African producers poised as Europe seeks alternate supplies Alberto-GALHARDO-SIMÕES

With European governments turning to Africa for help, African nations must prepare themselves to take advantage of this abrupt change.

Alberto GALHARDO SIMÕES Partner and Head of the Lusophone Africa Practice CMS PORTUGAL

African energy producers poised as Europe seeks new supplies

March 17, 2023

Alberto Galhardo Simões, partner and head of the Lusophone Africa practice at CMS Portugal, talks to The Energy Year about the position of African producers as Europe seeks alternate energy supplies and the readiness of Mozambique and Angola to establish a more predictable investment environment. CMS is a global organisation of law firms that offers full-service legal and tax advice.

The move to reduce the reliance on Russian gas has unleashed uncertainty and an energy crisis across Europe. How well positioned are African producers to become reliable energy exporters to Europe when the continent is seeking to secure alternative gas supplies?
Unfortunately, I do not think that changes in LNG market dynamics will have an immediate effect on Europe’s energy crisis. There will have to be a lot of investments made and we all know that investment in LNG infrastructure is costly.
The war in Ukraine has completely changed the balance of power globally and, if anything, it has unveiled Europe’s extremely high degree of dependence on Russian gas. With European governments turning to Africa for help, African nations must prepare themselves to take advantage of this abrupt change sweeping through the Old Continent.
Currently, countries with significant natural gas reserves are stepping up their investments into gas exploration and production activities and towards LNG infrastructure development. The first shipment of LNG from Mozambique’s Coral South project in November 2022 was a significant step in the country’s strategy to contribute to Europe’s energy security. Mozambique has the second-largest natural gas reserves in sub-Saharan Africa and the improved security situation in the country’s Cabo Delgado province indicates that energy companies are ready to resume their activities. TotalEnergies is also considering the possibility of restarting the USD 20-billion Mozambique LNG project in 2023, after having declared force majeure in 2021.
Similarly, we are seeing investments being made in other countries, such as Angola. Qatar is also making a lot of investments in LNG and they are requiring long-term contracts, which makes sense for LNG supplies, so that they can cater and mitigate the risk of the war ending sooner.
This is our current reality. Returns on LNG investments will take time to materialise and we will probably not see a difference in existing LNG market dynamics up until 2025. The question is whether the war in Ukraine will still be on by then. What is for sure is that LNG is here to stay and Europe cannot be dependent on Russian gas anymore. In the long run, Russia is poised to suffer a lot from Europe’s aggressive strategy to diversify its energy import partners in the years to come.

Given Africa’s security challenges, how prepared are countries such as Mozambique and Angola to establish a predictable investment climate and host multibillion-dollar projects?
Political risk and instability have always faced the business community in Africa. The continent is a political risk in itself, especially for investors that do not know the area very well. Having said that, many countries, including Angola and Mozambique, have managed to offer an attractive environment for foreign investors. Despite the escalation of terrorism and insurgency in Cabo Delgado, both Angola and Mozambique have been at peace since the end of their civil wars 20 and 30 years ago, respectively.
In the case of Angola, the country has orchestrated a peaceful change of government in 2017 and President João Lourenço has since been improving governance and reducing corruption. In 2022, the ruling MPLA party won the legislative elections, giving a second term to President Lourenço and sending a strong message of stability to international investors.
Investors looking at these countries should not be very concerned. There are issues that you always have to take into account. For instance, if you are executing a big infrastructure project in Africa, you have to face issues around local content and development costs are much more expensive than in Europe or in any other continent. They can go up to 30% of the cost of developing a project. But then you have the multilateral institutions that can finance those development costs.
Investors have seen a big foreign exchange risk in Angola. Now, the price of the oil barrel is very high and you have a lot of dollars in the economy, so it is easier to convert Kwanza into US dollars or euros. But it has not been like that in the past five years or so. It’s been very difficult for investors to repatriate. And when that is the case, the first thing they ask is “Why am I going to invest in the country when I cannot repatriate the profits to my country?” Investors simply need to realise that going into Africa is not the same as investing in Europe. It requires a different way of doing business.


