Partner States assess the energy requirements of the region in the next thirty to forty years and to plan towards ensuring these are met.

Forward planning and thinking at the regional level will be a key factor in ensuring the region is energy sufficient as its economies, population, industries, and manufacturing grow. To this effect, the EAC Industrial Policy and Strategy and the Energy master-plan needs to be revised to consider these new discoveries. Furthermore, application of the articles in the EAC Treaty regarding

cooperation in environment and natural resource management need to be adhered to explicitly to ensure regional stability.

In sum, what are needed are dedicated policies towards exploiting these fiends in an open and transparent manner that will benefit citizens, individual nations, and the region.

We also must ensure the environment is looked after as we secure the benefits of these resources, no one wants a repeat of the Karura forest saga or the Mau water catchment fiasco where government is fighting to preserve it now after decades of abuse.

Q4. Is the region ready for the black gold?

There is no right or wrong answer to this question. One can never say there is a correct time to discover oil and therefore exploit it. In actual fact oil exploration has been going on for several decades across this region and it is only now that the deposits being found are being touted for commercial exploitation.

We must remember that oil deposit discovery and oil exploitation for commercial sale are two different issues requiring huge sums of investment. For example, according to different government officials in Uganda, exporting the oil is expensive - It will require generators to heat the pipeline in order to keep the oil flowing from Western Uganda throughout Kenya to the port of Mombasa – a more than 1,300km stretch. Uganda’s oil is waxy, which means that it solidifies quickly, and, therefore, needs to be heated in order to flow. Building a pipeline would also revive the messy issue of acquiring land and dealing with compensations over the evictions in two countries – a subject that has never been short on controversy.

What is important for the region is that it should be cautious not to fall in to the trap that several African countries find themselves after the discovery of oil and other natural resources. In other words it is imperative the EAC avoids the curse of the ‘Dutch disease’ where discovery of a natural resource has failed to achieve the desired development due unsustainable fiscal expansion and government spending typically associated with the African experience with natural resource exploitation.

Finally, a key consideration needs to be placed on the current integration process.

We are now operating in customs union soon to be fully fledged common market, and moving towards establishing a monetary union. The creation of a monetary union has significant implications for how the EAC and

national governments will agree to share the revenues from the exploitation of the oil and natural gas discoveries. Similarly, given these commodities are volatile and susceptible to global price shocks, policy makers need to be able to cushion the region against such shocks using monetary policy. Are the national governments ready to hand over monetary policy power to a regional institute?

Q5. With the discovery of the oil, will the bio-fuel projects be abandoned?

The issue of bio-fuels is controversial in nature especially since there are debates both in the academic and policy arena about the effectiveness of bio-fuel projects. It has been argued among several quarters that many bio-fuel projects have resulted in the substituting arable land for the production of the jatropha plant that is synonymous in the bio-fuel industry. This has in turn resulted food and crop production being substituted in favour of the jatropha plant and hence bio-fuels production. This I think is the issue no whether bio-fuels projects should be abandoned but how policy and strategy should be developed to accommodate the two. Essentially we all want a country and region that is energy sufficient, both oil and bio-fuel production will take us to that state.

On this issue, I would like to see the stop of arable land being used to farm jatropha because we risk running out of land to produce food crops and rear animals. Given that the region is now prone to famine and drought almost every two years, something needs to be done. In addition, the jatropha plant is resilient and can grow in fairly harsh conditions, and so it would be prudent for measure to stop the allocation of arable to farming this plant.

Finally, the future of bio-fuels is difficult to assess as the verdict on its ability to meet energy demands are still being debated.

I would not advocate for abandoning the projects, but aligning them in a sustainable way that does not impinge on the environment and our arable land.

Oil and natural gas discoveries are cause for celebration in any economy developed or developing. What is cause for even bigger celebration is the trickledown effect of the benefits from these discoveries to the citizenry. Only then can we say that we have exploited these resources.

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Exploration Breakthrough

Exploration

BREAKTHROUGH By: David Mugwe

Since President Mwai Kibaki announced that a prospecting British company had struck oil in Turkana at the end of March this year, Kenya, which for a long time has been one of the few in the region without any major exploration breakthroughs, has seen an increase in mining activities.

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East Africa’s largest economy would remain behind the scenes when Uganda - the regions third largest economy - would talk of negotiating oil contracts while Tanzania - the regions second largest kept finding new gas fields lifting the country’s profile and making it attractive to investors.

