–Professor Omowumi O. Iledare
The energy transition, which refers to the switching away or transformation of the global energy sector from fossil-fuel dominated energy supply mix to zero-carbon emission sources, has fundamental implications for emerging petroleum economies. For example, oil’s share of the global energy mix is forecast to drop from the current 90 per cent to about 50 per cent, if the 2°c (degrees centigrade) global warming target is to be attained by 2050, according to some estimates.
While the desire, determination and diligence to switch is not conjectural, the key challenges of the how to transit and the rate of transition without disrupting global economies, and the unintended consequences, remain debatable.
Energy transition pace will present challenges, as well as opportunities (mixed implications) in Africa. More so, in Africa’s emerging petroleum economies, where petroleum resources are in abundance, and the dependability of such economies on petroleum for economic growth and development is significantly glaring.
On the other hand, natural gas, christened as the primary transition fuel, remains in abundance in Africa South of Sahara (ASS). Since 2010, there has been a wave of significant oil and gas discoveries in several African countries, including Ghana, which promises to address critical energy security and equity needs in the region. Revenues from these natural resource exports are needed to close the estimated US$130 to US$170 billion a year continent-wide infrastructure gap, among others.
However, how would nations in Africa fund national economic development, if they were to give up on exploration and exploitation of the petroleum resources due to climate concerns? Interestingly, these emerging petroleum economies in Africa are marginal contributors to global CO2 emissions with carbon emissions cumulative share estimated at less than 3 per cent by 2040, according to IEA 2019.
Thus, the speed at which the global economies ‘walk’ the ongoing energy transition ‘talk’ is overly critical, and it has mixed implications for petroleum-dependent economies in Africa South of Sahara in particular. This is more so, because these economies with its endowed petroleum resources, and paradoxically, significantly low energy access and high energy costs, would experience reduction in productivity and international trade competitiveness.
Given this context, the key aim of this OP-ED is to present what the energy transition means for the development of Africa’s vast oil and gas resources. It will also appraise the opportunities and challenges that this transition presents, in terms of using these resources, for example, natural gas, to fuel the industrial development of their national economies.
Meanwhile, oil and gas production and export remain the economic linchpin, with several countries latching on the oil and gas industry as a fundamental component of their industrial strategy. Ironically, however, and as alluded to earlier, Africa emits the least global Co2 emissions, and yet, stands to bear the biggest negative externalities of climate change. Thus, this generates new questions on what emerging economies with a lot of petroleum resources in Africa, must do to secure the needed investments to expand energy access and security, and how to further utilise the petrodollars to mitigate the future negative externalities of climate change.
Given this context, permit me to share with you, scholarly perceptive of three distinguished scholars assembled for a webinar on energy transition dynamics in December 2020 organised by the Office of the GNPC Petroleum Chair in Oil and Gas Studies at the University of Cape Coast, Ghana. The scholars, on the way forward for African oil and gas producers, in response to the global energy transition, analysed what the energy transition means for the development of Africa’s vast oil and gas resources. They appraised the opportunities and challenges that this transition presents, in terms of using petroleum resources, for example, natural gas, to fuel the industrial development of these national economies.
Dr. Theophilus Acheampong, Petroleum Economist, Political Risk Analyst and Associate Lecturer, CEPMLP, U. of Dundee university; and Honourary Research Fellow, Ctr. for Research in Energy Economics & Finance, University of Aberdeen, categorised the fundamental drivers influencing the shift from fossil-based to zero-carbon global energy market into to two. The drivers, according to Acheampong, in his keynote address at a webinar organised by the Office of the UCC GNPC Petroleum Chair in December 2020, are either exogenous (external) and/or endogenous (internal). The exogenous drivers include access to external finance, UN SDGs compliance increasingly prominence, technological advances in energy supply and changing investor priorities. The endogenous drivers, on the other hand, include: significant fossil fuel resources and renewable potential, revenue and employment challenges, energy access and energy security. There is, thus, a clear dichotomy between the external force, vis-à-vis the internal forces in petroleum dependent economies. This begs the question, of what strategic options to take, keeping in view the imperative of IEA that defunding petroleum assets is the only road to attaining zero carbon emissions in 2050.
