African oil industry faces complex challenges under energy transition

Onome Amuge

The post-mortem of the 28th meeting of the Conference of Parties (COP28) held in December 2023, has revealed a mixed picture of progress and challenges on climate change. In its closing communique, the conference called on countries to transition away from fossil fuels and phase out subsidies for inefficient fuels, while submitting economy-wide Nationally Determined Contributions (NDCs).

However, while the commitments made at COP28 are considered a step in the right direction,  Olaniwun Ajayi LP, one of Nigeria’s leading law firms specialised in handling all kinds of complex and sophisticated legal matters, warns that the African oil and gas industry may face unique challenges in the transition to a low-carbon economy, as African oil and gas producers could face significant economic and social impacts if the transition is not carefully managed.

The law firm, in a new report titled ‘COP 28 Agreement to Transition Away from Fossil Fuel: Impact on African Oil Producers’, observed that African oil-producing nations are heavily reliant on revenue from fossil fuel exports, with oil and gas revenue making up 35-82 percent of government revenues in many cases. The report suggests that the commitments made at COP28 could have a significant impact on the economies of these countries, which are often heavily dependent on fossil fuel revenues.

The report highlights the fact that African nations play a significant role in global oil production, with the region accounting for 8 percent of the world’s total crude oil reserves. The report also points out that the National Oil Companies (NOCs) of African countries such as Algeria, Angola, Libya, and Nigeria are projected to account for a significant portion of the continent’s oil and gas production in the coming years. In particular, the report notes that these NOCs are expected to account for 85 percent of liquid production and 88 percent of natural gas production by African NOCs from 2023 to 2024.

Given the strong economic reliance on fossil fuel exports, the report noted that a decline in demand or prices for oil and gas could have a significant impact on the revenues of African producing nations, especially for those that have not diversified their economies to include non-oil sources of revenue. This means that any disruptions to the oil and gas market could lead to a significant decline in government revenue and economic activity, with potentially severe consequences for the countries concerned.

In addition to the potential impact on government revenue and GDP, the report warns of the risk of stranded assets, which are investments that become economically unviable due to changes in the market or regulatory environment. In the context of COP28, the law firm explained that stranded assets could arise from a decline in demand for oil and gas, as well as new climate policies that restrict the use of fossil fuels. It also warns that this could lead to a significant loss of value for oil-producing countries, as well as potential social and political instability.

“As it affects African oil producers, a rapid shift to cleaner sources will result in stranded assets as global extractive companies and investors realign their portfolios in response to evolving market dynamics and new low-carbon regulations affecting investment flow,” it noted.

Olaniwun Ajayi LP highlighted the dilemma that countries like Nigeria face, with reduced investment and production, while still having significant upstream assets. The report suggests that, for a country like Nigeria, the abandonment of these assets is not a viable option, given the significant economic impact it would have.

According to the report, for a country like Nigeria which is facing reduced investment inflows and modest production despite having significant upstream assets valued at around $90 billion, abandoning these assets does not appear to be an option.

The report also raised the issue of energy security, noting that sub-Saharan Africa has the lowest levels of access to electricity of any region in the world, with over 50 percent of the population lacking access to electricity.

It stated, “In fact, as indicated in a recent World Bank Press Release, the proportion of the Nigerian population with access to electricity stands at around 55.4%, which translates to approximately 44.6% of Nigerians or 90 million individuals, who lack access to electricity.

“This brings to the fore, the impact of migrating from fossil fuel in the absence of adequate resources and infrastructure to transit to cleaner energy sources. Without careful planning, rapid decreases in fossil fuel investments might create energy supply shortages, impacting both industries and households,” it noted. 

Olaniwun Ajayi LP argued that investments in oil, gas, and coal in Africa can help to alleviate energy poverty and support economic development, while also enhancing the continent’s resilience in the face of climate change. However, it emphasises that a balanced approach is needed, with investments in both fossil fuels and renewable energy sources, in order to ensure Africa’s energy security and address climate change in a sustainable manner.

On the other hand, the law firm also highlighted the potential risks of an overreliance on fossil fuels, warning that while phasing out fossil fuels would reduce Africa’s emissions, it could also lead to a reduction in the limited energy supply available to the continent, as well as economic instability. It described this scenario as a transition from “dawn to darkness,” referring to the fact that Africa’s energy supply would be inadequate to meet the needs of its growing population and economy.

According to the report, increased political pressure on climate change could lead to reduced funding or higher costs for oil and gas projects in Africa. The report argues that this would create a vicious cycle of reduced investment, economic slowdown, and energy poverty. 

It emphasised that diminished foreign investment in fossil fuel projects in Africa could have a detrimental effect on the development of energy infrastructure, including power generation capacity and access. This is because much of the infrastructure development is financed by foreign investment, and a reduction in investment could significantly slow down the pace of infrastructure development.

Furthermore, the report highlighted the threat of job losses in the energy sector as a consequence of COP28’s resolutions. It pointed out that energy-related industries such as mining, extraction, refining, and power generation, which rely on fossil fuels, could experience significant job losses. This is particularly concerning for African countries, which already have high unemployment rates. The report cautions that job losses in the energy sector could have a significant negative impact on the economies of oil-producing countries in Africa, as well as on the livelihoods of the people who work in these industries.

The report advocates for a two-pronged approach to the issue of a just transition. On the one hand, African nations should be allowed to maximise the use of their fossil fuel resources in a sustainable manner, to industrialise and increase their revenues. On the other hand, African nations should also be supported in investing in green energy sources, such as solar, wind, and hydroelectric power, in order to reduce their reliance on fossil fuels and mitigate the negative effects of climate change.

Olaniwun Ajayi LP emphasised the importance of tailoring each African nation’s energy transition plan to its unique situation, considering factors such as the country’s starting point, the availability of resources, and the economic and social conditions. 

African nations were also advised to prioritise the goal of providing access to clean, affordable, and reliable energy, in order to drive inclusive economic growth and narrow socioeconomic disparities. The report points out that the success of the energy transition will depend on the ability of African nations to leverage their unique advantages, such as abundant renewable energy resources, and to develop policies that are tailored to their specific circumstances.

“Thus, a just and equitable transition from fossil fuels to renewable energy is imperative, not solely to address climate change but also to extend accessible, reliable, sustainable, and modern energy to about 580 million Africans who remain devoid of electricity access,” it added.

To address the economic challenges of the energy transition, the report proposes a number of recommendations for African oil producing countries, including economic diversification, the repurposing of stranded assets, upskilling and capacity building, global cooperation and partnerships, and policy and regulatory changes.