What are your predictions for sustainable energy investments across the African continent?
Momentarily, there will be a lot of investment in LNG because Europe needs alternatives to its Russian gas imports. At the same time, we are also seeing a big push from multilateral institutions, including the World Bank, for accelerating the renewable energy transition across Africa.
South Africa has expressed a strong interest in developing solar projects across Africa and Angola has already pledged to increase its renewable energy capacity to 70% of the country’s energy matrix by 2025. Sonangol is very keen to diversify its activity beyond oil and gas and the national champion already has a renewables department, similar to international giants such as BP, TotalEnergies and Chevron. They all are preparing themselves to navigate the energy transition and ensure a low-carbon future.
Additionally, Europe is already turning to North African nations like Morocco and Egypt, where we are seeing remarkable solar power developments. In my opinion, the future will be dominated by renewables. At CMS, we have been carefully following the steps taken by governments and companies towards energy transition and we have already participated in projects in the area of solar energy.

CMS has advised on the Angolan government’s MoU with solar project developer Sun Africa for a USD 1.9-billion mini-grid project to supply electricity and drinking water to the country’s southern provinces. What does this landmark deal mean for Angola’s energy transition ambitions?
It is one of those projects that ticks all the boxes and I am most proud to have been involved in as a project lawyer. It is in the renewables sector; it brings electricity to the country’s remote areas that are not connected to the grid and it also allows for water extraction and purification. Only about 45% of the population has access to electricity in Angola and if you go to rural areas, only 6% have access to energy from the grid.
The project includes the construction of two photovoltaic plants: one 400-MW plant in Laúca and one 104-MW plant in Catete and it provides for the construction of 65 solar mini-grids for electricity production, storage, connection infrastructures and the expansion of water distribution grids. This will replace, for example, generators that run with diesel and it is actually something that the country badly needs as it aims to step up its efforts towards decarbonisation. Changing the energy mix will be a long journey for a country like Angola, but this project certainly represents a big step in the right direction.

The government of Angola has launched its 2019-2025 bidding strategy and allowed direct negotiations with the operators for blocks not already awarded. Given the favourable oil price scenario, how can Angola balance its oil and gas and renewables investments in the years to come?
I think Angola will still be, for several years, an hydrocarbons-driven economy. There is no way around it because oil and gas still account for 90% of the country’s export revenue. The Angolan government – especially when the price of oil was down – made a lot of efforts towards diversification away from fossil fuels and, to a certain extent, they have managed to develop new industries like agrobusiness. However, they cannot simply forget about oil and gas because it is what keeps the economy going. Angola has so much to offer to the world other than oil and gas, but sometimes it is easy to rely only on the most obvious source of income. I think the current government has awakened to this reality and they are taking the right steps to further diversify the economy, but things do not happen overnight.

M&A deals in Angola made up 70% of total hydrocarbons-related M&A activity on the continent in 2022. How do you view the environment for M&As and how important will these deals be to ensuring the accelerated development of large-scale energy projects across Africa?
I think 2023 will be a busy year for mergers, acquisitions and new privatisation activity in Africa. It is clear that the private sector has to be more involved in the economy. There is a lot of pressure on governments across the continent to privatise their energy assets that could very easily be run by private enterprises. I expect to see a lot of action in Angola and in other countries too.
Together with our colleagues at CMS UK, in 2022 we advised BP on the 50-50 independent joint venture combining the Angolan businesses of BP and Eni into Azule Energy, which has become the country’s largest independent equity producer of oil and gas. It was a USD 14-billion merger that is still ongoing, with tasks such as seeking approval from competition authorities and the full transfer of employees to be finalised.
Angola also launched its ambitious privatisation programme (PROPRIV) in 2019 and although it has not moved forward as quickly as multilateral institutions and international investors would have wanted it to, it has certainly created a spark of excitement. We are also very optimistic about Sonangol’s privatisation plans moving forward.

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