When will sub-Saharan Africa be able to properly see the light?
Approximately 600 million people in Africa have no access to electricity. In a continent with considerable potential for energy natural resource development – both through renewable and fossil fuels – why has it become so difficult to finance related trades and new projects?
Deciding to work from home today, some 180 miles away from the luxury of the warmth of the TXF office in London, I was highly conscious of trying to keep warm most of the day in my home office. This is not such an easy task when we are stuck in minus temperatures again and even more so when domestic heating bills have spiralled at least threefold in recent months. But hey, at least I have heat and plenty of jumpers, at least I have electricity and the lights are on – and hopefully will stay on!
On this theme though my thoughts are certainly with the population in Ukraine, many of whom are having to face a much harsher and bleaker European mid-winter without any heating and often no lighting as Putin’s armed forces continue to cruelly destroy vital civilian infrastructure – particularly power stations, sub-stations and electricity transmission lines - with predominantly long-range cruise missiles and drone attacks.
Turning to the southern hemisphere, and in a similar vein my thoughts are very much on sub-Saharan Africa where according to the most recent International Energy Agency (IEA) report some 600 million people (43% of the African population) have no access to electricity at all. It is shocking and we (the rich countries of the world) are certainly not helping enough. In fact we have actually made it more difficult (see below).
Although 18% of the world’s population live in Africa, less than 6% of global energy use is from Africa. The IEA says that the global energy crisis is undermining efforts to ensure universal access to secure and affordable energy, especially in sub-Saharan Africa, reversing years of progress.
Looking at individual countries throughout Africa, these are the percentages of access to electricity supply for a group of countries I have selected: Central African Republic 4.4%; Chad 7.8%; Democratic Republic of Congo 8.7%; Niger 13.6%; Sierra Leone 21.6%; Mozambique 34.9%; Tanzania 38%; Angola 44.9%; Ethiopia 48%; Sudan 48.4%; Gambia 62%; Cameroon 63%; Nigeria 65.9%; Senegal 70.4%; Kenya 74.5%; Cote d’Ivoire 78.1%; Gabon 91%; and South Africa 94.9%.
“Ensuring people have access to reliable, affordable and modern energy services is critical for sustainable economic development – the world is going backwards on this front,” the IEA said. However, the IEA says that countries such as Ghana, Kenya and Rwanda are on track for full access by 2030, offering success stories other countries could follow.
The IEA believes that extending national grids is the least costly and most prudent option for increasing access to electricity. However, many public utilities within sub-Saharan Africa that play a key role in financing the power sector are facing severe liquidity crunches that risk evolving into longer term indebtedness, the report adds. In addition, many of these public utilities also have legacy issues related to poor governance, under-investment, and low-cost recovery due to low electricity tariffs for various reasons. This has hampered efforts to maintain their existing assets and invest in new ones, therefore slowing down the extension of electricity transmission and distribution networks.
The development of electricity transmission lines and distribution networks could certainly be enhanced and speeded up if the existing OECD Arrangement is amended and modified to allow export credit agencies (ECAs) to extend tenors for such projects in poorer countries. At the same time a reduction in export credit premiums on such projects is also something that many have been asking the OECD to put in place. These requested changes are long overdue.
The IEA estimates achieving access to electricity by 2030 for sub-Saharan Africa would require annual investments of $25 billion from now to 2030. The IEA says international support is essential to catalyse investment, especially in today’s difficult financial conditions. It stressed: “Reaching this level is well within the means of the international community, and must be an unerring focus for development banks.”
DFIs/ECAs will now only be a small part of the solution
It is natural for focus to be levelled at developmental financial institutions (DFIs) - and this could be bilateral or multilateral – but for non-African DFIs this is only going to be a focus on non-hydrocarbon related trades or projects. And let’s bear in mind that the African continent boasts an estimated 125.3 billion barrels of crude oil, 620 trillion cubic feet of gas and vast unquantified untapped renewable energy (hydro, geothermal, solar, wind etc) potential.
