A chance to pursue a sustainable future through an all-encompassing energy transition presents itself to the oil and gas producing countries in Africa, as the drive for sustainability continues to gain traction.
As the world moves towards reducing dependence on fossil fuels, Africa’s oil and gas industry is confronted with mounting pressures, signifying a new era. Our analysis indicates that these countries face significant exposure to the global energy transition as their economies heavily rely on oil and gas revenues, and their reserves are costlier to produce and more carbon-intensive than those in other regions.
Moreover, the continent’s energy demand is expected to surpass supply due to rapid population growth and industrialization over the next two decades, which will result in a substantial rise in energy demand, including for fossil fuels. McKinsey’s modeling reveals that by 2040, African energy demand could be approximately 30 percent higher than its current level, in contrast to the global energy demand, which is projected to increase by only 10 percent.
Although these dynamics present challenges that need to be addressed, they also provide an opportunity for Africa’s oil and gas producing nations to reassess their energy strategy. By creating a conducive environment, enhancing access to available capital, and attracting the right skills and capabilities, they can meet the energy needs of their growing populations and position themselves favorably in the new energy landscape.
The ongoing conflict in Ukraine has also added a layer of consideration, causing European gas prices to increase by more than three times in the past year. The European Commission has proposed a plan to make Europe self-sufficient in renewable energy and diversify its natural gas supply sources before 2030, leading to a potential surge in demand for oil and gas from African nations with the necessary infrastructure and reserves.
This article explores how the global energy transition and potential restructuring of natural gas supply sources could influence the future of Africa’s oil and gas industry. Additionally, it outlines potential options for affected countries to stimulate the required investments and build long-term resilience during this critical period.
Challenges in a Low-Carbon Future
The global momentum towards sustainability and away from fossil fuels is rapidly gaining speed. The United Nations’ Framework Convention on Climate Change Conference of the Parties (COP26) explicitly referenced a shift away from coal and phasing out fossil fuel subsidies in its 2021 decision text, while governments, investors, and consumers across the globe are indicating plans for a swifter transition away from fossil fuels. According to McKinsey’s “current trajectory” energy transition scenario, global oil demand could peak by 2027, and global gas demand could peak by 2040. Furthermore, if leading countries can achieve their net-zero commitments through focused policies, the transition could be even more rapid, with global oil demand peaking as early as 2024 and global gas demand peaking around 2030.
As a result of this shift, the oil and gas industry is facing new pressures from stakeholders and regulators. In its net-zero by 2050 roadmap, the International Energy Agency (IEA) emphasized the need for a significant reduction in hydrocarbon usage by 2040, including the phasing out of all unabated coal and oil power plants, to reach net-zero emissions by 2050.
At COP26, new commitments were made, providing further impetus to the energy transition. More than 150 countries, including several African countries such as Botswana, the Democratic Republic of the Congo, Egypt, Ghana, Kenya, Morocco, Nigeria, and South Africa, have pledged to limit methane emissions, end deforestation, phase out coal, and halt international financing for fossil fuels. Nigeria has also committed to achieving net-zero emissions by 2060, joining other major energy exporters like Saudi Arabia.
Outside Africa, several countries are implementing carbon pricing and taxes, which could impact African nations reliant on oil and gas exports. For instance, the European Union’s Carbon Border Adjustment Mechanism will mandate EU importers to obtain carbon certificates for imported goods based on the corresponding carbon price under the EU’s pricing regulations. While South Africa is currently the only African country with a carbon-pricing system, others may follow suit.
In this context, oil and gas majors face mounting pressure to generate higher returns more sustainably. As a result, many are reducing their exposure to upstream operations in Africa and rebalancing their portfolios towards resources with lower emissions intensity. Investors are also increasingly scrutinizing oil and gas projects, factoring in environmental, social, and governance considerations when making investment decisions. This shift is contributing to the widening valuation gap between oil and gas companies and renewable-energy firms.
Over 50% of African countries that produce oil and gas depend on oil and gas exports for more than 50% of their overall export earnings.
This trend poses several considerations for African nations that rely heavily on global capital pools to finance their oil and gas projects and maintain their operations. African oil and gas projects are, on average, 15 to 20 percent more expensive to develop and operate, and 70 to 80 percent more carbon-intensive than global oil and gas projects. As global capital pools for hydrocarbon projects decrease, our analysis indicates that the cost of oil and gas production in Africa is projected to increase, potentially rendering African oil and gas projects less competitive in global markets.
According to McKinsey’s achieved commitments energy transition scenario, roughly 60% of Africa’s current oil production could become uncompetitive by 2040. As oil majors shift towards lower-emission basins, African oil-producing countries may find themselves deprioritized for further development and facing the possibility of stranded assets, with significant untapped oil and gas reserves. This could exert additional pressure on government spending and affect development priorities, particularly since over 50% of African oil and gas producing nations depend on oil and gas exports for more than 50% of their total export earnings. For example, in Nigeria, petroleum exports constitute over 85% of the government’s total export revenues.
Leveraging the Energy Transition: Opportunities for African Oil and Gas Producing Countries
Notwithstanding these challenges, the transition to a low-carbon future could present significant opportunities for African oil and gas producing countries. These countries can leverage several options to strengthen the sustainability and resilience of their resource bases and build robust positions in the new energy businesses of the future. The actions required and which levers to pull will largely depend on each country’s reliance on oil and gas revenues and their position on the global hydrocarbon cost curve.
African countries can be classified into four archetypes based on the resilience of their crude oil reserves and the extent of their economic dependence on oil and gas revenues. Countries with more than 50% of their projected oil production at risk in the event of a faster energy transition (achieved commitments scenario) are considered vulnerable, while those with less than 50% of their production at risk are likely to be more resilient to global shifts. This analysis primarily focuses on the competitiveness of African crude supply, given the global nature of oil demand and supply dynamics. Generally, countries with significant gas production could expect their gas reserves to be more resilient than their oil reserves under a range of energy transition scenarios. However, it is worth noting that in Africa, more than one-third of gas production is associated gas, produced as a byproduct of crude oil production. Therefore, the resilience of gas production in Africa is linked, at least partially, to the resilience of the continent’s crude oil production.
Nigeria and Angola are examples of countries heavily reliant on oil and gas production, with lower oil-resource resilience. To improve the cost competitiveness of their resources, these countries could optimize fiscal terms, address sources of cost premium, and improve the ease of doing business. Initiatives to decarbonize existing operations and encourage investment in lower-carbon energy infrastructure such as gas pipelines could strengthen the resilience of their resources. They could also diversify their energy revenues by scaling up renewable-energy projects.
Senegal and Côte d’Ivoire are less reliant on oil and gas production but have oil resources that are less resilient. These countries could spur investment in renewable-energy or carbon-offset businesses while decarbonizing existing production. Egypt and Ghana have higher resource resilience and lower oil and gas revenue reliance. They could focus on protecting their already resilient reserves by decarbonizing existing operations and investing in renewable-energy businesses. Algeria and Libya have cost-competitive reserves and rely heavily on oil and gas revenues. They could prioritize reducing emissions from existing operations and diversifying energy revenues through renewable-energy investment.
Regardless of the archetype, prioritizing the sustainability of oil and gas production will be crucial. African oil and gas producing countries should focus on decarbonizing existing resource bases, increasing energy supply through lower-carbon infrastructure projects, and investing in renewable energies to position themselves optimally for the future energy landscape.
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