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Is Africa’s oil and gas sector under threat?

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Is Africa’s oil and gas sector under threat?

Africa Oil Week, held in Cape Town, South Africa last month, is widely considered the African industry’s premier conference. This year, a number of uncertainties overshadowed proceedings, as Stephen Williams reports.

The gathering of oil and gas companies at Africa Oil Week this year was characterised by a number of concerns regarding the sector’s prospects. Held in Cape Town in early November, the most immediate worry expressed at the event centred on plummeting oil prices and the impact of this trend on investment flows into new exploration.

Oil prices have been on the decline since the middle of 2014 when oil was commanding prices in excess of $100. By November, they had fallen to under $80 a barrel. At that price, the viability of the kinds of new frontier exploration that typify activities in Africa look particularly risky.

Weak oil prices have already had a huge impact on Africa’s largest economy, Nigeria, where the government relies on hydrocarbons for 80% of its revenues. Due to fears over tumbling prices, the Nigerian Stock Exchange all-share index went into freefall in November. In a bid to defend its currency, the Central Bank of Nigeria (CBN) has used its foreign reserves, which have descended to a four- month low, in order to avoid the need to increase interest rates or devalue the naira. By the end of the Africa Oil Week conference, on 7 November, Nigeria’s foreign exchange reserves had dropped for more than two weeks, sliding to $38 billion. It is estimated by Deutsche Bank that Nigeria needs an oil price of $126 a barrel to balance its budget. Were the oil price to continue its precipitous fall, a rise in interest rates and/or a devaluation of the currency would seem inevitable for Nigeria. This would deal a serious blow to President Goodluck Jonathan’s election prospects next year.

However, for all Nigeria’s woes, Rolake Akinkugbe, the Head of Energy and Natural Resources Coverage at First Bank of Nigeria, reminded the Africa Oil Week conference that only a minority of Africa’s 54 countries actually possess known oil and gas reserves. Even fewer actually export hydrocarbons, and as she pointed out, the effect of lower oil prices is generally welcome news to Africa’s majority of non-producers.

The next sub-prime crisis?

Another major concern for the oil and gas industry currently comes from the threat of climate change. More pressure has been exerted on the industry recently following the publication of a landmark report by the Intergovernmental Panel on Climate Change (IPCC). The publication issued the starkest warning yet that the world is on a path to a temperature rise of four degrees, a scenario scientists say would be “catastrophic”.

As Rajendra Pachauri, the IPCC chief, warned: “We have little time before the window of opportunity to stay within two degrees [of warming] closes. To keep a good chance of staying below two degrees, and at manageable costs, our emissions must drop by 40% to 70% globally between 2010 and 2050.”

Given these warnings, the oil and gas industry in Africa fears new emissions legislation could curb their activities. The burning of fossil fuels accounts for around 37% of all global greenhouse gas emissions, and 7% of global oil and gas supplies come from Africa. There have of course been plenty of similar alarms raised by experts and scientists in the past, but what makes the newest report particularly significant is the political backing it has received.

UN Secretary-General Ban Ki-Moon threw his weight behind the panel’s findings, stating: “Human influence on the climate system is clear, and clearly growing.” Meanwhile, US Secretary of State John Kerry claimed that “those who choose to ignore or dispute the science clearly laid out in this report do so at great risk for our kids and grandkids.”

Most significantly, however, US President Barack Obama and China’s President Xi Jinping announced in November after meeting in China that their respective countries – the former with the world’s highest per capita emissions, the latter with the world’s largest absolute emissions – would commit to targets to lower their carbon emissions.

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Written by Stephen Williams

Stephen Williams is a freelance journalist, based in London UK. Having worked in publishing for over 40years, he has focused on covering issues that directly affect the majority world. A specialist on Africa, his remit also includes the Middle East and North Africa region. Currently, Williams works for a number of London-based print publications including New African magazine.

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