FUTURE FUEL: Africa’s untapped resources bode well for energy security
JOHANNESBURG – The long-term global demand for various resources will continue to rise due to population growth, higher economic growth and resultant higher income levels – driving foreign investment into oil and gas in Africa.
The global and regional demand for hydrocarbon-based energy will remain important in spite of the growth in renewable energy, particularly within the context of requirements for energy security driven by global geopolitical uncertainties.
Africa's upstream resources are still relatively untapped and provide an avenue to meet these requirements.
Foreign capital has always been crucial to the African upstream sector. Demand continues to be driven by its large resource base, which requires significant financing that cannot be met by the African capital markets.
Public financing to national oil companies is also limited as African governments struggle to meet budgetary spending requirements.
Depending on the forecaster, investment requirements for the African upstream sector range from $10 billion (R152bn) to $20bn a year and are expected to increase.
According to PwC’s Africa Capital Market Report Watch 2018, only $2.2bn was raised in Africa via initial public offerings (IPOs) in 2018 and $6.1bn through secondary offerings; virtually no capital was raised for the upstream sector.
The story is not much different in the corporate debt sector.
In short, there is a significant gap between Africa’s upstream funding requirements and the capacity of the African capital market.
Africa’s conventional exploration and production (E&P) remain a key driver of investment, with a massive resource base and opportunities cutting across several countries, from deserts to swamps to ultra-deep water, from rank exploration to producing assets and from marginal resources to world-scale opportunities.
Investment in processing, conversion and transportation of primary hydrocarbon commodities is crucial – gas to liquids (GTL), compressed natural gas (CNG), mini-liquid natural gas (LNG), floating liquefied natural gas (FLNG), modular refineries, distributed power generation, and petrochemicals for example; also opportunities that integrate and/or support renewable energy and help manage environmental issues such as gas flaring.
It is important to approach these investments with a modular investment philosophy to manage risk-return attributes.
These investments are important by themselves or in conjunction with conventional E&P investments because the paucity of capital and other challenges invariably means that weaker, less developed infrastructure or segments of the value chains limit the ability of the upstream sector to enhance value in a sustainable manner.
For example, gas flaring is both economically and environmentally unsustainable and can limit oil production.
Secondary and tertiary enhanced recovery investments, and non-conventional resources such as bitumen and shale oil/gas, can also provide significant opportunities.
However, Africa remains a high-risk region for various reasons – political risk, regulatory uncertainty, resource nationalism, security, challenges with contract enforcement, militancy, theft, corruption, lack of transparency to name but a few. These have translated into reduced availability and higher cost of capital relative to other continents.
Some progress has been made by some governments, but a lot more needs to be done. Ultimately, they need to play a long-term game which is often difficult against short-term pressures and realities. Simplified laws and regulation, continued deregulation, public/private investment models should remain a key focus.
Platforms such as Africa Oil Week are an invaluable opportunity for all stakeholders in African upstream oil and gas to hear each other out on all the issues, and to engage on what is needed to take this important growth sector forward.
Investors are increasingly focused now on legal and regulatory compliance, social investing and returns, sustainability indices, diversity management, reputational risk and stakeholder management besides looking for world-class corporate processes and systems, good corporate governance structures and sound enterprise risk management.
They have close to zero tolerance for non-compliance.
It is important that companies demonstrate that they have thought about the matters relevant to their business environment and have taken appropriate measures to manage them.
Also, they need to be flexible in considering an increasingly diverse range of financing structures which may be better match investor risk-return expectations.
Sustainable financing strategies are important.
The integration of environmental, social and corporate governance processes with finance matters is here to stay.
Ultimately, these factors will drive the availability and cost of capital.
Companies able to manage sustainability issues will be more attractive to financiers, customers, suppliers, governments, regulators, communities and other stakeholders because decisions will not be taken solely due to traditional economic considerations.
It is also important to recognise that sustainable business need not result in economic losses; quite often it provides an avenue for sustainable value.
Olu Ogunfowora is a partner at Nigeria-based energy and infrastructure advisory firm Argentil Capital Partners. He will be speaking at Africa Oil Week in November.