Africa Set To Fuel Asian Growth and Its Own Brighter Future
African oil and gas is increasingly becoming an investment magnet as new discoveries position the continent as a guarantor of energy security to emerging Asian nations and as Africa itself seeks to enter the 21st century.
Africa is on track to becoming the world’s most populous region by 2023 as growth in the continent’s population surpasses that of China and India; between 2020 and 2040, one in every two births will be African, according to the International Energy Agency (IEA).
The problem—and the opportunity—is that three-quarters of those new global citizens living in sub-Saharan Africa will live without access to electricity and other energy-driven staples of the modern world.
“More than half a billion people [will be] added to Africa’s urban population by 2040, much higher than the growth seen in China’s urban population in the two decades of China’s economic and energy boom,” IEA noted in its Africa Energy Outlook 2019.
“Growing urban populations mean rapid growth in energy demand for industrial production, cooling, and mobility,” IEA analysts wrote. “The projected growth in oil demand is higher than that of China and second only to that of India as the size of the car fleet more than doubles (the bulk of which have low fuel efficiency) and liquefied petroleum gas (LPG) is increasingly used for clean cooking.”
With regards to gas, Africa is on track to becoming the third-largest region to feed the growth in global gas demand over the next 20 years, the IEA said (Fig. 1).
Africa accounted for 8.8% of the world’s oil production in 2019, according to the BP Statistical Review of World Energy 2020. Nigeria was Africa’s top oil producer at 2.2%; Algeria was next at 1.6%; then Angola, 1.5%; and Libya, 1.3%.
BP economists calculated Africa contributed 6.0% to the world’s natural gas production in 2019. They ranked Algeria as the continent’s top gas producer at a global share of 2.2% followed by Egypt, 1.6%, and Nigeria, 1.2%.
Africa’s hydrocarbon-producing nations have always depended on fossil fuel and mineral exports for the foreign exchange that feeds their economies.
But as the continent’s population grows and its demographics become younger and more urban, Africa is revealing itself as a “barefoot shoemaker”—wealthy to the extreme in fossil fuels and renewables, but with three-quarters of its sub-Saharan population living without electricity.
Africa’s R/P (reserves-to-production) ratio is about half that of the Middle East and a quarter of first-place South America. But it is worth asking if South America’s high R/P is not due to years of high-profile exploration, while Africa—with a west-coastal geology similar to South America’s east coast—is simply underexplored.
The World Bank has declared 32 of the continent’s 48 nations to be in an energy crisis considering that their gross domestic product (GDP) growth is outpacing power generation by a factor of three to four times.
Investment is vital to turning this situation around, and the most attractive investment opportunities pre-pandemic were found in Nigeria, Mozambique, Egypt, Mauritania, and Equatorial Guinea, according to the organizers of
Africa Oil Week (AOW), an exploration and production (E&P) investment conference held annually for 27 years.
Nigerian Bid Round Targets Local Producers
Keen to add to its reserve base, Nigeria is preparing a new Petroleum Industry Bill (PIB), and the government has provisionally awarded tenders to develop 57 marginal oil fields, with $500 million in signature bonuses at stake.
Nigeria is targeting marginal fields for the first time in 20 years as the country looks not only to boost its revenues but also to raise local participation in the oil sector from indigenous companies, which typically work these marginal fields.
Involving more local participation to produce Nigeria’s oil riches may also help to tamp down the sabotage, theft, and security issues that Shell (to cite but one example) blames for the drop in its Nigerian production from 266,000 BOED in 2019 to 223,000 in 2020, according to its annual report.
Shell is scaling down its Nigerian oil assets but still focusing on gas and deep water. In May 2020, Shell Gas declared it had reached a final investment decision to add a seventh train to Nigeria’s Bonny Island facility, adding 8 mtpa of future liquefied natural gas (LNG) capacity.
Nigerian LNG is a joint venture owned by the Nigerian National Petroleum Corporation (49% interest), Shell (25.6%), Total (15%), and Eni (10.4%), according to Shell’s website.
Angola Challenges Brazil in the Pre-Salt
Last month, Angola’s National Oil, Gas, and Biofuel’s Agency kicked off a series of digital and in-person roadshows and technical presentations to promote blocks offered in the country’s 2020 ongoing bid round. Acreages on offer included:
- Three blocks of the lower Congo onshore basin CON1, CON5, and CON6
- Six blocks of the Kwanza onshore basin (KON5, KON6, KON8, KON9, KON17, and KON20)
To attract investors, Nigeria and Angola are having to navigate not only the pandemic’s effect on financial markets, but also stiff competition from frontier regions such as Guyana and Suriname which share West Africa’s fertile geology and are capturing current headlines.