The non-African DFIs were the first group of big financiers to withdraw support for international hydrocarbon trades and projects. And even though in Europe, with its acute focus on the energy crisis, the European Union has been considering gas as a ‘green’ source of energy, the DFIs are certainly not going to stretch themselves to supporting anything other than renewable energy deals and possibly more transmission and distribution networks in Africa. But even within renewables and distribution, non-African DFIs have been pretty tame in putting their best foot forward.
For the likes of Afreximbank and the African Development Bank (AfDB) they are still committed to supporting African trades and projects in the hydrocarbon space. They have no other choice. And there is the realisation among many that with so much oil and gas untapped throughout the continent that Africa is going to need a good deal of that to be exploited as part of the development transition in order to ‘jump’ economies to anywhere near to where they can afford to pay for certain economic developments, including investing in renewables of one form or another.
While the IEA’s 248-page Africa Energy Outlook 2022 provides a very balanced approach to the problems that Africa faces in meeting the challenges of electricity access for all, it does provide a realistic outlook whereby fossil fuel developments and renewables will be seen to jointly contribute to the overall goal of ‘switching on the lights’.
And as far as gas projects are concerned it notes: “The continent’s large resource discoveries over the past decade provide an opportunity for natural gas to play an expanded role in Africa’s energy system. More than 5,000 bcm of natural gas resources have been discovered to date in Africa that have not yet been approved for development. These resources could provide an additional 90 bcm of gas a year by 2030.”
Unfortunately, international ECAs, along with the DFIs, are another group of financiers which are now very unlikely to get involved in any new fossil fuel projects. Most ECAs switched off their support for such projects a couple of years back as their respective governments declared they would no longer fund new fossil fuel developments. As an example of this, back in December 2020, the UK government said that after March 2021 no new fossil fuel projects would be funded or guaranteed by the country’s ECA UK Export Finance (UKEF).
However, this hasn’t stopped legal challenges from certain environmental groups keen to stop projects which were funded prior to March 2021. In the most recent case decided last week in the UK, environmental group Friends of the Earth lost in the UK Court of Appeal a suit which they had brought against UKEF for financing the Mozambique LNG Area I project.
That project had been financed back in 2020. The initial financing amounted to $14.9 billion, the largest by some stretch in Africa, and included direct and covered loans from eight ECAs, 19 commercial banks, and a loan from the African Development Bank. The ECAs participating provided the cornerstone for the transaction. ECA direct lenders were: US Exim ($4.7 billion), JBIC ($3 billion), Kexim ($500 million), UKEF ($300 million), and Thai Eximbank ($150 million). ECAs as guarantors were: NEXI, UKEF, ECIC, SACE, and Atradius.
In 2020, the overall magnitude of investment in Mozambique LNG represented the largest FDI in Africa and the third largest project financing globally. The project was set to transform the economy of Mozambique and confer significant benefits on the wider southern African region.
It was also considered to play a significant role in the global energy transition and be a catalyst for upcoming change in the global fuel mix with declining coal and oil sources. With targeted countries largely based in Asia (China and India in particular) some of the volumes to be exported by the Mozambique LNG project were destined to be used in power generation to replace coal and oil generators - a move which would lower carbon emissions globally. Economic benefits for Mozambique would see increased power generation within the country and revenue for social and environmental programmes.
Going forward, big fossil fuel projects will increasingly be a rarity, and they will no longer enjoy support from DFIs and ECAs outside of Africa. The bulk of finance is likely to be raised through commercial banks – but increasingly the banks are intent on keeping a low profile when it comes to anything to do with fossil fuel financing – oil & gas majors, energy trading companies and funds and other private capital sources.
Being realistic and being fair!
So here’s the thing that is my real bugbear, we have around 600 million people in Africa that don’t have access to electricity and an estimated 900 million without access to affordable fuel for cooking – so how can the rest of the world to all intents and purposes tell some of the poorest African nations that they shouldn’t be exploiting their oil and gas resources.
