Opinion – Upstream activity in Africa to rise in 2023: What is driving the surge?

NJ Ayuk

When TotalEnergies and Shell separately announced “significant” discoveries of what appeared to be commercial oil and gas off the coast of Namibia — potentially totaling more than 4 billion barrels of oil — it signaled something new for the nation: an opportunity to monetize its natural resources from fuel poverty combat and accelerate economic growth. The offshore deposits — the country’s biggest find since independence — are at their peak and are expected to bring Windhoek an estimated $5.6 billion a year in royalties and taxes and help the nation grow its $11 billion economy to double by 2040.

The find also showed how well African oil and gas development activity is progressing despite repeated efforts to contain it. With activist investors trying to stem the flow of international money into African fossil fuel projects and big oil companies under pressure to rebalance their portfolios to include lower-carbon assets, the Namibian experience is impressive on several counts. The pragmatism of Namibian officials has encouraged investors and we hope that pragmatism will continue.

According to the African Energy Chamber’s (AEC) report, The State of African Energy: 2023 Outlook, this is also likely to herald Africa’s upstream energy sector.

According to the report, investment in African upstream activities (defined as exploration, production and development) will be around US$33 billion by 2022 and then grow by up to US$15 billion more over 2023-2025 compared to the estimates at the end of 2021. In addition to Namibia, greenfield spendings – i.e. foreign direct investments in new projects – are being promoted by Mauritania, Senegal, Uganda, Congo, Mozambique, Ghana, Angola and the Ivory Coast. In 2022, exploration alone increased by 130% in 2021.

deep pockets

TotalEnergies and Shell’s twin discoveries were three weeks apart, but overnight successes don’t happen in oil and gas. Exploration by one company or another has been going on in Namibia for more than 30 years, and first production from the huge find is not expected until 2028. While this is the biggest discovery yet, it’s just the latest in a string of new opportunities, including a high-impact onshore exploration program by Canadian oil company ReconAfrica (the basin is the size of Texas, and some say it could be the last major onshore oil discovery in the world) and developments at Atlantic Oil & Gas and Global Petroleum – projects detailed in Outlook 2023.

Could there be better evidence that the world is not ready to give up fossil fuels, especially given market conditions and the fact that renewable energy, while desirable, is not yet ready to replace hydrocarbons? Could there be more evidence that the “last frontier” fields on land and off the coast of Africa are being viewed as a viable alternative to the world’s ancient basins, which are declining in productivity?

True, COP26 and its international bans on fossil fuel financing have taken the wind out of some sails. A lack of investment has delayed some projects and suspended others over the past year. But even climate deals haven’t stopped the United States International Development Finance Corporation (DFC), one of the main financiers of all kinds of energy projects abroad, from pouring far more support into oil and gas development in Africa than into renewable energy.

The Guardian recently reported that DFC and Exim – the United States Export-Import Bank – have invested more than $9 billion in hydrocarbons, compared to just $682 million in wind and solar. Together they have financed oil facilities in Senegal and Equatorial Guinea and invested in an Egyptian gas pipeline. And in 2019, Exim agreed to provide a $4.7 billion loan to fund a TotalEnergies-supervised project in northern Mozambique. The truth is, plain and simple, the world needs more energy. And Africa needs it more than most.

drive progress

Africa is ripe for increased energy development, hydrocarbons and renewables alike, particularly as the continent is undergoing dramatic demographic changes, most notably prodigious population growth, continued urbanization and greater industrialization. Consider this: in 1950 less than 10% of the world’s population lived in Africa, but by 2050 that number will be closer to 25%. By then – in less than 30 years – the population of more than half of Africa’s nations is expected to double. In real terms, this means that by 2050 Africa will be home to 2.5 billion people, with an additional 950 million people living in its urban areas alone. In fact, Africa’s cities are the fastest growing on the planet. In general, this is good news.

City living is associated with better economic outcomes for individuals, as well as higher living standards: better access to education, jobs, services, infrastructure and electricity. Progress in cities far outpaces rural areas by almost every metric.

Of course, it takes a lot of energy (and money) to drive progress. Experts say that energy demand in Africa is projected to be 30% higher over the next two decades (in contrast, global demand is only expected to grow by 10%), meaning it will far exceed supply.

Although Africa has about 60% of the world’s best solar resources, 1% installed solar capacity is unlikely to keep many lights on or factories running. No wonder we’re seeing this kind of upside in upstream activity.

Opportunity in sub-Saharan Africa

While oil is still in play, much of the focus has shifted to natural gas, which even the most ardent hydrocarbon advocates see as a clean, even “green” fuel. Today, analysts believe that countries with significant gas production might expect their gas reserves to be more resilient than their oil reserves under various energy transition scenarios.

What does this mean for Africa? As discussed during African Energy Week in Cape Town, the 2023 Outlook notes that the continent holds more gas potential than oil in the medium term – more than 700 trillion cubic feet (tcf) of natural gas resources have been discovered in Africa, but have yet to be approved for development . Many of these discoveries are set to be developed as liquefied natural gas (LNG) projects.

In fact, most of the gas projects sanctioned in Africa relate to the supply of LNG either within Africa or to markets such as China and Europe, which is diversifying away from Russian gas. With the exception of developments in Libya, most of the LNG projects are in sub-Saharan Africa. Therefore, CAPEX expenditures are concentrated here. The AEC report estimates that 80% of Africa’s cumulative greenfield spending from 2022 to 2025 is expected to come from sub-Saharan projects.

While some condemn these investments for generating energy for export outside the continent, government officials say their economies – and by extension their citizens – depend on resource wealth. And intra-regional trade within Africa is expected to grow, particularly as investment increases in the gas infrastructure needed to support domestic industrialization – pipelines, processing plants, LNG regasification plants and the like.

A template for the future?

Whether they’re on land or the high seas, the Namibian discoveries aren’t just important – they’re transformative. ReconAfrica’s massive conventional oil field already provides well-paying jobs for 200 people from the Kavango region, where 40% of people live in generational poverty, and local hiring is expected to continue as the project progresses. The company has also made it a priority to provide the region with clean water; They have drilled four water wells and have permits for 16 more.

As we’ve seen time and time again, success breeds success in the energy business.

In this case, Namibia shares the same geological sedimentary basin with South Africa – and Shell, TotalEnergies, PetroSA, Sezigyn and Impact Africa all own exploration acreage in the South African sector. South Africa needs to address oil legislation without delay and ensure stability to allow more investment to flow into the country. The region’s hydrocarbon potential is enormous, suggesting that the economic potential holds as well – as long as development continues.

*NJ Ayuk is the Executive Chair of the African Energy Chamber