By Liz Hart, Managing Director Africa Energy Indaba
The energy transition—and the restructuring of global natural gas supply sources following the Russian invasion of Ukraine—are shaping the future of Africa’s gas sector. It offers bright options for several affected countries should they have the political will to invest in their infrastructure and create private sector opportunities – thereby building long-term economic resilience for themselves at this critical juncture.
The upcoming Africa Energy Indaba (7-9 March at the Cape Town International Convention Centre) is set to empower attendees with insights to leverage the significant opportunities that will ultimately accelerate Africa’s energy infrastructure, thereby transforming the continent into a competitive, industrialised global player.
Africa’s gas industry is entering a new era. Yet there are paradoxes: the opportunity arises at the exact moment the world is looking to accelerate a transition away from fossil fuels, leaving the continent’s oil and gas producing nations highly exposed to the global energy transition and their economies dependent on at-risk oil and gas revenues. Furthermore, their reserves cost on average 15% to 20% more to extract, according to McKinsey and are, also on average, 70% to 80% more carbon-intensive than comparable reserves from other regions.
Furthermore, many developed countries are beginning to implement carbon pricing and taxes, which may be likely to have an adverse impact on African countries’ cost base for gas exports. As an example, the European Union’s Carbon Border Adjustment Mechanism, will require EU importers to secure carbon certificates on imported goods corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s pricing rules.
In this context, Africa’s gas majors are increasingly challenged to deliver higher returns more sustainably. Investor scrutiny of gas projects, meanwhile, is intensifying as capital providers factor environmental, social, and governance considerations into their decisions. Regarding local consumption, rapid population growth and industrialisation mean energy demand on the continent is threatening to outstrip supply—including for fossil fuels. Modelling by McKinsey estimates that African energy demand by 2040 could be around 30% higher than it is today, an average threefold increase compared to the global increase in energy demand.
The Ukraine conflict has highlighted the strategic and moral dilemma facing Europe’s most industrialised economies, the European Commission has recognised the region’s own limited natural resources, by announcing a plan to make Europe independent of Russian fossil fuels before 2030. This will be achieved by a combination of acceleration of renewable energy and diversification of natural gas supplies. This could galvanise demand for oil and gas from those African countries that have the reserves – the caveat being that they must also have the infrastructure in place to meet that sharply increased demand.
African gas producing countries are already highly dependent on global capital pools to fund their hydrocarbon projects so as maintain their gas operations. A challenge in the future will be that those global capital pools for hydrocarbon projects are in the process of being cut in line with global commitments made at November’s UN Climate Change Conference (CoP27) in Sharm El-Sheikh, Egypt, and CoP26 before that.
Given African oil and gas assets are more carbon intensive than global gas assets, European countries might be tempted to look elsewhere as first choice.
Energy prices have skyrocketed since early 2022, with Europe heavily reliant on Russia for more than half of its gas, almost half of its coal and about a third of its oil, according to Bloomberg. The region is finding its renewables are nowhere near enough to sustain populations’ demands for the electricity and fuel needed to power their economy.
Africa needs to set its own path in the energy transition, with a diverse source of energy that for some time will include both coal and gas, while opening up the renewables market as fast as possible. Compare Germany and Uganda. According to the World Bank, GDP per capita in Germany was USD46 208 in 2020, while for Uganda it was a miserly USD822. African countries such as Uganda – and many others – still have a long way to go to catch up with the developed nations of the world.
The UN Framework Convention on Climate Change defines a just transition as, “greening the economy in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities and leaving no one behind”.
In this context, while Africa must join the global drive towards limiting greenhouse gas (GHG) emissions, its own just transition towards a low-carbon economy must be done in a manner that recognises and addresses the deep energy deficit across African economies, where less than 50% of the population have even a rudimentary access to electricity. Transitioning away from non-renewable energy will in Africa necessarily be a measured process.
The World Bank has argued that Africa’s medium-term development requires a degree of acceptance of further investment in ‘brown’ activities. To do otherwise would amount to denying Africa its right to sustainable development. It would be unjust for global capital pools to enforce a total or immediate ban on further transitional projects in Africa which currently contributes only 3.8% of GHGs.
Africa cannot afford to accept perpetual under-developed by foregoing all carbon-based fuel investment opportunities in step with the developed world. This would be a massive social sacrifice to the continent. Both developed and developing nations need to transition to something better at their own pace – and international financiers should support Africa’s just energy transition.