The West African and South American margin basins have some of the same characteristics including the pre-salt tectono-sedimentary sequences along with reservoir qualities and crude oil grades. Angola’s primary basins are the offshore Lower Congo, Kwanza, Benguela, and Namibe basins.
From an investment perspective, small- to mid-cap producers are gravitating to these opposing sides of the Atlantic. The London-based Energy Council found in a recent survey that a majority of its small- to mid-cap members consider exploration for fossil fuels as important to their business future, and a third describe their principal focus as West Africa and South America (32.68% and 33.85%, respectively).
Independent oil companies responding to the same survey said they did not consider fossil fuel exploration as relevant to their future business plans.
The Energy Council noted that the announced discoveries in the MSGBC Basin (Senegal/Mauritania) and Guyana had piqued their members’ attention.
Italy’s Eni and its joint-venture partners will invest around $7 billion in Angola in exploration and production, refining, and solar energy over the next 4 years, with Angola part of Eni’s future growth strategy.
Eni announced in April a new offshore light-oil discovery in its Block 15/06 where it has discovered over 2 billion BOE since 2018. It expects to begin operating a new solar-power plant in 2022; it also jointly runs the Luanda Refinery with state oil major Sonangol.
Gas Projects To Drive Sub-Saharan Electrification
Besides upping its investment in Nigeria LNG, Shell is also playing a role in the re-emergence of Egypt as a regional LNG supplier in the eastern Mediterranean. The supermajor operates Egypt’s Idku LNG plant which shipped seven cargos in January and 17 in Q4 2020 to buyers in China, India, and Turkey, according to S&P Global.
BP’s statistical review ranks Nigeria as Africa’s leading LNG producer at 28.8 Bcm in 2019; Algeria follows at 16.6 Bcm; Angola, 5.8 Bcm; and Egypt at 4.5 Bcm.
But most intriguing among BP’s statistics is Egypt’s 129.8% increase year-on-year (2018 and 2019) in its LNG exports, demonstrating a forward momentum toward achieving its ambition to become an LNG hub for east Mediterranean gas.
In addition to having strong exports from the Shell-operated Idku plant, Egypt in February shipped its first cargo in 8 years from its second LNG liquefaction facility—the 5 mtpa Damietta LNG plant—which Eni and its partners are restarting.
Damietta was idled after the Arab Spring in 2012 caused domestic gas shortages that left no surplus gas for export. Putting Damietta back on stream gives Egypt an additional export capability as it looks to make the most off spot-market pricing of a surplus of gas that it now enjoys because of production from the Eni-operated supergiant Zohr field and the start in 2020 of imports from Israel.
In further pursuit of Egypt’s gas hub dream, the country’s president, Abdel Fattah Al-Sisi, has asked Greek Prime Minister Kyriakos Mitsotakis to consider rerouting the East-Med gas pipeline to Europe, reconfiguring it to bypass Cyprus, and sending Israeli gas in two directions: to Greece and to Egypt.
The pipeline would still start from Israel’s Leviathan gas field but instead of going to Cyprus through an offshore pipeline, it would head overland to Egypt and then ascend to the island of Crete, passing through an area demarcated as a Greek-Egyptian Exclusive Economic Zone.
LNG ships will then be able to transport the gas either to Alexandroupolis or elsewhere, having Europe as a final destination, according to Greek media reports on the talks.
Egypt produced 64.9 Bcm of gas in 2019, an increase of 61% since 2016. That makes it the fifth-biggest producer in the Middle East and North Africa region, according to BP’s statistical review.
Mozambique Hits the Gas but Remains in the Dark
Situated on the East African coast, Mozambique possesses some of Africa’s largest gas reserves, but it also has one of the world’s lowest electrification rates.
Determined to bring Mozambique into the 21st century, the government is attracting investment by covering 23% of CAPEX on future project spending on infrastructure that will monetize the massive offshore gas discoveries made in 2010. Only Nigeria incentivizes investors at a slightly higher rate, according to Africa Oil Week.
