Business opportunities in N. Africa hold considerable risks


Posted at Jan 26 2013 10:42 AM | Updated as of Jan 26 2013 06:42 PM

The logos of JGC Corp are seen at its headquarters in Yokohama, south of Tokyo, January 21, 2013. The hostage death toll from a four-day siege at an Algerian gas plant deep in the Sahara has risen to almost 60. Photo by Kim Kyung-Hoon, Reuters

TOKYO - North African countries have been a magnet for western and Japanese businesses thanks to their gas and oil deposits, proximity to the European market, and the potential of their own internal markets driven by young, growing populations.

Some firms, however, are reevaluating business opportunities there because of geopolitical risks, highlighted by the deadly hostage crisis in Algeria involving dozens of foreigners, including several Japanese.

Political instability and civil strife since the Arab Spring movement for democracy that originated in the region in 2011 have forced a number of Japanese companies to shut down factories, or pull out altogether.

"The situation in Egypt is still unstable. We are considering selling our concessions," said an executive of the holding company of Arabian Oil Co. at a news conference in December, effectively admitting that the Japanese company is withdrawing from petroleum resources development in the country.

A pioneer in oil development, Arabian Oil has been hit by sluggish business since losing its stake in projects in Saudi Arabia and other countries in the 2000s. It also hit a snag in an oil field development in the Gulf of Suez in Egypt which it had been undertaking since 2005.

The Egyptians ousted former President Hosni Mubarak in February 2011 and elected Islamist Mohamed Morsi as president in June 2012.

But even after the transfer of power, the country has been marred by sporadic demonstrations and civil unrest.

"It has become difficult to start production due to political and economic turmoil," an official with the company said.

North African countries such as Libya and Algeria have rich deposits of natural resources in their desert regions. With high proportions of young workers, they have attracted a growing number of western companies seeking to establish production bases to supply European markets since the early 2000s.

Economies in the Middle East and North Africa grew over 5 percent in inflation-adjusted terms from a year earlier level between 2003 and 2008, according to the Japanese government's 2010 white paper on trade.

Japanese businesses have been undertaking major projects in Algeria since around 2006 such as construction of highways and liquefied natural gas plants, according to the Japan External Trade Organization (JETRO).

Unlike China, a market fairly well tapped by Japanese companies and close to Japan, African countries "are rich in natural resources and have potential for growth as a market," said an official of a trading house.

But given political instability and long distances from Japan, even big businesses need careful deliberations in deciding whether to extend into Africa.

In January 2011, Tunisians, frustrated by high unemployment and authoritarian rule, took to the streets and toppled the government of President Zine El Abidine Ben Ali.

It set off a series of intensified strikes and riots. Yazaki Corp. had been manufacturing wire harnesses for cars in Gafsa in the central part of the country. In late November that year, it suspended the factory. Yazaki said production resumed around the summer of 2012.

In Libya, Sekisui Chemical Co. had been proceeding with a plan to design and build a factory for resin water pipes and other products since 2009. After civil strife between the Muammar Gaddafi government and rebels in 2011, the Japanese company decided to pull out.

Inpex Corp., a Japanese oil development company, was also searching for oil deposits in a field in which it held concessions in western Libya but also discontinued the work after the conflict.

Though stung by the latest hostage drama, Algeria had long been seen as a relatively stable country, though some expressed concern about an influx of militants from Libya after the strife there.

JGC Corp., which has seen some of its staff killed in the hostage crisis, has been designing and building various plants in the Middle East, Southeast Asia and Africa. In the year ended March 2012, African projects generated 44.3 billion yen in revenue, accounting for 8 percent of its consolidated sales.

In Algeria, besides the In Amenas plant, where the hostage standoff took place, JGC has also received an order to build a crude oil treatment plant in another location.

Shohei Nishimura, a senior researcher with Japan Oil, Gas and Metals National Corp., said, "Plants built by JGC and other Japanese companies enjoy a good reputation for quality and Japan's presence is felt" in Algeria. JGC's move into Algeria "was a logical choice."

Algeria boasts North Africa's largest natural gas reserves including shale gas, which has been drawing renewed attention as a new source of energy.

Nishimura noted the need for strengthening ties between Japan and Algeria, saying, "Gas imports from Algeria could increase to Japan, where demand for (non-nuclear) energy sources is growing after most nuclear power plants have been shut down" in the country following the Fukushima nuclear crisis of 2011.

While there may be business opportunities there, assessing political risks in the region remains a challenge. "The situation in North Africa often changes abruptly," said an official at the Foreign Ministry in charge of overseas travel information.

The ministry began advising evacuation from Algeria late last year, while warning about the threat near its regions on the border with Mali. It cited possible acts of terrorism as a result of an influx of militants and anticipated even a major operation by security forces.

The hostage crisis came half a month later.