Value addition across AfricaNovember 15, 2021
Osam Iyahen, director of natural resources investments for the Africa Finance Corporation (AFC), talks to The Energy Year about how African nations can best approach investment and value addition and shifts taking place in oil and gas financing. AFC is a multilateral financial institution dedicated to solving the continent’s infrastructure investment deficit.
What approach to investment and value addition should African nations adopt to achieve further economic development?
The energy transition has forced a lot of African countries, especially the hydrocarbons producers such as Nigeria, to develop more sustainable inward-looking revenue-generating models to monetise their resources. The elementary economic model adopted by many African countries has been the one of extracting and exporting raw materials to then reimport refined end products. However, this method has proven to be no longer tenable, especially with the global market and supply chain dislocations caused by Covid-19.
When designing projects, African countries have to take into consideration the dependencies and the value addition opportunities found across the entire value chain. For example, in oil and gas projects, it is no longer viable to only look at the upstream sector. African nations should now invest in and develop value addition opportunities across the domestic market – including pipelines, refineries and power assets – to ensure that value is being retained in the continent. That is the way Africa will benefit from its resources going forward.
Along these lines, AFC has adopted an ecosystem investment approach which focuses on maximising the developmental impact of our investments by diversifying the nature of our projects. We are taking a wholesale approach that seeks opportunities to invest at every stage of the value chain. This increases the investment and economic impact of the project.
For instance, we will consider the feasibility of using gas domestically for power stations, manufacturing and for the downstream sector. By adopting this model of investment, we aim to spur long-term sustainable economic growth and development. With it, African countries will start developing resources more competitively.
Despite the trends of energy transition and diversification, how important will fossil fuels continue to be in Africa in the coming years?
Africa is a paradox of challenges and opportunities, being home to three of the 10 fastest-growing economies globally. In spite of its wealth of natural resources, it has the highest level of poverty and the lowest development index in the world. There is an urgent need to change this reality. At AFC, we believe there is a case for using natural resources, including oil and gas, as a catalyst for infrastructure and economic growth in Africa. We are blessed with an abundance of hydrocarbons that should be a vehicle for value creation and addition.
At the same time, we recognise that there is an urgency in terms of the energy transition, with Africa being among the regions most vulnerable to the impacts of climate change. Interestingly enough, Africa generates the lowest carbon emissions in the world, both in terms of overall volumes and on a per capita basis.
Despite this need, the energy transition has adversely impacted us in terms of the number of upstream projects that we finance. There is a dwindling number of available financing partners in the hydrocarbons space but we are adjusting to this reality by advocating for a pragmatic approach which balances the urgent need to address energy poverty on the continent with the need for transitioning away from fossil fuels over time. This is a challenging yet urgent matter to address.
There are about 600 million Africans currently lacking electricity and when you combine that with the economic fragility exposed by the Covid-19 pandemic, it seems obvious that oil and gas must remain a significant source of revenue and employment in the short to medium term. What works in Europe doesn’t necessarily work in Africa; it’s not an either/or decision for this continent.
As for AFC, we are focused on bridging the gap through a small configurable economic model that could, for example, use oil and gas as feedstock to create other value-added products like petrochemicals. We could provide revenues to build infrastructure and diversify our economies.
To what extent are local oil companies rather than IOCs beginning to drive oil and gas industries in Africa?
The development of the sector will depend on where oil prices go in the short to medium term. For now, the oil price is hovering around USD 60-70 per barrel and some analysts predict it will reach USD 100 in the next few years. If this is the case, many projects will remain bankable and investor enthusiasm will be reflected in the number of new transactions.
Yet, the truth is that today there is also a lot of divestment. This is triggering an interesting phenomenon where mid-tier indigenous operators or producers are seeing momentum, considering oil and gas profitable. This is patent in Nigeria, Gabon, Equatorial Guinea, Mozambique and Angola. Divestments by major IOCs across the continent are giving way to the birth of a crop of novel independent and local players which will continue to hold the fort of fossil fuels in the next 15-20 years.
Globally, oil and gas seem to be becoming less valuable and less acceptable. Moreover, the Paris Agreement establishes 2050 as a deadline to reach net-zero emissions. It is now up to African nations to produce their assets in a timely fashion as this will have a direct impact on their fiscal stability in the short to medium term. Governments via their NOCs are seeing the urgency of producing their rich assets as soon as possible. In tandem, indigenous players are now majorly assisting in the development of the sector.
In what ways are financial schemes within oil and gas projects shifting?
Traders are taking a more active role in providing financing for oil and gas projects, and often taking the lead. In terms of financial structures, we will probably witness an increase of non-equity-type instruments. A lot of financiers are not eager to finance opportunities using equity, preferring hybrid instruments for investments. Financing dynamics are becoming more flexible given the situation and this is clear with alternative models such as multi-tranche and multi-source financing. Gone are the days when we had a template. The crisis has affected how one finances projects and the appetite to do so as well.
What important investments has AFC made lately in the area of hydrocarbons?
In the last 12-18 months, there hasn’t been a lot of activity, due to the pandemic. We have been involved in transactions supporting the development of some of Sonangol’s assets, participating alongside international banks. This helped us to break into the Angolan market.
Also, in July 2019 AFC provided a USD 100-million package to Aker Energy’s deepwater offshore oil project in Ghana. The funds will be used by Aker ASA to finance the development of the Deepwater Tano Cape Three Points block, which contains multiple oilfields. The asset is owned by JV partners Aker Energy (with 50%), Lukoil (with 38%) and Fueltrade (with 2%), and the Ghana National Petroleum Corporation has a 10% carry.
The block is projected to start producing up to 100,000 bopd in a three-year period. This move exemplifies the position we are taking in the oil and gas sector, aiming at quality and high-grade transactions. Thus, we are focusing on strong players with strong balance sheets and proven experience.
What scope of projects and investment is AFC taking on in Nigeria?
AFC is looking to invest in projects from the upstream to the downstream. That is why we’ve invested in NLNG’s Train 7, in the Dangote Refinery and in Waltersmith’s modular refinery. We are also looking into pipeline-based projects to make sure that crude oil produced onshore by the indigenous players who acquired Shell’s assets is effectively evacuated. Nigeria’s lack of evacuation infrastructure is a major issue that generates huge losses for indigenous players. We are also looking at a number of undertakings to build pipelines to FPSOs offshore. This is a true reflection of the full gamut of how we invest – upstream, midstream and all the way to downstream.
At the same time, we are shifting our investment scope in Nigeria. The first step for us is reducing our exposure on the oil side and betting more on gas projects. We have been looking into doing more gas-to-power and gas-to-industry projects as these have tremendous developmental impact, which fits nicely with our mandate.