- Africa’s oil and gas industry faces a considerable funding gap as international financiers withdraw from the sector.
- As international financiers exit Africa’s oil and gas industry to minimise their hydrocarbon exposure, local banks and other innovators are bridging the financing gap.
- In two decades, industrialisation and rapid population growth will further drive Africa’s energy demand, including for fossil fuels.
Decarbonisation and Africa’s energy demand
Africa’s oil and gas industry is entering a new era. The world is looking to fast-track its transition from fossil fuels. Consequently, this puts pressure on the continent’s oil and gas-producing nations. Most producing countries remain highly exposed to the global energy transition since their economies depend on oil and gas revenues. Similarly, their oil and gas reserves cost more to produce and, on average, remain carbon-intensive than those from other regions.
Moreover, Africa’s energy demand threatens to outstrip the available supply. In two decades, industrialisation and rapid population growth will further drive Africa’s energy demand, including for fossil fuels. According to McKinsey modelling estimates, Africa’s energy demand in 2040 could rise by up to 30 per cent higher than it is today, compared with a 10 per cent increase in global energy demand.
These dynamics bring challenges that must be negotiated. They also allow Africa to take stock and reconsider its energy approach. Oil and gas-producing countries in Africa consider creating enabling environments. This involves improving access to available capital pools to address the funding gaps. This will attract the right skills and capabilities to meet the energy needs of their growing populations. Moreover, it positions Africa firmly in a new energy landscape.
Africa’s oil and gas industry faces a considerable funding gap as international financiers withdraw from the sector. Moreover, oil and gas research institutions that have always led the technological development are closing their petroleum faculties.
Consequently, stakeholders, including the African Petroleum Producers Organisations (APPO), have resolved to look within the continent at public and private sources to raise the necessary capital to finance the oil and gas industry. The APPO 41st ministerial session in 2021 agreed that Africa needed to re-strategise as the “energy game” was quickly changing.
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Africa Oil Week 2023
Local banks bridging the funding gap in Africa’s oil and gas industry
International financiers have exited Africa’s oil and gas industry to minimise their hydrocarbon exposure. However, local banks and other innovators will seek to bridge the financing gap. African banks aim to provide the required finance as the continent adapts to the global energy transition.
This was a key theme of the Africa Oil Week (AOW) energy event. AOW was held in Cape Town, South Africa, from 10 to 13 October. The event was devoted to supporting dealmaking in Africa’s energy sector. Delegates at the AOW heard that finance in the continents upstream is undergoing rapid transformation innovation.
As traditional international financiers scale down their global oil and gas exposure, most African upstream assets still need debt finance. This financing will now come from local commercial creditors and commodity dealers. Africa’s multilateral banks, familiar with the environment, have a risk appetite and no issue partnering in their continent’s economic development.
Appetite and optimism for oil and gas projects
“There is appetite and optimism for Africa’s oil and gas projects, and liquidity is available,” said Pascal Nicodeme, CFO of Africa Oil Corp. “The only difference is that the actors have changed. The era of the international banks is over, but the African banks have stepped in. There is still a great appetite for quality projects with the right balance sheet.”
“Africa is open for business,” said Babajide Sodipo, senior manager of export development advisory at Afreximbank. “As a development bank, we continue to support fossil-fuel financing, and we do it in a way that does not endanger the environment and which gives back to the community.”
Debunking the “high-risk” notion
Speakers at the AOW rejected the notion that Africa is a high–risk investment destination. According to Anastacia Deulina, CFO of Afentra, an independent company with oil and gas interests in Angola, “Africa is a great place to do business. Most countries on the continent are stable and even a bit boring. In Angola, we have found a pragmatic, supportive and efficient environment and secured finance on one of our projects within six weeks.”
Moreover, Mike Fidler, CFO of Azule Energy, an international energy firm based in Angola, said, “We need to ensure we invest in the current energy system without tearing it all down while we invest in the new. But liquidity is available for quality energy projects with good technical resources, government support, and high ESG standards.”
Self-structured oil and gas project deals
Another viable solution for bridging the funding gap in Africa’s oil and gas industry lies in the energy companies structuring the deals and selling them to prospective partners, including traders and development finance institutions.
Akinbambo Ibidapo Obe, general manager of commercials for Nigeria-based energy company Oando, said, “We are not seeing banks breaking down our door looking to provide finance. To deal with this challenge, we are transitioning from a customer-seller relationship to more of a partnership approach.”
All speakers at AOW agreed that for projects to find finance amid the global energy transition and the local realignment, management teams must clearly outline their plan to minimise the carbon footprint of their operations and guarantee their developments will also positively enrich host communities.
Taiwo Okwor, vice president of the Africa Finance Corporation, a pan-African development finance institution, said, “ESG commitments are very important today. We are more than willing to partner, but we first need to understand where you are on ESG and how we can help.”
Energy companies have assured their support for decarbonising the energy sector and ensuring it upholds high environmental, social and governance (ESG) standards.
Fidler said, “There is pressure for ESG compliance from lenders and shareholders,”. “But ESG compliance is easy when you have the right culture that cares about the society where it operates.”
Independent commodity traders
Another solution emerging in Africa’s energy sector involves independent commodity traders taking up a growing responsibility as financiers and owners in producing oil and gas commodities.
Trafigura, one of the world’s leading suppliers of oil and gas commodities, is among these independent traders. Matthieu Milandri, Trafigura’s head of upstream finance, expressed enthusiasm about Africa’s oil and gas industry.
Milandri said, “The idea of political risk in Africa is exaggerated. Traders are doing good business in Africa. We evaluate the quality of the asset, the management team, and the country risk. As long as there is production, we can do business.”
Also Read: Africa’s Energy Gap Provides Investment Opportunity
Conclusion
The global energy transition creates several considerations for Africa’s oil and gas-producing countries that depend on international capital pools to finance their hydrocarbon projects and sustain operations within the oil and gas industry.
Africa’s oil and gas commodities are 15 to 20 per cent more costly to develop and operate. They are also 70 to 80 per cent more carbon-intensive than other global assets. Funding from traditional sources has dried up as decarbonisation policies gather momentum to reduce climate impacts.
This has left a smaller financing pool for oil and gas corporations and the countries in which they operate. As international capital pools for hydrocarbon projects reduce, Africa’s oil and gas production costs are expected to rise.
This makes Africa’s oil and gas industry potentially even less competitive in global markets. Moreover, Africa’s oil and gas industry could be deprioritised for further development and face an increased risk of stranded assets with significant untapped reserves.
This could further strain government expenditure and affect development priorities. More than half of African oil and gas-producing countries depend on oil and gas exports for more than 50 per cent of their total export incomes. In Nigeria, for example, petroleum exports make up more than 85 per cent of the government’s total export revenues.
African banks and traders are filling the financing gap for oil and gas projects. This will mitigate the challenges and risks to the energy sector. Although lending institutions have become increasingly scrutinised for their role in new carbon-intensive energy projects, they feel obligated to fund developing oil and gas fields. Governments in oil-producing countries also continue defending the right to extract their resources.
