“Let me use this opportunity to once again canvass for the creation of an African Local Content Fund that could be utilized to set up a bank or financial institution to provide funding for the development of oil and gas projects in Africa. This is especially important against the backdrop of the reluctance and outright declaration by some banks and financial institutions to stop funding of hydrocarbon-related projects. I hope the Afrexim Bank, AfDB, or the AU, through the AfCFTA Secretariat, need to institute a form of contribution, no matter how little, as a fund to support the continent’s need for funds.”
These were the words of Engr. Simbi Wabote, Executive Secretary of the Nigerian Content Development and Monitoring Board (NCDMB), at a recent event on the growing clamour for an African energy development bank and during which he further explained that the Nigerian Content Intervention (NCI) Fund has exceeded half a billion dollars, or $500 million.
“In our own case, the deduction of one per cent of every contract awarded to any contractor, subcontractor, alliance partner or any other entity involved in any project, operation, activity, or transaction in the upstream sector of the Nigeria oil and gas industry has resulted in us having a pool of funds to support various intervention programmes.”
And part of these deductions make up the NCI Fund, which is statutorily extended as low-cost credit to qualified oil and gas companies that covers asset acquisition, project financing, manufacturing, working capital, loan refinancing, women in oil and gas, as well as research and development. In other words, it is a component of the Nigerian Content Development Fund (NCDF) that is accumulated through one percent deductions from contracts awarded in the upstream sector of the oil and gas industry in Nigeria as a forward-looking policy and operational response to actual and potential funding, technological and political changes in the local and global energy market place.
For instance, the United States, Canada and 18 other countries committed at the COP26 climate summit last November to stop public financing for fossil fuel projects abroad by the end of 2022 and steer their spending into clean energy instead.
Campaigners called the commitment a “historic” step in turning off the funding taps for fossil fuel projects. By covering all fossil fuels, including oil and gas, the deal goes further than a pledge made by G20 countries to halt overseas financing for just coal.
The 20 countries that signed the pledge include Denmark, Italy, Finland, Costa Rica, Ethiopia, The Gambia, New Zealand and the Marshall Islands, plus five development institutions, including the European Investment Bank and the East African Development Bank.
“We will end new direct public support for the international unabated fossil fuel energy sector by the end of 2022,” the partnering nations said in a declaration.
That would cover coal, oil and gas projects that are “unabated,” meaning that they burn fossil fuels without using technology to capture the resulting CO2 emissions, although the deal allowed for exemptions in unspecified “limited” circumstances, which it said must be consistent with the Paris Agreement’s target to cap global warming at 1.5OC.
Countries that signed the pledge together invested nearly $18 billion on average each year in international fossil fuel projects from 2016 to 2020, according to analysis by non-profit organisation, Oil Change International.
By bringing together richer donor countries with poorer nations that receive international financial support, the new deal signed at COP26 aims to build a consensus among nations to stop backing polluting projects and instead support clean energy both to curb emissions and to avoid building stranded assets.
Enormous investment in green technologies is needed for the task, and Bernstein analysts estimate that the required low-carbon investments would average around roughly $2 to 4 trillion per year until 2050.
This comes as governments and financial institutions around the world are facing increased pressure to stop funding coal, oil and gas projects responsible for producing the greenhouse gas emissions that are driving climate change, both at home and abroad.
“The world has no more space or time left to accommodate the expansion of fossil fuel energy,” said Lidy Nacpil of the non-profit, Asian Peoples’ Movement for Debt and Development.
Britain ended direct government support for new fossil fuel projects overseas in 2021 and Denmark has said it would do the same, with exemptions for some gas projects that it considers to meet “strict conditions” until 2025.
The European Investment Bank also committed to end oil and gas project funding in 2021. In support of this, the International Energy Agency has said ending investments in oil, coal or gas supply projects is necessary for the world to reach net-zero global emissions by 2050 – which scientists say is crucial for keeping the average global temperature from rising more than 1.5 degrees Celsius beyond preindustrial levels. Beyond that threshold, environmental scientists warn that global warming could unleash catastrophic and irreversible impacts on the planet.
