–By Dr. Omar Farouk Ibrahim, Secretary General, African Petroleum Producers’ Organization, APPO
Cape Town, South Africa was agog recently when it played host to the just concluded week-long, Africa Energy Week, where leaders, experts, professionals and key stakeholders in the energy world, brainstormed on energy transition in Africa. Below are some of the thought-provoking speeches delivered at the all-important event:
1. I have chosen to speak on the topic, The Imperative of a Second Paradigm Shift in the Discourse on Energy Transition in Africa and I would like to begin by highlighting key elements of the first paradigm shift.
2. The first is that the energy world has not been the same since global leaders assembled in Paris in 2015 and signed the Climate Agreement. That meeting heralded the acceptance of the global paradigm shift away from fossil to renewable fuels. It has since raised the tempo of research on renewables, greatly increased funding for renewable energy projects, reduced funding for fossil fuel projects, reduced research budgets for fossils, and increased funding to groups and lobbies to sensitize and educate the global population about the dangers that the continuous use of fossil fuels pose to humanity.
3. The second element is that African leaders, including those whose economies and societies are heavily dependent on fossil revenues, have committed to energy transition and net zero, even though some are now asking for a little more time than was prescribed by the global powers that be, and on whom our countries have become so dependent.
4. The third element is that there are inherent contradictions in Africa’s acceptance of the energy transition and all that it entails on the one hand, and its search for solutions to the imminent existential challenges that the energy transition poses to the continent on the other hand.
5. Excellencies, ladies and gentlemen, it is these contradictions that call for a second paradigm shift in the discourse on energy transition in Africa.
6. Although APPO has identified three imminent existential challenges that the energy transition poses to Africa, for the sake of time, I shall discuss only one in this paper, and that is the challenge of financing the oil and gas industry in Africa in the light of the energy transition, and highlight the contradictions in the analyses and the recommendations being made by experts.
7. Since the traditional financiers of oil and gas projects in Africa, especially the Western financial institutions and even the IOCs and service companies, announced their commitment to ending funding fossil projects particularly in Africa, our oil and gas ministers and by extension the governments they serve, the CEOs of their NOCs and the Ministers of Finance who rely on oil and gas revenue to meet government obligations have become very worried.
8. I do not think that I would be far off the mark if I say that our economists and financial gurus including the Western Consultancies that we all heavily rely on for advice on how to raise funds for oil and gas projects, and panelists at conferences like this, have mostly failed us. And the cause of their failure is easy to trace.
9. These experts have accepted that the world of oil and gas has changed. But they have not come to terms with accepting the fact that what worked for the industry in the pre-energy transition era cannot work today, because the times have changed. So, instead of a complete overhaul of the century or decades old mechanism for fund-raising for the oil and gas industry, they go for fundamentally the same solution to what is essentially a new problem.
10. Working on the premise that foreign capital is country blind, these experts tell us that in order to attract foreign capital in today’s world of energy transition, our countries should be prepared to give more attractive fiscal regimes. We should be prepared to give more tax holidays, collect less taxes, collect less royalties, give greater flexibility to repatriate funds and so on and so forth.
11. African countries that have just made big finds or have planned big projects are told that they need to quickly offer good deals and have them signed before the little available capital goes elsewhere. They are told that the owners of the capital are being approached by many other capital seekers and the earlier they inked agreement the better for their countries and peoples. And of course, when these agreements are inked and the countries later come to find out that there were no other competitors for the capital, or that the deals were not the best they could have got, they cannot renege. Any attempt to seek renegotiation is interpreted as an attempt to breach the sanctity of a contract.
12. Excellencies ladies and gentlemen, permit me to highlight some of the fallacies that have conditioned the thinking of our experts, and inform the analyses that they make and the recommendations they give to us. It is only when we have accepted that these are fallacies that we can start the journey to the second paradigm shift.
13. The first fallacy is that international capital is country blind. But how factual is this assertion? Do Western investors, in particular, make investment decisions solely on rational calculation of profits? Can IOCs invest in any country of their choice that will give them the highest return on investment irrespective of the positions of their home governments on that country? The answer is NO. So capital is not country blind.
14. Following from this logic, it makes sense to argue that the imminent financing challenge for the oil and gas industry in Africa is not due to a lack of finance in the global financial system to fund oil and gas projects in Africa. There is a lot of money looking for good and profitable investments. Rather, it is an ideological issue that goes beyond profit and loss.
15. IOCs are wary of investing in Africa not because they do not believe that it makes economic sense to do so, or that they honestly believe that they owe humanity a duty to protect the planet earth, but rather because they are afraid of sanctions from their home governments.
16. If this argument is valid, then there is a limit to what African countries can do to attract investments from the West. Even if African countries bring down their royalties and petroleum taxes to the lowest possible level, investments will only be for the short to medium term, and cautiously too.