This seems to have changed since that first announcement with focus now turning to finding more oil deposits in the country particularly after Tullow - the British prospecting firm recently announcing the discovery of an extra 43 metres of oil at its first well in Turkana, bringing the total depth of oil find to 143 metres.

While commercial viability of the oil is yet to be established, the news over the

past few months seems to have raised interest in the region not just for Kenya but for the entire region as a whole.

is the first of six exploration licences they hold in the country, according to Moody’s Investor Service.

“Tullow Oil and Africa Oil’s outstanding success at the Ngamia exploration well in Kenya has materially heightened investor interest in the companies that have exposure to upcoming drilling related catalysts in the country,” said Morgan Stanley in a research note released late July.

Africa Oil Corporation and Tullow Oil, co-own the well in which the discoveries were made and according to Morgan Stanley more than 20 other companies are active in the country with only eight having onshore acreage.

The agency said that oil production would give a welcome boost to Kenya’s economy, which is adversely affected when global oil prices are high and that government officials are hoping that Kenya’s oil potential will translate into a lower petroleum import bill and cheaper oil prices for domestic consumption.

Last year for instance, the country spent $4.1 billion on oil imports which is about 11 per cent of its gross domestic product and 4 time more than it received for its tea exports which is its largest export earner.

Oil production according to the ratings agency would also boost economic growth directly as well as provide increased revenues to help strengthen the country’s future economic potential.

The oil finds come not only with the promise of investments in infrastructure coming into the areas where prospecting is being done but also with the prospects of hundreds of direct and indirect jobs for locals and the establishment of a new industries.

If found commercially viable, the oil finds will earn the country millions in revenue and tax receipts and possibly lead to an inflow of foreign currency.

A significant reduction in the country’s imports could also be realised if the country is able to refine the crude and use it locally then export any extra leading to an improvement in the difference between what we import and export making the Kenyan currency less vulnerable to external events.

Global financial services firm Citibank in a research report released before the second announcement by Tullow and Africa Oil said that the Ngamia well has so far exceeded pre-drill expectations of 17 metres estimating the discovery could be in the region of 200 to 250 thousand barrels of oil.

This, according to the global financial services firms is already close to the commercial threshold for a pipeline development of 250 to 300 thousand barrels and significant potential exists in other areas being explored with at least eight additional prospects expected to deliver resource potential of over one billion barrels.

Credit rating agency Moody’s in a research note said that oil finds in Kenya had moved the country a step closer to establishing a viable oil exporting industry.

“Exporting oil would help diversify the country’s exports and significantly reduce its oil-import dependence, which is a key credit negative for the country,” said the credit rating agency adding that further exploration will also attract vital capital inflows into the country well ahead of actual oil production.

Already, Africa Oil and Tullow Oil have reportedly spent $53 million on the exploration phase at Ngamia-1, which

According to the Kenya National Bureau of Statistics, the country’s economy expanded by 5.9 per cent, 6.3 and 7 per cent in 2005, 2006, and 2007 but then dropped to 1.5 per cent in 2008 following the post-election violence and unfavorable weather conditions that affected agricultural production.

High international crude oil prices and the global financial crisis also compounded the problem resulting in the slow growth.

According to Moody’s, oil production will help strengthen Kenya’s exports sector and lead to greater balance in the structure of its economy.

Apart from oil exploration, other mineral deposit finds including coal in Mui basin and niobium and other rare earth minerals in Kwale are set to transform these areas which for a long time have remained some of the poorest in the country.

The country has been importing all the coal it has been using with data from the Energy Ministry showing an average consumption of coal of 130,000 tonnes per year that between 2006 and 2011.

Cortec Mining which has been planning to start mining the rare earth minerals and producing niobium in Kwale has plans to establish a smelter for Ferro Niobium – the final product of the rare earth metal – in in the country.

Niobium is used in the manufacture of high performance steels for use in aircraft turbine blades, wind turbines, vehicles and Brazil produces 83 per cent of it in the world.

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Egypt welcomes you to

ASEA

African Securities Exchanges Association Conference Unleashing Africa's Investment Potential – What could be done by African Capital Markets?

2nd - 4th December 2012 Fairmont Heliopolis,Cairo, Egypt Egyptian Exchange | Tel: +02 35316300 / 400 | fx.: +02 35316388 | website: www.egx.com.eg | www.africansea.org | www.aseaegypt2012.org | E-mail: sarah.hosni@egx.com.eg | swanjiru@nse.co.ke 12 2012 I Issue 2

KASNEB Mandate of KASNEB The mandate of KASNEB is derived from legislation and includes among others developing syllabuses for professional and technician examinations, administering examinations and certifying candidates, promoting its qualifications nationally, regionally and internationally and accrediting relevant training institutions.