While NCDMB has been using the NCDF to catalyze the construction of modular refineries, gas processing plants, LPG terminals and bottling plants, LPG cylinder manufacturing plants, lube oil blending plants, base oil production plants, methanol production plants, and many other, its leadership has also been canvassing that a similar fund be replicated at the continental level.
The idea is for it to be utilized in developing huge mega oil and gas projects, particularly as world financial institutions are now becoming increasingly reluctant to finance hydrocarbon-related projects around the world.
The recent spike in crude oil prices above $120 per barrel has been seen by the continent’s energy industry watchers as an excellent opportunity for African oil producers and its service providers to develop new fields, ensure security of supply and affordability, as well as increase revenue generation.
With the price of crude oil increasing by over 50 percent in 12 months, African oil producers are expected to use the opportunity to also make plans towards energy transition and to lower the cost of services.
But, in order to achieve all these at the continental level, an enabling regulatory framework that is backed with the appropriate legislation is very fundamental in Local Content practice. African oil producers are now putting in place investor-friendly laws to promote the oil and gas industry, and the ongoing collaboration among the countries of Africa to advance the local content journey is gaining more traction.
It is expected that such laws will align with the goals of AfCFTA, which seeks to create the world’s largest free trade area by integrating 1.3 billion people across 54 African countries, with the objective of tapping into a combined Gross Domestic Product (GDP) of over $3 trillion.
This will help African oil producers to utilize existing cross-border infrastructure to unlock the development of stranded assets and bring energy closer to the people. For instance, the existing West Africa Gas Pipeline (WAGP) and ongoing AKK gas transmission infrastructure project in Nigeria provide a good opportunity to serve regional markets. In the same vein, the SHI-MCI yard, a joint project of Samsung Heavy Industries located in Lagos, which is the only FPSO integration yard infrastructure in Africa, has put Nigeria at a vantage position to serve the wider African market.
“The key enabler for the continent is to create a collaborative ecosystem between the local industry stakeholders alongside the African Continental Free Trade Area (AfCFTA),” said Nicholas Odinuwe, who is the Chairman, Petroleum Triners Association of Nigeria (PETAN), while advocating for regional collaboration and innovation to enhance the future of energy sector in Africa.
Odinuwe encouraged governments across Africa to provide necessary incentives to attract private sector investments across the entire value chain, which would trigger, in his words, “a massive economic revolution, human capital development, and deepen local content across the continent.”
In relation to this emerging issue, NCDMB, the African Petroleum Producers’ Organization (APPO), and the Africa Export-Import Bank (Afrexim Bank), in the second week of March 2022, outlined new and sustainable models of funding oil and gas investments in Africa, using resources drawn from the continent and de-emphasising international financiers.
The new pathways were some of the key outcomes of the African Local Content Investment Forum hosted by NCDMB in Lagos and form part of the concerted efforts to overcome the decision of Western nations and their financial institutions, together with international operating oil companies to suspend funding of new investments in hydrocarbon projects because of their advocacy for energy transition and green fuels.
The rally by African institutions is also intended to respond to the sustained push by Western nations for Africa to abandon her hydrocarbon resources by attracting or deploying new or alternative funding to the continent’s oil and gas industry and is coming on the heels of the COP26 event held in Glasgow in late 2021 where leading advocates of energy transition made fresh commitments to curb methane emissions, align the global financial sector with net-zero targets by 2050, ditch the internal combustion engine, accelerate the phasing-out of coal, and end international financing for fossil fuels altogether.
Even though African oil-producing countries need to continue exploiting their hydrocarbon resources to fuel their developmental and economic activities, their actions need to be backed by an urgent strategy to address funding, investment, and technological challenges.
This is because inadequate energy is widely acknowledged partly as the reason why Africa is faced with poverty, conflicts, migration, brain drain, and also ranks very low on all human development indexes. But the African Export-Import Bank (Afrexim Bank), which supports several oil and gas deals on the continent, the African Development Bank (AfDB), and other funds from Development Financial Institutions (DFIs) in Africa, could be explored for funding hydrocarbon development projects.
