The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

Energy companies will have to tread fine lines in African engagement

Covid-19 has created wide-ranging pressures for African governments reliant on oil and gas, and they will look to the industry to kick-start national recoveries. The sense of urgency is compounded by the recognition that energy transition dynamics are narrowing options for future developments. However, companies need to balance short-term delivery with support for countries on a longer-term transition pathway.

By Laura Morrison, Associate Director

Time is of the essence

The Covid-19 pandemic is far from nearing its endgame in Africa. As the Delta wave spreads, other health indicators continue to decline. Around 40 million Africans have fallen back into extreme poverty. Governments grappled with an average economic contraction of 2% through 2020, accompanied by a steep rise in unplanned borrowing and social spending. Young people, most affected by job losses, educational disruption and social restrictions, are ready to vent frustration – as seen in recent months in countries from South Africa to Senegal.

Time is of the essence

The longer-term economic consequences are set to be especially severe in natural resource-dependent economies, creating pressure for investors to get projects back on track and expedite new developments. Even pre-Delta, the IMF forecasted zero growth in per-capita incomes in African oil exporters until at least 2025 (more diversified economies fare better, a point newer producers must heed). Focus is further sharpened by the global energy transition creating a sense of finite investability for countries with oil and gas resources.

Authorities are acting to make up for lost time. After years of delay, Nigeria’s Petroleum Industry Bill (PIB) is on the brink of Presidential sign-off. Although long-awaited, the PIB brings a raft of new measures to navigate and provides potential new grounds for friction with host communities.

The spate of licensing rounds taking place in 2021 underlines how countries want to push on with what they can, even in less than ideal circumstances. Many rounds were postponed in 2020, but countries cannot wait indefinitely. South Sudan’s inaugural round is now open, as is Cote d’Ivoire’s ‘mini-round’. Results are expected from 2021 rounds held in Angola, Senegal, Gabon and Liberia. The outcomes will indicate how well countries have calibrated their attractiveness as the industry becomes more selective.

Both new entrants and incumbents will face impatience around timelines. In situations where previous acreage holders backed out of assets or changed development plans as a result of the pandemic, newer entrants may also encounter initial mistrust. Companies may have to grapple with the application of local content regulations that in many countries were not fully tested prior to Covid’s arrival and will now be leaned on as ways to leverage quick tangible benefits. When suspecting ‘resource nationalism’, companies who understand the economic and socio-political pressures that governments are under will have better chances of finding effective responses.

Standing up to scrutiny

The argument that Africa above almost all other parts of the world merits extra time and leeway to develop its natural resources generally holds, although practical financing challenges will increasingly arise and there is likely to be a growing political salience to climate and environmental issues on the continent. Companies pursuing oil and gas projects should be prepared to work closely with governments to ensure both sides can continue to justify such projects to domestic and international constituencies.

Companies and governments have made the argument that reduced funding for oil and gas projects will hinder African development and keep populations in energy poverty. Past decades provide too little evidence that extractives projects translate into domestic energy availability (Nigeria’s access rate is 58.5%, Angola’s 45.6%), or that governments with access to resource revenues prioritise development. As more scrutiny is placed on oil and gas projects, well-crafted initiatives that connect communities to electricity, help countries to deliver emissions reductions consistent with Paris Agreement commitments, and prepare authorities and workforces to capitalise on cleaner energy investments, will help companies and their host countries respond to growing scrutiny of fossil fuel investments.

Local differentiation

Companies are also likely to have to invest in greater localisation and better attune corporate approaches to local contexts. Partly this is practical. Travel constraints will remain and expatriate staffing has become more logistically complicated. Connectivity and supply chain risks have been sharply highlighted by the pandemic, as have severe management and technical inefficiencies caused by over-reliance on flying in decision-makers and technical experts. Meanwhile, local content requirements and expectations are highly unlikely to be reduced.

Local offices should also be more empowered to mediate between local realities and global centres. Increasingly there is a values and narratives mismatch between African capitals and ‘developed country’ partners. The pandemic has exacerbated this – vaccine inequality, poorly-timed aid cuts, extreme divergence on economic orthodoxy, and the lack of value placed on African public health experience are among factors that have created a sense of starkly unequal partnership. Democracy and security support are also more problematic platforms for Western relationship building. Moreover, the nexus of arguments around energy, development, climate and environment also plays differently in African contexts than elsewhere. Increasingly, corporate approaches crafted centrally will land clumsily at the country-level without genuine two-way understanding.

Challenges for renewables

The flipside of the challenges faced by oil and gas companies is that renewables investors will also increasingly need to grapple with political risk. Given the scale and persistence of supply shortfalls, agnosticism about energy sources will persist in most countries even as they commit to increasing renewables percentages in their energy mixes. There is a risk that such agnosticism fails to create firm policy direction for new energies. The management assumption that renewable energies are automatically viewed positively will also not always hold. Resistance may be driven by incumbent utilities and fossil fuel vested interests threatened by new decentralised models. Issues of the sort more familiar to extractives projects will also arise more frequently – community opposition, short-term revenue-raising, fiscal changes, local content demands, and basic misperceptions among legislators about how the sector functions. Sectoral co-ordination to deepen understanding and advocate for consistent and enabling renewables policy should become a focus, thereby shifting renewables from a project-by-project footing to genuine strategic engagement.