Africa’s energy challenge

Tension around Africa’s energy future has been palpable at the Africa Oil Week conference in Dubai these last few days. With COP26 running simultaneously in Glasgow, renewables, off-grid solutions and even a pan-African power grid have made a timely entrance to this year’s narrative.

But the urgency and scale of the challenge to improve Africa’s fortunes needs spelling out. Africa has one-fifth of the world’s people but is responsible for just 4% of global emissions. The population of 1.4 billion is growing annually at 2.5%, equivalent to a new California every year, though electricity consumption per capita is a tiny fraction of the US state. One-third of all Africans – almost 500 million people – have no access to power.

The numerous resource-rich African nations are pragmatic. They see oil, gas and even coal as the fast-track way to improve energy access, quality of life and drive economic growth.

And Africa is indeed blessed with oil and gas riches – 61 billion boe of conventional resource was discovered between 2011 and 2020, almost twice as much as any other region. A lot of it is gas, which compounds the ever-present difficulties of commercialising resource around much of the continent.

Attracting capital to Africa is tougher than ever today. The IOCs are in the grip of capital discipline, and bigger, longer-term themes are reshaping the industry’s allocation of capital. Most prominent among these are uncertainty around future demand for oil and gas; ESG and corporate net zero ambitions; portfolio high grading, which is leading some IOCs to exit or downsize positions in Africa; and, for the Majors, increasing competition from new energy for the money.

Mansur Mohammed, Senior Manager Upstream, estimates Africa’s share of future global upstream investment through this decade is 5%. The question we posed in our keynote address, Re-imagining the African Upstream, is what can African countries do to secure that 5% or capture a bigger share? We suggested three things.

First, the industry needs to reduce project costs and improve project delivery. Africa, like the rest of the industry, has greatly improved performance since the oil price crash of 2015. A suite of African pre-FID oil projects, including Baleine (Cote d’Ivoire) and Tilenga (Uganda), are world class in terms of single-digit years to payback, some even on breakeven economics.

Gas, though, is an altogether different matter. Domestic markets are limited, or non-existent while bigger gas discoveries depend on LNG exports for commercialisation with inevitably complex projects. High costs, low returns and long payback periods are not unique to African greenfield LNG projects, it’s an industry-wide problem.

Finding an economic solution for gas resources is crucial for gas-rich nations including Mozambique, Tanzania, Senegal and Mauritania. It was encouraging to hear that Mozambique’s plans for commercialising its Rovuma field included domestic and regional gas sales and power generation as well as the payload LNG.

Second, governments’ role. Tax can be a highly effective tool to shift capital where it’s wanted. Nigeria’s gas industry got going in the 1990s only after the government put specific tax incentives in place.

Governments’ default position in the face of the energy transition will be to ‘harvest’: increase tax rates and strengthen the position of the NOC. That is likely to exacerbate the problem, discouraging new investment and encouraging IOCs to do likewise and merely run down existing production to maximise cash flow.

An enlightened approach would be to ease the tax take on new investment, as Nigeria (new PIA fiscal terms) and Angola (marginal discoveries) have both done. Even bolder would be to follow the example of Norway and Oman by introducing tax allowances for renewables to power upstream developments. As well as a fiscal win-win, it’s a way to kickstart decarbonisation of a country’s upstream industry and national diversification into low carbon technologies.

Third, cut Scope 1 and 2 emissions. Africa has a problem – its upstream carbon intensity is one of the highest anywhere. Buyers increasingly won’t want to buy crude, products, gas or LNG that are high in emissions intensity. African countries have to get to grips with the Big 3 sources of upstream emissions – flaring, production and processing (mainly powering operations including drilling), and methane leakage. Low emissions have become a key screening criterion for IOCs in allocating investment to new projects and increasingly a pre-pre-requisite of lenders to secure funding.

The dual challenges of ensuring African energy poverty becomes a thing of the past and aligning with expectations from Glasgow have certainly prompted much debate. Let’s hope the solutions are grasped.