Acheampong then espoused the following strategic options going forward:
– Revamp oil and gas exploration activities, license extension, fiscal and non-fiscal incentive for exploration activity.
– Adopt progressive asset stewardship and an integrated hub-based or cluster development of marginal fields to maximise economic recovery.
– Review and simplify the Gulf of Guinea fiscal regime framework to improve attractiveness and competitiveness in the post-COVID and energy transition era.
Acheampong stated unequivocally, that the energy transition is here, and at a quicker pace than previously anticipated or projected.
Hence, he concluded with the following recommendations:
• Petroleum producers in Africa can benefit from early adoption of the energy transition by using the oil and gas revenues to accelerate green investments, especially deepening renewable energy penetration. Post-COVID economic stability and reform plans need to recognise this.
• Develop advantageous barrels – meaning that only the best projects that deliver on overall economics are likely to attract capital. Key to this is reducing project risk (especially above ground risk and fiscal and regulatory uncertainties). Ghana and other producers in Africa must encourage and support upstream investment, or run the risk of production decline.
• Gas-friendly policies: Gas-to-power push represents a promising way to decarbonise Africa’s upstream oil and gas sector, but particularly good incentives are needed to monetise natural gas, and create new demand centres-for both internal power and non-power use, as well as regional exports. This can enhance value capture, thereby improving fiscal receipts, and potentially more jobs.
• Regional cooperation in the context of the AfCTA is pivotal to facilitating cross-border trade and investment flows to the petroleum and wider energy sector. Protectionism is always exposed by the markets, and consumers end up paying the price (not welfare enhancing).
Following the enlightening keynote address by Acheampong, Dr. Carole Nakhale , CEO, Crystol Energy, London, emphasised time frame and cost as key factors to the discussion on energy transition. Highlighting lessons from the pandemic, she stated that there is the need to expect the unexpected, especially when it comes to energy forecasts. Less credence should be given due to the high level of uncertainty and inexactitudes. These forecasts are based on assumptions, human interpretations and normative judgement calls, which are prone to presumptions.
Nakhale noted that not all oil producing countries are battling budget deficits due to oil price decline. Oil producing countries, with diversified economies and less reliance on oil revenue to sustain their economy, are better shielded from the decline in oil prices. Conversely, countries with less diversified economies and high dependence on oil revenue (especially countries in Africa South of Saharan, Latin America, and Middle East) are vulnerable to oil price decline, and their economies are affected significantly.
Nakhale explained that it takes about 50 to 60 years to transit from one energy source to the other, using the key example of the transition from coal to crude oil. She stated that the displacement of a dominant energy source does not automatically eliminate the energy source from the energy supply mix. She suggested that the displacement happens through a smooth demand decline.
For instance, the smooth decline of oil demand will mean the shrinking of the oil market. The consequences of market shrinking may further affect price, and high-cost producers will be squeezed out of the market first, while low-cost producers will then be driven out last. The silver lining of the pandemic was a glimpse of the future, which showed the timing of when the oil market may begin to shrink.
The energy transition is going to bring many changes and opportunities. Hence, if high-cost producers can manage a reduction in their cost of production, then, they can benefit from the transition, and extend the oil market era, as oil will not disappear overnight. Rather, it will take many decades.
Professor Adeola Adenikinju, Director, Centre for Petroleum, Energy Economics and Law, Ibadan in Oyo State, Nigeria focused on the macroeconomic impacts and adjustments that Africa oil producers can take to minimise the inevitable impact of energy transition. Energy transition is exogenous, and the factors affecting the transition are quite powerful, such as global commitment to move away from carbon-based energy to zero carbon emission energy-based, global finance (with private sectors investing heavily on the transition), policies, science, and technology.
