Africa: Gas still the next frontier as region looks to turn economic tide

Leaders from 29 African countries attended the COP26 summit in Glasgow (UK), held between 31 October and 12 November. We consider what the summit and the broader global climate change agenda means for the region.

One of the most pressing and divisive issues at COP26 was climate finance. African leaders, alongside other heads of developing states, asked that wealthy countries make good on their promise to mobilise USD 100bn a year in funding to the region by 2020. The commitment arose from the 2009 UN climate talks. However, the delivery plan from COP26 stated that this will only be possible to begin from 2023. And by the end of the summit, African leaders indicated that the region actually needs closer to USD 700bn a year to finance its energy transition.

Clearly, shifting away from hydrocarbons isn’t cheap. But a much larger issue is at stake. Many countries in the region are relying on LNG reserves to change their economic fortunes. Debt levels across the region climbed to 50.4% in 2019, up from 37.8% in 2015, and are forecast by the IMF to reach 56.4% in 2022, worsened in part by the COVID-19 pandemic. With much of state revenue directed towards debt servicing, countries with gas reserves have been hoping to bring in significant revenue through exports.

Ultimately, South Africa was the only African country at COP26 to come out with a clear deal. The EU, France, Germany, the UK, and the US together pledged USD 8.5bn in support of South Africa’s climate change goals, which include reducing its reliance on coal-fired power by 60% by 2030. South Africa’s well-developed regulatory framework no doubt enabled this aid, but its power sector is also under scrutiny as coal becomes the first big casualty in the global energy transition.

The region’s limited access to climate finance isn’t only the result of wealthy countries failing to uphold ambitious commitments made more than a decade ago. High debt loads also complicate other avenues of support. Some governments may be reluctant to take on more debt to finance the energy transition, where revenue from these developments is lower than that from LNG projects.

Green bonds, a debt instrument where funds from the sales of the bond are directed towards climate-related or environmental projects, have proliferated across the world since they were introduced in 2007. However, between then and 2018, Africa accounted for less than 0.4% of green bonds issued worldwide, and in the region, only Kenya, Namibia, Nigeria, South Africa, and the Seychelles have participated.

The world’s first and only blue bond – another climate-related debt instrument, but directed towards healthy oceans and freshwater or access to water and sanitation – came from the region, when it was issued by the Seychelles in October 2018. However, this is still a relatively new product that is yet to gain traction, and may not be harnessed in the region. The next is expected to be issued in 2022 in Belize (Central America).

The issue of the environment

Even if governments are able to finance the energy transition, there are questions about the impact of renewable energy projects within the broader climate change conversation. According to the International Energy Agency (IEA), clean energy technologies such as solar photovoltaic (PV) plants and wind farms generally require more minerals to build than traditional hydrocarbon resources. It estimates that “an onshore wind plant requires nine times more mineral resources than a gas-fired plant”. This means that future production will also escalate demand for many metals, increasing mining activity – which has a detrimental impact on biodiversity, and in turn, climate change.

This consideration is important for Africa’s climate change considerations. Despite being responsible for just 3% of global carbon emissions, it is highly susceptible to extreme weather patterns, including drought, flooding, and heat waves. They disrupt agricultural output and drive internal displacement, events which have far-reaching consequences on economic, political, and social stability. While the growing need for minerals worldwide as the renewable energy sectors grows could provide resource-rich Congo (DRC), Zambia and South Africa with increased revenue, the environmental impact may give pause for concern.

Gas powers on 

Still, the potential that gas finds have for the region’s economic fortunes is the largest sticking point in this debate. Substantial increases in state revenues through exports would give a host of governments room to spend without staring down a fiscal cliff, and enable increased local business activity. This is primarily what will see gas remain the new frontier in the region over the next decade. New projects have come online in the past few years, with the sector showing no signs of losing momentum.

In West Africa, Nigeria is already one of the world’s largest exporters of gas, including to its neighbours. President Muhammadu Buhari in March announced that he hoped to drive industrialisation through “an enhanced, accelerated gas revolution” by the end of 2030. Cote d’Ivoire, meanwhile, is hoping to begin gas production in 2023, not only to meet its domestic power demands to reduce reliance on imports from Nigeria, but to position itself as a regional LNG import hub. Senegal is using its 2015 offshore discoveries to implement a gas-to-power programme that aims to deliver a more stable and affordable domestic electricity supply.

In Mozambique, already a small producer of natural gas, the 2013 discovery of vast LNG reserves off its northern coast (part of the gas-rich Rovuma Basin) saw predictions that revenue could dwarf spending for the first time since 2008. While security issues have delayed the start of the largest development, smaller projects are expected to begin before the end of the year, while on 24 November the National Petroleum Institute (INP) announced a new bidding round of 16 blocks, to conclude in October 2022. Tanzania – part of the same Rovuma Basin – is also eager to capitalise on its LNG export potential. President Samia Suluhu in June restarted talks with hydrocarbon companies after negotiations stalled in 2019 with her predecessor, John Magufuli (2015-21).

Traditionally oil-reliant economies, which have been hard hit since the commodity price fell in 2014, will also look to bring in revenue this way. All oil-producing countries have LNG reserves that can be exploited to a greater degree. Countries like Angola, Congo (DRC), and Equatorial Guinea, already have the necessary infrastructure and expertise to shift to gas. Diversification into other economic sectors, like ICT or pharmaceuticals, is far more expensive and reliant on foreign private sector help.

The bigger picture

This does not mean that it is smooth sailing ahead for the gas sector. Governments have ambitious targets for their proposed big-ticket projects, and history indicates that these are almost never completed in time or within budget. Difficult operating environments across the region also limit wider foreign participation. With the exception of South Africa, banking sectors are broadly ill equipped to offer the size and duration of loans necessary for project financing, and many businesses are not prepared to provide capital upfront in markets with high operating risks. Even some development finance institutions (DFIs) are reluctant to work with state-owned enterprises, such as in the power sector, where creditworthiness is a concern. Projects that go ahead are typically ones where these high risks have the potential to translate into high rewards.

Then there is the growing pressure on shareholders of hydrocarbon companies, from governments and activists, to support climate change efforts. However, COP26 did not place restrictions on gas exploration activities, only requests that countries support climate change efforts. Businesses can also undertake reforestation measures to offset hydrocarbon activities. DFIs are broadly in favour of this, as it supports their separate efforts to provide employment opportunities and enhance biodiversity through reforestation, while governments can unlock monetary benefits from the World Bank through accumulating carbon stock.

It also does not mean that the renewable energy sector is lacking momentum, or that climate finance for the region is not possible. On the contrary, solar and wind projects have proliferated across the region over the past decade, and DFIs have supported countries in developing improved regulatory frameworks to accommodate this need and harness the region’s potential. South Africa has announced its intention to harness its solar and wind capacity, while Kenya has one of the most diversified power mixes in the region. Over the coming years, governments will therefore likely encourage projects across the energy spectrum, as they seek to secure more stable power supplies for their populations.