17. The second fallacy is that capital can only be found from Western financial institutions or governments. I think we need to re-examine this fixated position. Capital can be found in many other places, including in our own so-called poor countries. It is a matter of prioritizing expenditure. If we are agreed that oil and gas are currently the geese that lay the golden eggs for our member countries, and will continue to do so for some time to come because of the huge reserves we have and the monocultural economy that we operate, then we have a responsibility to grow that industry, to master its technology, control its finances and it markets.
18. Is it correct to say that African oil and gas producing countries do not have the capital to invest in the industry that is the life wire of their economies? I do not think so, and for the following reasons. Let me give some statistics of oil earnings at two different times by these countries in recent years. The first period was 2003-2008. Oil prices rose from an average of about 23 dollars per barrel in 2003 to about 120 dollars per barrel by mid 2008. During the same period, crude production rose from about 82 mbd to 86 mbd, with almost all African countries’ production rising.
19. If we agree that the mainstay of our national economies are oil and gas, what did we do to take full control of that industry with the hundreds of billions of dollars in windfall revenue that accrued to us?
20. Another example is the recent Covid19 challenge which saw oil prices in the negative territory sometime in April 2020. By the last quarter of 2020 when our countries were finalizing their budgets for 2021, how many oil and gas producing countries in Africa projected oil price of USD 50 for their 2021 budget? How many projected the speed of oil demand recovery in 2021? Yet, by September 2021, oil prices were over USD 80 per barrel and many countries were producing not less than what they were pre-covid.
21. The point I am trying to make is that if we set our priorities right, we shall be able to raise the needed funds to operate the industry. Instead, the bulk of the windfall revenue goes to the importation of goods and services that do not add much value to the local development of the industry. Or investing our sovereign and pension funds in the West because we are made to believe that those are safer havens.
22. If our leaders are to take a collective decision to invest an agreed percentage of any windfall revenue from oil and gas sales for a period of 7—12 years in the industry, we will not need to go looking elsewhere for capital. We will not need to be sending our oil and gas technicians and scientists and innovators outside Africa to study. We can pool resources together and have the highest levels of regional centers of oil and gas research, development, innovation and training, while middle level research and trainings are still conducted by individual countries.
23. And these are exactly what APPO is currently doing, working to establish regional centers of excellence in oil and gas research, development and innovation in some of its Member Countries. And on the finance side, we are currently working with the AFREXIMBANK to establish the Africa Energy Bank. The establishment of the Africa Energy Bank is informed by our recognition that Africa must begin to take its destiny in its own hands. We cannot declare over 125 billion barrels of proven crude reserves and over 550 trillion cubic feet of gas stranded assets, simply because those on whom we have always depended for finance have decided to discontinue funding our fossil projects. Not when we have the largest proportion of the world’s population living in energy poverty. Not when our continent is on the verge of industrialization and shall need all the energy it can get. Permit me Excellencies to express our appreciation to Professor Benedict Oramah, President and Chairman of the Board of Afreximbank for the leadership you are providing for this great Africa-focused initiative.
24. Another fallacy is the magnitude of capital needed for the industry. We are told that the magnitude of capital needed for industry projects are too high for Africa to raise. Agreed, the industry is capital intensive. But what we are not told is that it will be less so if we work on addressing issues of corruption, of inefficiencies in production, non-digitization of processes, finance and administration etc in the industry. Put differently, we need so much capital because so much is wasted through corruption, mismanagement and inefficiencies.
25. We appeal to our finance experts to begin to think outside the box as they search for solutions to the imminent finance challenges posed to Africa by the energy transition. Don’t keep telling us that our salvation lies with more dependence on others.
26. Excellencies, ladies and gentlemen, the imperative of thinking outside the box when looking for the solutions to the finance challenge that I have just argued also applies to the way companies that organize oil and gas conferences on the continent.
27. In APPO we truly appreciate the contributions of the various firms that have been organizing various energy events on the continent. You have done well for the industry in Africa over the years by providing suitable fora for discourses at the highest political levels leading to policy formulation and key decisions on energy matters. You provided platforms for the sensitization and mobilization of investors. And you provided platforms for our operators to articulate their positions on critical issues affecting the industry. Thank you for those invaluable contributions.
28. But the times have changed. With the emergence of energy transition, the challenges of the industry on the continent have also changed. The new challenges are existential and require urgent solutions. These solutions cannot be found in the current unhealthy cut-throat competition among various firms each claiming to be the best African energy or oil and gas event.
29. At APPO we believe that it is time Africa got a truly continental energy event similar to the OTC, that will provide our key industry players and policy makers the platform to showcase what strides Africa is making towards addressing the challenges posed to us by energy transition.
30. We do not have the resources to be everywhere for the same kind of event, meeting the same people and hearing the same position papers. We need a truly African energy event that shall attract our innovators, our researchers, our academics and our policy makers once a year to come and say or demonstrate something new that they have said or made since the last conference.
31. For the event organizers, do not be scared of any income loss. You can still do national or regional events. I can assure you that if you come together to do something truly continental, the industry will be the better for it and so will you. And I assure you that APPO is prepared to help facilitate cooperation and collaboration to achieve this laudable objective.
32. I thank you all for your kind attention.