KASNEB administers five (5) professional examinations and four (4) technician examinations which are held twice in a year; in May/June and November/December. These examinations lead to the following qualifications.

Professional Qualifications Certified Public Accountants (CPA) Certified Public Accountants are skilled and competent professional accountants, auditors, finance managers, tax consultants and practitioners.

Certified Public Secretaries (CPS) Certified Public Secretaries are expert practitioners in corporate governance, corporate secretarial practice, consultancy, business management and administration and human resources management.

Minimum entry requirements for technician examinations (a) Kenya Certificate of Secondary Education (KCSE) examination with an aggregate average of at least grade D+ (D Plus) or equivalent qualifications. (b) Any other KASNEB technician examination certificate. (c) Such other certificates or diplomas as may be approved by KASNEB. Only one choice: KASNEB As regional and international integrations gather pace and dovetail to create an expanded international market, only professionals in possession of top-notch technical skills and application competencies in their fields of expertise will be able to compete effectively in the dynamic global market.

The upshot of it all is that aspiring professionals have to choose those qualifications which will enable them to fit in whichever market they choose to operate in. For those with aspirations of qualifying and working in the fields of finance, accountancy, governance and management, information technology, securities and investment analysis and credit management, there can be only one choice: KASNEB.

Certified Information Communication Technologists (CICT) Certified Information Communication Technologists are skilled and competent system developers and programmers, network administrators, systems engineers, ICT consultants and practitioners.

Why pursue a KASNEB qualification • Internationally recognised.

• Highly rated by employers.

• International mobility.

• Membership to professional institutes of repute.

• Credit transfers with institutions of higher learning.

Certified Securities and Investment Analysts (CSIA) Certified Securities and Investment Analysts are experts in financial analysis, consultants and practitioners in investments and securities, portfolio management of retirement benefit schemes and investment banking.

Regional contacts Burundi East African Centre for Professional Studies Dr. Daniel Kiriti (+25779430619)

Certified Credit Professionals (CCP) Certified Credit Professionals are skilled and competent top level managers, practitioners and consultants in the rapidly developing field of credit management.

Rwanda KASNEB Liaison Office School of Finance and Banking (SFB) (+250782520278/+250728520278) South Sudan (Juba) University of Juba Joseph Lemiguya (+24995509922) Tanzania Kampala International University Dar-es-Salaam Campus Owolabi Olaniyi (+255756234591) Uganda • Bugema University Grace Birungi (+256772821363) • Busoga University Elder Ewandiwalana (+256752655835) • Kampala University Dr. Evans Kerosi (+254724708217) • Kampala International University 071812707 or 07744171 • Makerere University Business School Massy Nabasirye (+256772402238)

Minimum entry requirements for professional examinations (a) Kenya Certificate of Secondary Education (KCSE) examination with an aggregate average of at least grade C+ (C plus) provided the applicant has obtained a minimum of a grade C + (C plus) in both English and Mathematics or equivalent qualifications (b) Kenya Advanced Certificate of Education (KACE) with at least TWO Principal passes provided that the applicant has credits in Mathematics and English at Kenya Certificate of Education (KCE) level or equivalent qualifications. (c) KASNEB technician or professional examination certificate. (d) A degree from a recognised university. (e) Such other certificates or diplomas as may be approved by KASNEB. Technician Qualifications Accounting Technicians Certificate (ATC) The Accounting Technicians qualification equips candidates with skills and competencies to work as middle level accountants providing technical support in accounting, auditing and taxation.

Information Communication Technology Technicians (ICTT) Information Communication Technology Technicians have the technical know-how and skills to work in the dynamic ICT industry as technicians in systems development, systems programming, administration and maintenance.

Investment and Securities Technicians (IST) Investment and Securities Technicians work as technical analysts in the specialised fields of investment, securities analysis and pension administration.

For more information contact: KASNEB Towers - Hospital Road, Upper Hill, The Secretary and Chief Executive P.O. Box 41362 - 00100 Nairobi, Kenya Telephone: 254(020) 2712640/2712828 Cellphone: 0734 600624/0722 201214 Fax: 254(020) 2712915 Email: info@kasneb.or.ke Website: www.kasneb.or.ke

Credit Management Technicians (CMT) Credit Management Technicians are competent and skilled to work as technicians in credit management and credit control in both financial and non-financial enterprises.

Providing globally competitive professionals 2012 I Issue 2 13

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