There is a structural shift in global energy demand that has moved demand backwards, and at a time, where there is an expanding energy supply, which invariably placed a long-term trajectory of low energy (oil) prices. Thus, the period of high energy prices is over. This shift has also been exacerbated by COVID-19, and it may now be a permanent shift that has moved to a long-term lower equilibrium, in terms of price trajectory.
Thus, Africa oil producers must come to the realisation that they are facing a permanent shock, where there is a global shift in demand that will make prices to fall, and be at a lower-level trajectory. This will thus affect investment in the oil and gas sector, and capability to increase reserves and government capacity. This has a further implication on employment, poverty, and inflation etc.
The goal, right now for Africa oil producing countries, should be on how to optimise what is known as the energy sustainability system. Africa is rich in conventional and unconventional energy resources, and it is time for the continent to explore and exploit both classes of energy resources.
Adenikinju then made the following recommendations in his concluding remarks: the deliberate investing, or creating an enabling environment that will allow for the investment in renewable energy, and guarantee energy security in the short and long term; economic diversification (inter-sectoral and horizontal diversification, effective utilisation and development of value chains); national oil companies need to broaden their operations to include other energy resources; and oil companies reallocation of investment to promote energy resources, apart from oil.
Dr. Joseph K. Essandoh-Yeddu, the immediate past Director, Strategy and Policy Division, Energy Commission for Ghana, also shared some innovations and options for sustainable supply mix. He identified some past and present failed experiences, such as the West African Gas Pipeline that did not meet expectations, deep geologic depth challenges, interest of advanced markets and supply security.
He suggested that the way forward from this failed experience lies in political will, based on national agenda, affordability of energy resource (made possible by innovation along the energy value chain), localisation to industrialisation (local content, training, research, blue hydrogen production etc.), and utilisation of revenue from carbon-based fuels to expand the renewables.
Let me conclude this OP-ED by re-echoing Nakhle’s assertion that it takes about 50 to 60 years to transit from one energy source to the other, using the key example of the transition from coal to crude oil. She also stated that the displacement of a dominant energy source does not automatically eliminate the energy source from the energy supply mix. Empirical evidence suggests that the world is not running out of crude oil, and it also seems that it is less likely than not that the world will run crude oil out of the global energy supply mix without dare macroeconomic consequences and energy affordability complexities in Africa. Africa needs a strategic thinking approach to the transition dynamics beyond the traditional reactive thinking approach.
Unquestionably, according to the Arena International Renewable Energy Agency, energy transition is a pathway toward transformation of the global energy sector from fossil-fuel dominated energy mix to zero carbon emission sources, and the train has left the station. Besides, according to Sheikh Zaki Yamani, Saudi Arabian Minister of Oil and Mineral Resources (1962-1986), “The Stone Age did not end for lack of stone, and the oil age will end long before the world runs out of oil.”
Change is the only constant (thing), and Africa’s emerging economies, with oil endowment, will really have to embrace it. However, African leaders in the private and public sectors in these economies must embrace the zero-carbon emissions talk, but walk the talk less rapidly than the developed economies who rode on the back of crude oil for economic stardom.
Sustainable optimisation of an economy for national development requires energy accessibility, affordability and sustainability, and no energy source should be left out of the energy supply mix. Nevertheless, Africa must learn the lesson from the no smoking campaign for many years before it took traction. The campaign for zero carbon emission fuels is on course. Using petroleum revenue management tools to drive the linkage necessary for the oil sector to drive emerging economies is critical to absorb the unintended consequences on African economies, in case the developed economies decide to walk the loud energy transition talk precipitously.
NOTE: (Iledare is a Senior Fellow
USAEE, Fellow NAEE, Fellow EI,
GNPC Petroleum Chair at UCC
Oil and Gas Studies, GH and
Professor Emeritus in Petroleum
Economics at LSU Energy
Studies, USA)