We all firmly get the Paris Accords from COP21 in 2015 that we need to keep the global average temperature from rising no more than 1.5 degrees centigrade. And many countries have committed further with decisions on becoming net zero in their carbon emissions. The majority of countries have put net zero emissions by 2050 into law. Unfortunately, China, which is still building coal-fired power stations has in place a policy decision to reach net zero by 2060, and India – a country which spends billions on its space programme - has only pledged to reach net zero by 2070! Interestingly, within Africa, Ethiopia has a policy decision to reach net zero by 2030, and South Africa by 2050. No other sub-Saharan countries have committed to a date so far.
We all want a cleaner planet – on land and sea, but at the same time we need to be realistic and not unduly penalise populations that have virtually nothing – such as many of those in sub-Saharan Africa. We are in a transition in many countries, somewhat put into a reverse gear for some because of Russia’s war in Ukraine, but for others, particularly for many sub-Saharan African countries they haven’t even got to base one yet! The removal of a huge chunk of potential finance from DFIs and ECAs, that could help African countries generate revenue from these resources to at least try and get out of poverty, is disastrous. There is a case to argue the point for the less developed countries (LDCs) of this world and much of the developmental finance community hasn’t even tried to help.
And to the jokers that think such countries ought to be moving straight to renewables – they need to ask how could they pay for such projects, and how could any related debt be repaid? If exceptions were made whereby a poor country received developmental support to exploit a natural gas deposit for instance, agreements could also be structured that a certain proportion of the resultant revenues be invested in renewables and social projects over a specific timeframe. There are ways to make this happen without the complete cut-off to big finance that now seems to exist.
Earlier this year, NJ Ayuk, executive chairman of the African Energy Chamber (AEC), stated: “African nations must focus on developing a natural gas market to serve as the foundation of the continent’s energy industry. Africa will be unable to meet the UN’s sustainable development goals unless we tap into all resources available, which is why we must encourage and facilitate international investment, specifically from Europe, in oil and gas in order to fairly and economically participate in the global energy transition and drive socioeconomic development throughout the continent.”
In a similar vein, during the December 2022 US-Africa Leaders’ Summit, taking place in Washington DC, Equatorial Guinea’s minister of mines and hydrocarbons and OPEC President for 2023, Gabriel Mbaga Obiang Lima, discussed the importance of oil and gas developments in Africa and how exploitation of the continent’s natural resources will serve to reduce energy poverty while establishing an independent path towards a just and inclusive energy transition.
He remarked: “What we are not going to do, is abandon a resource that can change our countries. We will continue drilling because we need it. Anyone asking African countries not to develop fossil fuels, is criminal. It is criminal because they are telling us that we do not have the right to develop. The largest number of members of OPEC, this year, are African countries. Mozambique is going to become the biggest supplier of gas, Senegal will become a big supplier of gas, Nigeria and Equatorial Guinea will become big suppliers of gas. So, what you will have in 2035, you will have the African continent serving as the biggest supplier of oil and gas.”
He pointed out that energy poverty eradication will require an immense, concerted effort, and necessitated the utilisation of all energy resources available within Africa. As such, natural gas, will be a crucial tool to decarbonise the continent in pursuit of global climate sustainability goals. He added: “We are not responsible for the climate crisis; the climate crisis has two players: the producers and the consumers. And what’s driving it, is the demand. You need the resources to be able to develop and we will continue to do so.”
Commercial banks remain committed
Fortunately, many of the commercial banks still remain committed to financing hydrocarbon deals within sub-Saharan Africa. Why? There are good margins to be made, and they are not necessarily under so much pressure as DFIs and government influenced/owned ECAs. But, at the same time they also have increasing pressures, particularly from some of their shareholders., and sometimes from within due to reputational perspectives. Unfortunately, many banks do not want to talk about such deals or do not want to be seen in such financings in the hydrocarbons sector in any way – so often news of such deals can be sketchy.
At the end of the day, oil and gas is going to be needed for a good many years to come - right up to 2050 and beyond. And for sub-Saharan Africa whether those products are exported wholesale or used to feed domestic power stations (in the case of gas) or feed domestic refineries for oil products to replace imported by-products, it can only be a good thing for those African countries at this stage of their economic development.