“It’s estimated that the lifetime CAPEX of Mozambican LNG projects could be as high as $50 billion,” AOW reports on its website. “With those revenues, the government is primed to almost completely transform the national economy and infrastructure. In fact, they would make Madagascar one of the world’s fastest-growing economies.”
This policy has attracted the biggest names in the industry: Total, Eni, BP, ExxonMobil, and Sasol to name a few. But Mozambique is also yet another example of how terrorism and political instability add risk to projects in Africa.
Though the government expects to have approved $120 billion in gas-related projects by 2026, an insurgency of Islamist militants active for 3 years now regularly attacks communities.
This spring, terrorists stormed Palma, a town close to where Total is developing as operator the $20-billion Mozambique LNG Project, which seeks to deliver its first LNG in 2024. The project envisages two trains with the ability to expand to up to 43 mtpa.
Mozambique LNG is the biggest foreign direct investment yet in Africa, Bloomberg wrote, quoting the law firm White & Case LLP, advisors to the financiers.
The African Development Bank announced it will provide $400 million in senior loans and the Japan Bank for International Cooperation said it signed a loan agreement for as much as $3 billion.
The amount raised, which includes a loan from the Export-Import Bank of the United States, matches the GDP of Mozambique itself.
In December, South Africa’s Sasol opened bidding for engineering, procurement, and construction management firms to develop a processing facility with LPG storage and dispatch capability. The plant will be located next to the central processing facility in Temane, 600 km north of the capital city of Maputo.
“Eni has pledged over $6 billion in FLNG [floating LNG] projects in the gas-heavy Rovuma basin. Chief of these is Coral South, a floating, offshore gas hub valued at a cool $4.7 billion,” according to AOW’s website. “As well as Eni, BP has a big interest in Coral South, having already inked a deal to purchase 100% of LNG produced there.”
Rovuma LNG is another significant project, this time a joint venture between Eni and ExxonMobil, valued at $2.6 billion, AOW reported. India is heavily invested in the Rovuma offshore block including ONGC and other smaller Indian government-owned companies; Japan’s Mitsui is also involved.
State-run Indian companies have invested $8 billion in oil and gas assets throughout Africa, which is the second-largest market for Indian refined fuels, India’s Oil Minister Dharmendra Pradhan reminded attendees at a recent industry summit.
India is the world’s second-largest refining nation after the US. It imports over 80% of its oil, of which 15% currently comes from Africa, including the nations of Nigeria, Angola, Algeria, Egypt, Equatorial Guinea, Cameroon, Chad, Ghana, and Côte d’Ivoire, Pradhan said.
“As India seeks to further diversify sourcing of crude oil and LNG, Africa has a central role—largely due to its proximity and the absence of any choke points in trans-shipments,” Reuters quoted the minister as saying.
What Does Energy Transition Mean for Underdeveloped Countries?
Africa is blessed with a climate and topography that would enable it to incorporate green energy easily into its domestic power-generation tool kit: solar, wind, biowaste, geothermal, and hydroelectric.
As investors shift priorities, unplugging fossil fuel from the power grid to achieve zero carbon emissions by 2050, what about those rapidly growing populations that do not have a power grid and have not had an industrial revolution (Fig. 2)?
With regard to any nation south of the Sahara, South Africa is the exception. It is Africa’s most industrialized economy and its worst polluter, considering that coal-fired plants still produce around 80% of the country’s electricity.
South Africa has introduced a carbon tax and intends to decommission several coal-fired power plants by 2030 as it diversifies its energy mix to include solar and wind projects.
But the country also doubts it can meet international requirements and so it is now proposing policy changes to significantly reduce the targeted upper limit for carbon emissions over the next decade. It also says it will require $8 billion a year in financing through 2030 to implement planned carbon mitigation.
But heavy on the carbon or not, South Africa at least has electricity—not so for the 1.3 billion people who live without it globally: 57% in Africa and 17% in Asia, researchers say.
NJ Ayuk, executive chairman of the African Energy Chamber and CEO of pan-African corporate law firm, Centurion Law Group, bristled in a recent blog post about how developed nations lecture the underdeveloped about climate change.
“To achieve autonomy, we start by monetizing our oil and gas resources,” Ayuk wrote, explaining that climate change policies cannot be mandated across the globe as a “one-size-fits-all” solution.
For Africa, the solution “starts with using oil and gas as a feedstock to create other value-added products like petrochemicals and fuel. Then we take the revenues to build infrastructure and diversify economies,” he wrote.