African petrostate gas investments face transition risk: African Climate Foundation

A recent African Climate Foundation (ACF) report on sustainable energy transitions noted that African petrostates face challenges and multiple trade-offs in utilising their gas resources due to uncertainty and the transition risk associated with new investments in African natural gas.

The report evaluates the changing landscape and closing window of opportunity for African petrostates, including Nigeria, Angola and Chad, to take advantage of their gas resources, caused by the growing global recognition of the urgent threat posed by climate change as well as the only short-term demand for gas in Europe following Russia’s invasion of Ukraine.

“Greater commitment to climate action has led many countries and donor agencies to make plans to end financial support for petroleum extraction. At the same time, the European Union has been pursuing new sources of African natural gas to compensate for loss of supply from Russia. African countries face an unenviable dilemma of needing to foster economic development and industrial growth while mitigating the impacts they are likely to experience due to global climate change,” the report said.

It went on: “To many policymakers, gas development and export is a bridge to achieving both of these aims. However, exploiting Africa’s gas reserves involves multiple trade-offs, uncertainty and significant transition risk, particularly as the adoption of renewable energy and the low-carbon transition gains speed.”

According to the report, using models of two Paris-compliant scenarios developed by ACF, limiting global warming to well below 2°C or achieving net zero emissions by 2050 would lead to investments in African gas being ultimately value-destructive.

The report finds that current and aspiring African petrostates should be wary of accepting new risks associated with gas and gas infrastructure and should be incentivised to embrace rapidly scaling-up renewables in their energy technology mix, whether or not they pursue gas exploitation.

Challenges to gas development

Etulan Adu, a production engineer at Eni, an italian multinational oil and gas company, told Gas Outlook that African petrostates are facing the triple challenge of investment uncertainty, infrastructural challenges, and environmental concerns, regarding the utilisation of gas resources.

He said that balancing the economic benefits of gas production with environmental issues such as pollution and habitat disruption is an enormous challenge for Africa. “Uncertainty about environmental regulations and future climate policies can have an impact on the viability of gas projects. The European Green deal and current climate change action to reduce greenhouse gas emissions could result in limiting finance for non-environmental friendly energy projects in Africa,” he warned.

Adu said that petrostates in Africa “have not demonstrated capacity in handling environmental issues such as gas flaring and GHG emissions reduction to convince the West that a low-carbon footprint in ensuring continuous gas development and production is sustainable to address the energy challenges in Africa.”

He said that African countries may have to choose between meeting domestic energy demands such as gas-to-power through gas development, and fulfilling international commitments to reducing greenhouse gas emissions.

“Investing in gas projects in uncertain circumstances includes both risks and potential profits. African gas producing countries must weigh the risks of gas development, such as market volatility and regulatory changes, against the potential economic benefits of using their natural gas reserves. While advocates are calling for an end to natural gas development in Africa and from other petrostates globally, African countries say doing so would unfairly penalise them and stifle economic growth.”

Joshua Narh, Executive Chairman of the Energy Chamber of Ghana, told Gas Outlook that to address these challenges and trade-offs, African countries need to develop clear and stable regulatory frameworks, invest in infrastructure development, engage with local communities and stakeholders, and diversify their energy mix to reduce dependence on gas and mitigate the risks associated with uncertainty.

Transition risk of new gas investments

Narh said assessing the transition risk associated with new investments in African natural gas involves considering various factors such as regulatory changes, market dynamics, technological advancements, and environmental concerns.

He noted that natural gas markets are subject to volatility influenced by global demand, geopolitical tensions, and the development of renewable energy sources. “There’s a growing global focus on reducing greenhouse gas emissions and transitioning towards cleaner energy sources. Investments in natural gas could face risks associated with climate change mitigation efforts. The International Energy Agency’s World Energy Outlook highlights the need for substantial investment in renewable energy to meet climate targets, potentially impacting the future demand for natural gas.

“Advancements in renewable energy technologies, such as solar and wind power, along with energy storage solutions, could disrupt the traditional energy landscape. These advancements may impact the competitiveness of natural gas investments over the long-term,” he added.

The shift away from fossil fuels

Adu said that Africa’s oil and gas industry faces increasing pressures as the world transitions away from fossil fuels because their economies depend on oil and gas revenues.

“Their reserves are more expensive to produce and are more carbon-intensive than other regions. Energy demand on the continent is also threatening to outstrip supply, with rapid population growth and industrialisation driving strong demand growth across the continent, including for fossil fuels. McKinsey modelling estimates that African energy demand in 2040 could be around 30% higher than today.”

He said that to manage low-carbon transitions and move away from fossil fuels in Africa to promote Sustainable Development Goal 7 and the African Union Agenda 2063, there is a need to encourage investment in renewable energy sources such as solar, wind, hydropower, and geothermal electricity. Adu said this would minimise carbon emissions while simultaneously providing clean and sustainable energy for economic development. “This investment requires a different type of finance, as it is needed in small-scale projects, often in rural areas, by consumers with limited financial ability.”

“It is essential for African countries to create and put into effect policies that encourage energy efficiency across all industries and facilitate the switch to low-carbon technologies. This could involve phasing out subsidies for fossil fuels, defining goals for the deployment of renewable energy, and offering incentives for clean energy initiatives. It will work to identify financing options for innovative technical developments and investments, including electric vehicles and green hydrogen, to help the creation of quality, green jobs.”

Narh emphasised the need for Africa to build climate-resilient infrastructure that can help mitigate risks and ensure the reliability and sustainability of energy supply.

“Climate change poses significant risks to Africa’s infrastructure, including energy systems. Building climate-resilient infrastructure can help mitigate these risks and ensure the reliability and sustainability of energy supply. This includes measures such as strengthening power grids, protecting infrastructure from extreme weather events, and integrating climate considerations into infrastructure planning and design.”