One recent example of an oil financing is the August 2022 $2.5 billion pre-export finance transaction for Angola’s independent producer Azule Energy. This deal with a tenor of seven years was arranged by Deutsche Bank with a syndicate of banks.
Commenting on this landmark transaction, Deutsche Bank’s global head of natural resources finance, Sandra Primiero stated: “This transaction is structured to ensure ESG objectives are met in this critical upstream part of Angola’s oil industry. We continue to finance oil and gas, or else we risk a complete economic breakdown which is in nobody’s interest.”
The downstream sector – Nigeria and Dangote at the forefront
Oil and gas producers in sub-Sahara Africa have always had one eye on the downstream potential of such production, but it is only in more recent years that actual development of such large-scale plants have been planned and looked more likely of becoming a reality.
The Dangote Refinery complex in Nigeria has been talked about for years, and has suffered immense delays for a huge range of reasons – but particularly from financing problems to opposition from rivals and other vested interests, as well as technical issues and security of feedstock. Plans for the refinery were first mooted way back in 2013, but major structural construction only began in 2017. However, in the last few months in particular there has been considerable speculation that the refinery is nearing completion and ready for production.
The refinery once fully operational is expected to have the capacity to process about 650,000 barrels per day of crude oil, making it the largest single-train refinery in the world. The overall investment for the full complex is estimated at over $25 billion. The refinery is situated in the Lekki Free Trade Zone close to Lagos. Next to the refinery is an associated urea fertiliser factory, estimated to have cost $2.5 billion. Pipeline infrastructure is also estimated at $2.5 billion.
Natural gas from the Niger delta will be sourced to supply the fertiliser plant and be used in electrical generation for the refinery complex. The refinery is designed to produce up to 50 million litres of gasoline and 15 million litres of diesel a day. It will also produce aviation fuel and range of plastic and petrochemical products – most of which are currently imported by Nigeria and neighbouring countries.
The Dangote Refinery will be able to meet Nigeria's entire domestic fuel demand, as well as export refined products. Once completed the refinery is expected to have a significant impact on Nigeria’s foreign exchange through import substitution and substantial savings in earnings. As such the plant should be a game-changer for Nigeria and the wider West African region.
Full financing details of the overall complex are largely unknown. But what is public knowledge is that back in March 2020, the refinery secured a $300 million export credit finance facility through Italy’s Sace in a deal led by Standard Chartered Bank and Societe Generale. The deal also had support from Italy’s Cassa Depositi e Prestiti. And in July 2022 the Dangote Refinery raised a project bond of $451.05 million with the help of 13 banks.
Commenting on the recent developments, Robert Besseling, CEO, at Pangea-Risk, tells TXF: “The inauguration is not the event to watch, but rather the final commissioning of the refinery’s total capability, ie to refine 650,000 barrels of crude oil per day. Once this is reached, Nigeria should gain access to 10.4 million tonnes of petrol. This will reduce the import bill, protect foreign exchange reserves, and strengthen the naira currency. I do not believe full capacity will be reached in 2023.
“The Dangote refinery’s operations will be supported by the recently passed Petroleum Industry Act, after many years of delays to this legislation. However, Dangote will face strong competition - for example, from rival billionaire Abdul Rabiu and various others who have planned refineries in the region. These projects include the Gasoline Integrated International (GII) refinery, Waltersmith modular refinery, and the BUA Refinery, which is owned by BUA Group, Dangote’s key competitor.
There is a deluge of refineries coming onstream in Nigeria and West Africa in coming years, and so competition will be stiff.”
Besseling adds: “Nigeria can sign off on as many refineries they might wish. But without more reliable and ramped up crude oil production, refining capacity will be meaningless. The onus lies with the Nigerian federal government to better secure the Niger Delta region to prevent oil theft. We have seen some positive developments on this front since late 2022, when Nigeria contacted former warlords to protect oil infrastructure. But obviously, such a trend also carries great reputational risks for international oil companies, which are already divesting from the country.”
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