Catalysing Africa’s Oil and Gas Sector To Bring About an Effective Energy Transition

Many African nations are considering transitioning the energy usage of their citizens, while balancing short-term needs with long-term goals.

Geopolitical events such as the invasion of Ukraine created a huge surge in the profits of corporate (“Big Oil”) and national oil companies (“NOCs”). The public backlash was significant and heightened focus on environmental, social and governance (“ESG”) principles and sustainability. It also highlighted the gap between the developed and developing markets.¹

These events significantly impact the effective transition to a sustainable energy system, especially for emerging nations, by disrupting the stability of energy supply chains, leading to energy insecurity in affected regions. This in turn diverts the attention and resources of emerging nations away from investing in clean and renewable energy infrastructure.

Africa’s gas and oil sector plays a crucial role in the continent’s economic growth and development. Many African nations are considering how to transition their energy demands in a way that provides the most benefit for their citizens, balancing short-term needs (e.g. raising living standards and improving electricity access rates) with long-term imperatives (minimising climate change impacts and building the skills and capabilities within their workforce/economy to benefit from new technologies).

From a demand-side perspective, energy companies are facing immense pressure due to the not-always-complementary need to transition from fossil fuels to more renewable sources while simultaneously maintaining, and in some cases increasing, overall energy supply and addressing concerns around affordability and security of supply.

Pressure to Improve ESG and Sustainability

Data from FTI Consulting’s 2022 global Resilience Barometer® highlighted that in 2023, 45% of energy companies surveyed believe they will face increased pressure to improve on ESG and sustainability metrics compared to 36% of companies from other sectors. This pressure ranked highest on CEOs’ agendas and outstripped concerns about improving operating performance and increasing market share. Across the board, corporations and stakeholders must prioritise local employment and supplier development to boost socio-economic benefits and train and upskill the workforce for jobs in the renewable energy sector.

To catalyse the energy transition, African governments and industry players may have to prioritise ESG considerations to align with public opinion and investment requirements that increasingly focus on the environment (reducing emissions, minimising pollution and waste, and promoting biodiversity). On the social front, this must involve engaging with local communities, ensuring fair labour practices and protecting human rights.

Policy Incentives, Investment and Financing

The energy transition will not only require the building of new power generation resources and changing how we transport, store, trade and deploy energy across the economy; it will demand the creation of an entirely new ecosystem of industries and companies dedicated to enabling this fundamental shift.

Governments and regulatory bodies can strategically utilise Africa’s oil and gas reserves in the short term to generate revenue for investment in renewable energy projects and can drive change in ESG and energy transition by implementing favourable subsidy schemes and punitive legislation. The gas and oil sector can play a pivotal role in facilitating this transition, including developing pipelines and liquefied natural gas export terminals.

Attracting foreign direct investment for long-term projects will require a stable investment climate, political stability, robust governance frameworks and anti-corruption measures.

Sustainability

A key aspect of sustainability is the diversification of energy sources. Leveraging oil and gas revenues to fund renewable energy projects will foster a sustainable transition and reduce dependence on finite resources. Sustainability, however, is not the only driver curtailing financing, as investor concerns are driven by financial resilience. There is the risk of stranded assets (i.e. those assets that cannot earn an economic return far earlier than was assumed at the investment decision point).

Response from Energy Companies

Energy companies are trying to reduce relative scope 3 emissions by investing heavily in renewable energy. It will become increasingly important for energy companies to monitor and preserve liquidity as they seek to build sufficient reserves to withstand price shocks in a volatile market environment.

To this end, the need for scenario planning has been amplified from an internal risk management perspective and from the growing requirements of external stakeholders, including lenders and regulators seeking greater clarity and assurances on the financial health and ability of energy companies to withstand market shocks.

With a larger interconnected supply chain, energy companies will have to monitor supply chain risks. Supplier risks can be seen in many contexts, including reputational risks (supplier conduct having negative ramifications for the customer), commercial risks (pricing and security of supply concerns) and cybersecurity breaches.

Conclusion

Given the importance of energy to economic development, world events have made it increasingly apparent that reliance on other sovereign states for energy places dependent countries in very precarious positions. Investment in renewable energy infrastructure and cleaner-burning natural gas can enable Africa to play a crucial role in the global energy transition.

Collaboration between stakeholders is crucial for effective risk management. Countries should now aim to transition their economies in a way that provides the most benefit for their citizens, balancing short-term needs (e.g. raising living standards and improving electricity access rates) with long-term imperatives (minimising climate change impacts and building the skills and capabilities within their workforce/economy to benefit from new technologies).

To accelerate and scale the solutions that will address climate, cost and security, it will take decisive policy action, intelligent investments and strong stakeholder support, and we are racing against the clock. With its ability to finance and execute highly complex, technically challenging projects, the energy industry will need to be at the very heart of the process.

Footnotes:

1: https://www.reuters.com/business/energy/big-oil-doubles-profits-blockbuster-2022-2023-02-08