The implications of the cop-26 for africa’s oil and gas industry.
1. Introduction
There is no doubt that the global concerns for climate change due to greenhouse gas emissions into the atmosphere is driving the calls for the reduction of investments in the oil and gas industry. Given the fact that African producing countries are highly dependent on the revenues and foreign exchange earnings from the exploration and production of fossil fuels, they’re worried that scaling back investment finance for the exploration and exploitation of the continent’s rich oil and gas resources will hurt the economic and social development and ultimately, the welfare of the people due to energy poverty. In this paper, we will attempt to examine the impact of the just concluded COP-26 where there was an aggressive global campaign to stop further investment in the exploration of fossil fuels on the oil and gas industry in Africa.
2. COP-26 and Global Pressure for Energy Transition.
The COP26 was the last annual UN climate change conference, and it stands for Conference of the Parties. The summit was attended by the countries that signed the United Nations Framework Convention on Climate Change (UNFCCC), a treaty that came into force in 1994. This is the 26th COP summit and is hosted in partnership between the UK and Italy. The conference was held in Glasgow from 1-12 November 2021, a year later than planned due to delays caused by the COVID pandemic.
Tackling climate change is the biggest challenge currently facing the planet and our generation. The transition to clean energy is critical to the achievement of the goal of reaching net zero by 2050. COP-26 marks a crucial deadline for countries to present more ambitious climate commitments. The UNFCCC’s climate conference must set clear pathways for the transition to a net-zero economy, a decisive moment for global climate action.
Greenhouse gas emissions from human activities are causing climate change, including global warming. To slow climate change requires reducing these emissions. Achieving zero emissions means releasing no greenhouse gases to the atmosphere—that is, no carbon dioxide (CO2), no methane, no nitrous oxide or other greenhouse gases. Net-zero emissions means that some greenhouse gases are still released, but these are offset by removing an equivalent amount of greenhouse gases from the atmosphere and storing it permanently in soil, plants, or materials. Because it would be prohibitively expensive or disruptive to eliminate some sources of emissions entirely, achieving net-zero emissions is considered more feasible than achieving zero emissions. Many governments and businesses have set a goal of achieving net-zero emissions by 2050 limiting the rise in global temperature to 1.5°C.
The communique issued at the end of COP-26 reiterated the danger of not acting urgently to solve the climate change problem. It states that “we invite the international community to move on these priorities with urgency and, in light of the science and the realities on the ground, bring renewed commitment for a truly breakthrough international effort to COP26 in Glasgow. The risks of a global pandemic were known but not fully appreciated, and certainly not acted upon. Even now, even with economic activity rebounding, we continue to fly blind as we struggle to contain the spread of COVID-19 infections. The climate emergency is different: we fully appreciate the bulk of its risks and the actions needed to address them. Delaying the necessary action will only drive up the costs, suffering and uncertainty for society and the world economy. We simply cannot wait”.
3. The COP-26 Strategy for Achieving Net-Zero Emissions by 2050.
The unwavering policy focus on climate change in the net zero pathway results in a sharp decline in fossil fuel demand, meaning that the focus for oil and gas producers switches entirely to output – and emissions reductions – from the operation of existing assets. The International Energy Agency (IEA) recently released a report on the strategy to adopt in achieving the target of net-zero emissions by 2050. The report titled “Net-Zero by 2050: A roadmap for the global energy system” outlined the key principles for implementing the goal. According to the report, the energy transition envisioned in the net-zero emission involves a major contraction of oil and gas production with far reaching implications for the producers of these fuels. This strategy will drastically reduce oil demand from about 90 million per day in 2020 to 24 million barrels per day in 2050, while natural gas demand will decline from 3,900 billion cubic metres to about 1,700 billion cubic metres during the same period. It stated that “no fossil fuel exploration is required in the net-zero emission as no new oil and gas fields are required beyond those that have already been approved for development. Specifically, it submitted that no new natural gas fields are needed in the net-zero emission beyond those already under development and not many of the liquefied natural gas (LNG) liquefaction facilities currently under construction or at the planning stage are needed because natural gas traded as LNG will fall by 6% and trade by pipeline decline by 65% between 2020 and 2050.
The IEA report which was presented and discussed at the COP-26 provided the advocates of no further new investments in the exploration of oil and gas resources the ammunition for their campaigns during the conference. Before the conference, pressures have been mounting on the oil and gas industry to develop strategies for reducing its greenhouse gas emissions and some governments started banning further investments in fossil fuels. In April 2021, seven European countries, including France, Germany, and the United Kingdom, announced that they would halt public funding for certain fossil fuel project overseas. About a year ago, Norway’s sovereign wealth fund, the largest in the world, sold out of positions in major mining and energy companies because of environmental concerns. And in 2018, Ireland became the first country to pledge to entirely divest from fossil fuels. Private investors are also following the policies of these governments as they are exploring positions that reduce their exposure to climate change as well as the risk of stranded assets. For instance, analysis conducted by the Wall Street Journal, in the first three quarters of 2020 alone, oil and gas companies in North America and Europe wrote down asset values of $145 billion, approximately about 10% of their market value. The idea of the governments banning further investments in fossil fuels have been amplified by the IEA Report which stated that the exploitation and development of new oil and gas fields must stop this year and no new coal-fired power stations can be built if the world is to stay within safe limits of global heating and meet the goal of net zero emissions by 2050, the world’s leading energy organisation has said.
The strategy of achieving net-zero emissions through ending investment into the exploration and exploitation of oil and gas will, no doubt, have far reaching implications on the economies of African producers of the commodities. The loss of revenues and foreign exchange earnings from the production and export of oil and gas resources will limit their ability to implement development programs and social projecs because of the high dependence on income from the commodities.
