Energy transition in Africa

By Liz Williamson and Jonny Ross

The global move away from hydrocarbons towards renewable energy sources is posing an existential threat to the oil and gas industry. Closer to home, there are numerous countries in Sub-Saharan Africa highly reliant on the revenue generated from the production of oil and gas and the mining of coal. This relationship is further complicated by the fact that Africa is also the most energy-deprived continent on the planet, underlining the significant economic and social implications of this shift.

Therefore, the urgent question is: how does Africa adapt to this global call for a transition away from fossil fuels? Is it fair to ask the people of Africa to focus on more sustainability when much of the population grapples with severe energy poverty? Perhaps the better question is, how can African businesses support and invest in projects that deliver a primary source of revenue and more sustainable power while lifting a greater proportion of the population out of energy poverty?

Gas-to-power projects could have an immediate effect on reducing carbon emissions if they enable the shift from diesel generated power to domestically produced gas. RMB’s Oil and Gas advisory team has been engaging with Nigerian companies on various projects, while the Oil and Gas resources finance team is committed to funding transformational gas developments throughout Africa. RMB’s role in the Coral LNG project in Mozambique – the largest uncovered commitment of any African bank – indicates our ability to provide innovative funding solutions for these types of projects. It is apparent that there is now enormous potential for energy transition projects for oil and gas companies in Africa as the sector expands and evolves.

Moreover, the energy transition can be regarded as one of the most significant shifts in strategy for oil and gas companies and in the transformation of the international energy sector. Companies are increasingly looking to diversify their portfolios, invest sustainably and reduce their greenhouse gas (GHG) emissions. Natural gas, largely in the form of LNG, will be the key bridge for this transition. Many of the oil majors and large independents have already started to align their strategies in preparation for lower carbon emissions. They are increasing their portfolios’ resilience through investment in low-carbon technology, identifying and assessing the risks arising out of regulatory changes, and reducing their carbon intensity.

Some integrated oil companies have set long-term targets for GHG emission reductions, improved the monitoring and disclosure of emissions data, and started to align executive pay with action on reducing their carbon footprint. For instance, Shell has a target of reducing the carbon footprint of its energy products by 50% by 2050^[1]; Eni’s of reducing GHG emissions intensity by 43% by 2025^[2]; and Total has pledged to have green natural gas make up 60% of its hydrocarbon portfolio by 2035^[3].

The Paris Agreement (COP 21) increased regulatory pressures and the rise in sustainable investment has resulted in greater scrutiny of the energy sector. However, whilst climate action can be considered a crucial consideration within sustainability, it is not the only actionable target within the sustainable investment universe, which embodies all 17 of the Sustainable Development Goals (SDGs) set out by the UN (2015)^[4]. It is clear that sustainable or socially responsible investing (SRI) - encompassing environmental, social and governance principles (ESG) and impact investment vehicles - have significantly increased in popularity with both discretionary and institutional investors, attracting over US$30 trillion in investments in 2018^[5].

Proactive oil and gas companies are considered “market leaders” when they actively integrate ESG principles into all aspects of company strategy, thereby reducing the “material risk” that these challenges pose to their share price and capital raising^[6]. The transformation is reflected in changing strategies as oil and gas companies adopt more renewable energy options.

Whilst RMB is fully aligned with investor sentiment regarding sustainable investing, we have a continued commitment to oil and gas companies operating across Africa. Supporting one of Africa’s primary sources of revenue is critical to the continent’s development. Providing affordable, reliable and sustainable energy can empower local communities and help to alleviate energy poverty. Access to energy is a prerequisite for meeting a basic standard of living, fundamental to improving health, and reducing inequality and broadening access to socio-economic development opportunities^[7]. It is also significant in helping to meet all the SDGs, targets which RMB’s CSI principles are strongly aligned with.

RMB has already committed over R12bn to infrastructure projects in underdeveloped areas. Recent projects include:

• Acting as the sole mandated lead arranger on the 147MW Roggeveld Wind Project in South Africa. RMB structured and provided a combination of innovative and traditional funded and unfunded long-term debt, optimising the project’s financing and increasing its commercial competitiveness. The project is assisting South Africa to meet its green energy commitments and achieved the lowest renewable energy tariffs in South Africa.
• RMB, in partnership with KfW Development Bank (“KfW”), have created the Facility for Investment in Renewable Small Transactions (“FIRST”). FIRST is a R1.3 bn fund structured to enable the funding of small-medium sized renewable energy projects across Africa. These projects aim to increase access to energy access and contribute to the socio-economic development of the region.

To date, these projects have predominantly been in partnership with power and infrastructure companies. However, RMB is in discussions with several oil and gas companies who are seeking opportunities in Africa alongside more traditional upstream businesses. This will become an increasingly important theme for incumbent operators as there is much untapped potential in Africa for ESG investing.

Williamson and Ross are from RMB’s UK office. Williamson is Head: Oil and Gas for Corporate Finance, and Ross is Head: Oil and Gas Finance.

[1] Shell, 2019. “Shell’s Net Carbon Footprint Ambition”. Available at: https://www.shell.com/energy-and-innovation/the-energy-future/what-is-shells-net-carbon-footprint-ambition/faq.html

[2] Eni, 2019. “Energy and climate: the Eni strategy”. Available at: https://www.eni.com/en_IT/sustainability/decarbonization/climate-strategy.page

[3]  Total, 2018. “Integrating Climate into Our Strategy”. Available at: https://www.total.com/sites/default/files/atoms/files/total_climat_2018_en.pdf

[4] UNDP, 2017. “Mapping the Oil and Gas industry to the Sustainable Development Goals: An Atlas”. Available at: https://www.undp.org/content/dam/undp/library/Sustainable%20Development/Extractives/For%20Comment_Mapping%20the%20Oil%20and%20Gas%20industry%20to%20the%20Sustainable%20Development%20Goals%20-%20an%20Atlas_Feb2017.pdf

[5] GSI, 2018. “Global Sustainable Investment Review”. Available at: http://www.gsi-alliance.org/wp-content/uploads/2019/06/GSIR_Review2018F.pdf

[6] Shell, 2018. “Risk factors”. Available at: https://reports.shell.com/annual-report/2018/strategic-report/strategy-business-and-market-overview/risk-factors.php

[7] UNDP, 2009. “The Energy Access Situation in Developing Countries”. Available at: https://www.undp.org/content/dam/undp/library/Environment%20and%20Energy/Sustainable%20Energy/energy-access-situation-in-developing-countries.pdf