Seeds of Opportunity: The African Growth Series
May 2022 | Issue 1
In this week's issue, you will learn more about:
- Russian-Ukraine Conflict, Africa’s Energy Opportunity
- How the recent rains have boosted South Africa's National Water Storage
- M&A's in Africa’s Oil & Gas Industry
- Investing in Africa's Natural Gas Infrastructure
Russian-Ukraine Conflict, Africa’s Energy Opportunity
The Russian invasion of Ukraine has exposed Europe’s dependency on Russian oil and gas. To counter the effect of the imposed sanctions of the West on the economy, Russia decided to force all importers to pay in Rubles rather than Dollar or Euro and has since shut off gas supply to Poland and Bulgaria because they refused to pay in the Russian currency. This will drive Europe’s need to diversify Russian imports and will invigorate interest in African oil and gas production for export. African delegations from North and West Africa have reportedly met in Brussels with EU officials to discuss the region’s efforts to secure gas supply from the African continent. African oil and gas rich countries have since resurrected a number of stalled, cancelled or proposed projects such as the Algerian Trans-Saharan gas pipeline. While higher prices for fossil fuels should be a boost for renewables, adverse market conditions and rising interest rates will increase the costs, specifically in low-income, high-risk markets. Loan guarantees and other de-risking tools will become even more essential for the deployment of new energy projects, particularly renewables. The conflict will non-the-less drive the development of the natural gas infrastructure in Africa, which is crucial as the gas window was closing rapidly with little funding available for these types of energy projects since gas was labelled as “non-sustainable”. Africa needs to take advantage of this opportunity by developing key infrastructure and export routes, but most importantly, utilise the generated income to develop the local energy demand side to drive additional economic development and growth.
Recent Rains Have Boosted South Africa's National Water Storage
The recent rains in most parts of the country have boosted the country’s national water storage, according to a weekly report on the state of the reservoir capacity in South Africa. According to the Department of Water and Sanitation, the volume of water stored in reservoirs throughout the country has shot up, increasing from 95.0% to 96.3% - a week after the floods. Provinces such as Free State, Gauteng and Northern Cape have benefited significantly with reservoirs currently at full capacity. Reservoir levels in the Free State increased from 105.4% to 106.9%, while in Gauteng reservoir levels increased from 102.9% to 104.2% and in the Northern Cape, reservoir levels increased from 113.7% to a staggering 115.3%. Despite the destruction caused by the major floods in KwaZulu – Natal, the province also experienced an increase in reservoir levels, increasing from 90.4% to 92.5%. Although these heavy rains caused significant damage to infrastructure and lives, they brought a great improvement in the country’s reservoir levels, which increased from last year’s 73.5% during the same period.
The department has, however, advised that South Africans should remain cautious of their water usage and should continue to use water sparingly to ensure water security.
M&A's in Africa’s Oil & Gas Industry
Sub-Saharan Africa’s Oil & Gas industry has 20 countries with natural gas reserves totalling almost 190 billion cubic meters and crude oil reserves at 125.3 billion barrels in 2021. This industry has a mounting backlog of assets flying off the shelves since 2020 and 2022 is expected to see a rise in mergers & acquisitions (M&A). This is due to local and global operators looking to invest in the exploration and production of the available oil and gas. Below are five key drivers for M&A's in the market;
1. Companies and governments are repositioning to decarbonise for the energy transition. An example is Shell offloading its high-emission joint venture assets in Nigeria.
2. Global oil companies are looking to divest their non-core, mature assets. Such as ExxonMobil pulling from Chad, Equatorial Guinea and Nigeria.
3. Local operators are looking to consolidate and share resources to improve market resilience against events such as the conflict between Russia and Ukraine.
4. Brownfield assets in West and Central Africa attract the most M&A's an example being Seplat Energy announcing an acquisition of Mobil Producing Nigeria for USD 1.3 billion in the biggest deal of 2022 globally.
5. COP26 has reduced the investments and financing for fossil fuels however, funding projects for gas alongside oil can allow local and international investors to stay in the African market.
Investing in Africa's Natural Gas Infrastructure
Investing in Africa's oil and gas infrastructure is an important step forward to help the region leverage the economic benefits of the abundant resource and contribute to addressing the energy poverty issue. With Eastern Europe still facing ongoing challenges as a result of the Russian invasion of Ukraine, the region's full potential is hampered by the lack of adequate energy infrastructure. However interesting progress is being made, with countries like Mozambique, Kenya, and South Africa with ongoing and planned developments. In 2020, investments in new natural gas pipelines were estimated at USD 126 billion and will likely see growth in the upcoming years as governments take on new projects. In South Africa, projects with great potential include such as the proposed Richard's Bay liquefied natural gas (LNG) Terminal in KwaZulu-Natal (KZN) and developments in Coega in the Eastern Cape. Positive progress has been made on the development in KZN as the State-owned Transnet National Ports Authority (TNPA) recently confirmed that a request for proposals (RFP) will be issued in the coming months for the development. Natural gas is also seen in a positive light in neighbouring Mozambique, which has highlighted the importance of oil and natural gas in driving the industrialisation of the economy. As Africa exports gas mainly in the form of LNG (totaled 56.4 billion cubic meters in 2020), the successful and timely implementation of these infrastructure developments is imperative.
To find out more about opportunities in Africa, please contact Lynne Martin.
Lynne Martin
Rebecca Mabika