4. The Net-Zero Emission Goal and the African Oil & Gas Producing Countries.
Africa has been producing oil for over 70 years and its output is still important globally. African countries currently account for around 9% of the total global output of Crude oil, down from the share of over 12% at the end of the last decade and the peak of over 13% in the late 1960’s. Crude oil is produced in 20 African countries across all the five regions of Africa. However, this output is concentrated in five countries namely: Algeria; Angola; Nigeria; Egypt; and Libya, that between them account for over 80% of Africa’s oil production. Across Africa, although 16 countries have refineries, the majority of African produced crude oil (75%) is exported, and the majority of petroleum products used in Africa are imported. Indeed, Africa is alone in continents of the world as a net exporter of crude oil, but a net importer of petroleum products.
The IMF reported that in 2018 the petroleum sector accounted for over 50% of gross domestic product (GDP) of Equatorial Guinea, 80% of government revenue and more than 94% of exports, with crude oil exports alone, $3.2 billion, accounting for 65% of exports. In the Republic of Congo, Government data shows that the petroleum industry accounted for an estimated 60% of the State budget, whilst in Algeria, which is also a significant gas producer, Algeria.com has reported 95% of exports, 52% of budget revenues and 25% of GDP are from hydrocarbons. Oil production across Africa reached a peak to date in 2010, with just under 500 million tonnes produced, however, over the past ten years, production has fallen to around 400 million tonnes in 2019. Over this period, the demand for petroleum products increased significantly, rising by 60% over the past 10 years.
The high dependence of African oil and gas producing countries have led to the recent outcry of the leaders of Africa to stress the negative impact of global slowdown of new investment in the exploration of oil and gas resources. Nigerian president, Muhammadu Buhari, warned that “the move towards defunding of natural gas projects…would put countries, such as ours, in a very dire situation and make the (energy) transition extremely difficult for us”. His Vice President, Professor Yemi Osinbajo also stated that “curbing natural gas investments in Africa will do little to limit carbon emissions globally but much to hurt the continent’s economic prospects”. He noted further that although all countries must play their part in the fight against climate change, a global transition away from carbon-based fuels must account for the economic differences between countries and allow for multiple pathways to net-zero emissions”. In a similar tone, Gabriel Obiang Lima, the energy Minister of Equatorial Guinea said that “we must protect the environment, but also create jobs for young people. Hydrocarbon reserves are a blessing, we will not apologize for using them, especially gas, which can enable us to electrify the continent”. Mr. Gyude Moore, a former Liberia Minister of Public Works noted that “African countries can’t afford to grow their economies and lift their people’s incomes without relying on at least some fossil fuels – and it’s unfair and ahistorical for the West to ask them to do so…… Keeping Africa poor to fight climate change will do nothing to help the people most affected by it”. These African leaders are echoing the yearnings of the African oil and gas producers who will be negatively affected if the strategy of curbing the needed investment in the industry to meet the requirements of the net-zero emission is pursued by the Western countries.
5. Concluding Remarks
There is no need to dispute the reality of climate change and the need to act fast to stem its effect on the global economic and social activities. The decision to advocate for the achievement of a global net-zero emissions is a laudable one and which will definitely be beneficial to the African countries. Notwithstanding, the peculiar energy situation of Africa must be considered if the strategy being adopted will be seen to be fair and inclusive. Africa’s energy situation differs from other continents given its very high use of biofuels, mainly biomass (charcoal and firewood), which accounts for over 50% of final energy consumption in Africa. As a result, other fuels contribute far less to final energy consumption in Africa than they do globally. For example, oil accounts for 29% of final energy consumed in Africa compared to the IEA’s figure of 41% globally. These peculiarities of Africa’s energy mix should be considered in developing the strategies for achieving the net-zero emission goal.
This reasoning was underscored by Dr. Faith Birol, the IEA Executive Director in his forward to the Roadmap Report when he noted that “another guiding principle of the Roadmap is that clean energy transitions must be fair and inclusive, leaving nobody behind. We have to ensure that developing economies receive the financing and technological know-how they needed to continue building their energy systems to meet the needs of their expanding populations and economies in a sustainable way. It is a moral imperative to bring electricity to the hundreds of people who currently are deprived of access to it, most of them in Africa. He stated further that the pathway laid out in the report is global in scope, but each country will need to design its own strategy, considering its specific circumstances. There is no one-size-fits all approach to clean energy transitions. Plans need to reflect countries’ differing stage of economic development”. This position was also amplified by Professor Osinbajo, the Vice President of Nigeria by noting that “After decades of profiting from oil and gas, a growing number of wealthy nations have banned or restricted public investment in fossil fuels, including natural gas. Such policies often do not distinguish between different kinds of fuels, nor do they consider the vital role some fuels play in powering the growth of developing economies, especially in sub-Saharan Africa”.
In conclusion, the campaign for curbing investment in the exploration of fossil fuels in Africa seems inappropriate in view of their dependence on revenues from oil and gas resources and their energy mix. Further investment in the development of oil and gas resources will enable Africa to continue to derive economic and social benefits from its oil and gas resources while making efforts to achieve the global net-zero emissions by 2050.
The energy, oil and gas division of AMETRADE is committed to helping African oil and gas producing countries navigate the challenges of exploiting their natural resources and the ever-increasing needs of their economies. AMETRADE supports the energy, oil and gas industry in Africa through webinars, conferences and capacity building for policy makers and professionals in the industry. The company is helping the African Petroleum Producers Organisation (APPO) to manage its flagship conference, CAPEVIII, in Luanda, Angola, from Monday 16 to Thursday 19 May 2022. The conference brings together all the fifteen member countries of the organisation and non-member African producers to discuss national, regional, and international developments and challenges in the oil and gas industry as they affect Africa producers and consumers.