Renewable energy transition dominates Africa Oil Week — Conference Coverage

Two years and a global pandemic have passed since oil and gas stakeholders gathered at Africa Oil Week, but attendees thought this year’s Dubai edition (8 to 11 November) stood out for reasons other than COVID-19.

Taking place alongside the UN’s COP26 climate summit, the global transition towards renewable energy dominated a conference devoted to the development of oil and gas resources in Africa.

“The market has really shifted,” said a structured finance banker on the sidelines. “Five years ago, speakers at this conference would barely include one slide at the end of their presentation to reflect on ESG, now it’s front and centre of the conference.” European energy majors such as Shell and BP are downsizing oil and gas operations across the continent, and financiers are following suit. Speakers from Absa reiterated their focus on renewable energy investment over hydrocarbons, and those from Standard Chartered reminded the audience that the bank plans to deploy USD 300bn for green and transition financing over the next 10 years.

Financing oil and gas has become practically anathema for some lenders. “It is very difficult for a lot of banks, in particular in Europe, to look at oil and gas investments,” said the banker. “In some ways, it is becoming harder than getting standard credit approvals.”

Oil and gas companies are having to innovate to finance their operations. The CFO of an independent Nigerian energy company told Debtwire on the sidelines that he was looking at options such as vendor financing, as well as placing the firm’s first US dollar bond in Nigerian markets next year, where locals flush with FX would be less stringent with ESG conditions than offshore investors.

As Western banks shy away from fossil fuel investment opportunities, others are stepping in. Chinese lenders are dominating the debt syndication of the USD 4bn East African Crude Oil pipeline project and non-financial players may also boost their lending across the region.

“It is going to be harder to find conventional lenders to participate in these projects, so I think it’s likely that we will see big trading houses such as Glencore, Trafigura, Mercuria — those with the balance sheet — come in to fill this gap,” said the banker. “You might also start seeing more private debt and equity funds stepping into the picture.”

This reluctance from lenders to pursue opportunities they previously coveted is even more surprising given this year’s surge in oil and gas prices, as the world economy staggers out of the COVID-19 shock. Reduced access to capital will only further this dynamic.

“[If some] international banks pull back, there’s going to be a supply shortage and the prices will spike again, and then all consumers will still be paying higher prices for their fuel,” Michael Humphries, director at Redcliff Energy Advisors, said during a panel.

Higher prices will ensure higher returns for lenders, meaning there will always be funding available for projects, the banker noted.

“The question is — will the ESG processes of some of these less-regulated financiers be as good as that of regulated entities such as commercial banks?” the banker asked. “Even if some banks turn their backs on these projects, they will still get done because they are profitable, but we might end up worse off in terms of ESG compliance.”

Getting the energy mix right

While many governments, energy companies and financiers have committed to move away from non-renewable energy resources in Africa, this transition faces challenges unique to the continent.

“There is a wide disparity in industrial development across African countries,” said Humphries. The renewable energy transition can work in countries like South Africa, but the infrastructure reality elsewhere across the continent makes this harder, he added.

Finding the appropriate energy mix to guide this transition is another major challenge, but most agreed that fossil fuels would still play a key role in it for years to come. Banks may have become allergic to coal, but natural gas emerged as the least bad option.

“We see gas as a transitional force, we are involved in the major gas projects and we continue to be there,” said Ade Adeola, managing director for energy and natural resources at Standard Chartered during a panel. He believed natural gas will continue to have a similar share of the broad energy mix over the next ten years, if not increase over time, because from an infrastructure perspective, it is a natural substitute for coal.

Bhavtik Vallabhjee, head of power, utilities and infrastructure at Absa, said that while his bank is focused on renewable energy projects, particularly in countries such as South Africa, they cannot disregard non-renewable power altogether.

“That includes looking at E&P projects very selectively, and hydrogen development,” Vallabhjee said during a panel.

Governments urge pragmatism

African government officials present at the conference were similarly candid about the challenges ahead.

“We recognise gas is a finite resource […] and we need to look at alternatives, but for the foreseeable future we are clear in our minds that gas is the way to go,” Andrew Egyapa Mercer, Ghana’s deputy minister of energy told the audience.

Rather than move away from fossil fuels and possibly drive energy prices up, he urged European funders to “invest in Africa, in its resource, to produce responsibly and in an effective manner.”

Thomas Camara, Cote d’Ivoire’s minister of mines, petroleum and energy, told the audience that his country had committed to an energy mix made up of 42% renewables by 2030, and understood the need to reduce contamination. But in the interim, to ensure permanent access to energy for Ivoirian citizens, he said the country’s oil and gas resources must be utilised.

“A good part of our population does not have access to energy in the modern way as we know it, so we need to address this problem,” Camara said. “And this access of our populations to modern energy is not going to happen, for the moment, with renewable energy, because renewable energy is intermittent, but access to energy must be permanent. So, this basic question needs to be solved with fossil fuels first. […] We will not turn our backs on our oil resources, on our gas resources.” 

by Laura Gardner Cuesta in Dubai

Laura Gardner Cuesta Senior Reporter Debtwire CEEMEA

Laura is a sovereign debt senior reporter for Debtwire CEEMEA. She holds an MSc in Conflict Studies from the London School of Economics and a BA in Philosophy, Politics and Economics from the University of Exeter.

Laura Gardner Cuesta Senior Reporter Debtwire CEEMEA

Laura is a sovereign debt senior reporter for Debtwire CEEMEA. She holds an MSc in Conflict Studies from the London School of Economics and a BA in Philosophy, Politics and Economics from the University of Exeter.

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