Tackling emissions has come to dominate discussions around ESG, driving concerns that progress is slipping on tackling the energy gap that continues in many African states.
Investors are no longer simply looking for the best return on capital. Increasingly, they are also aiming to hit ESG targets, with a focus on the environmental impact.
As a result, oil companies have fallen from favour over the last couple of years. The industry has failed to highlight what it is doing to provide energy for local needs.
“Africa needs more in the way of energy progression, rather than transition, at this stage,” said Cany Jobe, director of exploration and production at the Gambia National Petroleum Corp. (GNPC), told attendees at the Africa E&P Summit last week.
“We must have bankable ways of having energy access. Clean and large renewable energy projects are not always bankable in the financing world,” she continued. “Where will Africa be able to derive the capital to access the transition?”
Impact over targets
Jobe went on to say The Gambia was facing a “starvation of interest and capital to develop our untapped reserves”. Currently, 80% of the people in The Gambia lack access to energy, she said. Additional revenues from hydrocarbon developments could go to tackling this issue.
BP had been planning to drill a well in the country’s A1 block. However, it relinquished the area earlier this year, with speculation that its energy transition plans had driven this decision.
A failure to provide reliable energy to local populations has a clear negative impact. Ex-BP exploration executive Jasper Peijs noted that Madagascans had cleared 80% of the country’s primary forest. “In the last 20 years, 4 million hectares have been cut down. That’s 2 gigatonnes of CO2 equivalent,” he said.
The problem is not just solved by providing, for instance, LPG stoves. GNPC’s Jobe noted that Senegal had achieved 90% penetration of LPG stoves “but it hasn’t increased use”.
While people may have stoves, “but we do not use it. Coal and firewood is still cheaper and more available”, she said. “The focus has to be on impact, not just targets.”
It is clear there is a shortage of capital available for gas projects, which could play a major role in tackling Africa’s energy shortage.
Standard Chartered’s managing director of natural resources, Ade Adeola, noted that the core investing business was shifting to the independents. “The access of independents to funding is also being impacted by these narratives, which has constrained bank credit committees, private equity investors to pretty much downsize appetite on capital allocation to oil and gas – or anything remotely connected to fossil fuels.”
Balancing ESG
Capital constraints are a problem. “There will be a social impact,” Afentra’s Paul McDade said, “it could be catastrophic. We have a job to do in gaining access to the capital markets, the African governments have a job to do, they need to simplify.”
If the industry is to access the funding required to meet local energy needs it must do a better job of communicating with normal people. “Those are the people who are driving the agenda in the capital markets. They’re demanding that their pension fund is a green fund,” McDade continued.
The idea of fighting for fossil fuels is a lost cause, he told conference attendees. Rather, the focus should be on calls for a “just transition”, so that those allocating capital are receptive to wider dynamics.
The challenge is around spreading the word that hydrocarbons will have a part to play for the next 10-20 years, Invest in Africa’s Will Pollen said.
This will have to “minimise the environmental impact, but maximise the social impact” in revenues and employment.
“We have a responsibility to change the narrative,” he said. “Pension funds want ESG. Gas can drive opportunities around local impact, it’s not just bad-bad-bad. There’s a big tick on the S and the G side if we can get that right.”
Demands for energy access from African states are becoming more strident. Adeola predicted “open revolt” at the upcoming COP26 summit, pitting energy-poor parties against the OECD.
Investing for change
Investing in gas-fired power to lift 1 billion people out of energy poverty would increase global emissions by only 0.64%, Pandreco’s Richard Norris said.
“It would be lovely to do this with renewable energy, but in Africa this really only scratches the surface,” he continued. Prices continue to be too high and fail to provide developmental support.
“In a way, the oil industry has failed over the last decade or so in returning capital to investors,” upstream advisor Eskil Jersing said.
He went on to note the pressure that 260 NGOs had brought to bear on TotalEnergies’ plans to finance its East African Crude Oil Pipeline (EACOP). The StopEACOP campaign drove away French banks, Jersing said, leaving Standard Bank, the Commercial Bank of China, Sumitomo Mitsui and Standard Chartered.
There is a “change of the guard” in who is now investing with an indigenous, grassroots attempt in Africa to tackle the challenge. Ghana is considering buying into an offshore field, while Nigeria’s energy minister has raised the prospect of an African energy bank.
Ultimately, the bulk of the required financing will still have to come from Europe and North America.
In 2020, McDade said, oil seemed to be in a death spiral, aligning with environmental concerns. “This year, there’s a bit of a mix up. They’re seeing value in oil. But they’ve still got this concern that they will not be able to attract investment into their fund if they do invest.” It is, he said, a question of “value vs values”.