It has also been argued by some energy analysts and experts that credible businessmen in the continent could also be motivated to pick interest in the industry. As Wabote expressed, adding that “there must be a means of aggregating the various funds so that big-ticket funding transactions can be carried out.”
The Secretary-General, African Petroleum Producers’ Organization, (APPO), Dr. Omar Farouk Ibrahim, pointed out that a major study commissioned by APPO on the “Future of the Oil and Gas Industry in Africa in the Light of the Energy Transition” revealed that the oil and gas industry in Africa would need a new development model to survive the energy transition.
The new model would emphasize greater cooperation and collaboration among African oil and gas producing countries. He stated that “the model shall also seek to emphasize a continental-wide approach to addressing the funding challenge, the capacity development challenge, the lack of cross-border and regional energy infrastructure challenge, the technology deficit challenge and the underdeveloped energy market challenge, using the African Continental Free Trade Agreement as an enabling vehicle.”
On sources of finance for energy projects in Africa in the absence of the traditional financiers, the APPO scribe recommended that various oil-producing countries should enact laws that provide for a portion of windfalls from oil and gas sales to be re-invested in the industry.
According to him, “we need to find ways of getting African oil and gas producing countries and governments to commit a certain percentage of the windfalls to a special fund for the sustenance of the oil and gas industry during the transition period. A guaranteed source of revenue is the only guarantee for the success of the new order we want to see in Africa.”
Ibrahim added that revenue shall not come from the private sector alone because the issue is a matter of national security. He insisted that none of the financial institutions operating in Africa today can afford to provide all the funds required for the oil and gas industry in Africa to operate and grow, and at the same time meet its original mandate.
Acknowledging the impact of the global energy transition on investment philosophies of international operating companies and financial institutions, the Managing Director of Afrexim Bank, Dr. Benedict Oramah, stated that African countries still rely on fossil fuels for growth and sustainable development, hence there is a need to continue financing oil and gas development in the continent to avoid destabilizing their economies.
Oramah, who was represented by the Director and Head of Advisory and Capital Markets, Ibrahim Sagna, assured of the bank’s commitment to the African oil and gas sector, pointing out that it had extended loans to players in the industry to the tune of $5 billion by the third quarter of 2021. He also said that the bank would continue to finance economically viable oil and gas transactions and would further work with stakeholders to explore the feasibility of the Africa Local Content Development Fund.
Minister of State for Petroleum Resources, Chief Timipre Sylva, said that sustainable funding is required in all aspects of the African petroleum industry, including upstream field development projects, pipelines, depots, terminals, refineries, petrochemical plants, as well as in oil and gas research, development and training institutions. He regretted that several regional development projects have been constrained by funding, including the West African Gas Pipeline (WAGP) and the Trans-Sahara Gas Pipeline (TSGP).
Speaking through the Permanent Secretary in the Ministry of Petroleum Resources, Dr. Nasir Sani Gwarzo, Sylva said that the Africa Continental Free Trade Area agreement and its growth aspirations can only be actualized if the continent has a vibrant oil and gas sector, in view of the oil industry’s capacity to harness resources from other sectors. He however insisted that forcing or nudging other nations to set timelines to reduce or abandon their locally available form of energy will be counter-productive and cause disruptions in global energy supply, hinting that it had already begun to demotivate new investments in oil and gas developments worldwide.
To Wabote, “the ongoing clamour for energy shift, energy swap, and energy transition by the Western world is a pre-notice of the impending stoppage of production of equipment, technology, and consumables required to exploit and explore hydrocarbon resources.”
To overcome this challenge, he believes that African nations must begin to develop or adapt technologies, such as rigs and other equipment that will enable the production and utilization of hydrocarbons on the continent.
“Homegrown technology and innovation are indispensable to ensure local resources are not discarded prematurely,” he said, while insisting also that a nation’s natural resources must remain on its energy mix as much as possible, and that timely and full exploitation and utilization of natural resources are essential pre-requisites for the creation of employment opportunities and societal development.
This underscores the reason why NCDMB is paying attention to research and development through different platforms, including organizing the research and development (R&D) fairs, and in launching the $50 million R&D Fund for basic research, commercialization of inventions, as well as establishment of R&D centers of excellence and endowments.
