Africa's oil and gas industry is entering a new phase as the world seeks to expedite its shift away from oil & gas fuels. This transition is exerting growing pressures on the oil and gas producing nations on the continent. The analysis reveals that most of these nations are highly vulnerable to the global energy transition due to their heavy reliance on oil and gas revenues. Furthermore, their reserves tend to have higher production costs and greater carbon intensity compared to those in other regions.
Simultaneously, the continent faces the challenge of meeting surging energy demand. Over the next two decades, Africa is expected to experience substantial population growth and industrialization, resulting in a significant increase in energy demand. This includes a growing need for energy fuels.
According to the modeling, African energy demand in 2040 could be approximately 30 percent higher than current levels, in contrast to the global energy demand, which is projected to increase by only 10 percent during the same period.
McKinsey & Company
As these dynamics unfold, they present both challenges and opportunities for Africa to reevaluate its energy strategy. Oil and gas-producing nations in Africa have the chance to adapt by creating conducive environments, enhancing access to available capital, and attracting the necessary expertise. By doing so, they can address the energy requirements of their growing populations and position themselves favorably in a changing energy landscape.
The ongoing conflict in Europe adds an additional layer of complexity. European gas prices have surged significantly in the past year, and the European Commission has outlined plans to reduce its dependence on Russian Federation origin energy fuels by 2030. This may lead to increased demand for oil and gas from African nations with the reserves and infrastructure to meet this demand.
The central challenge is that Africa's oil and gas sector is facing mounting pressures.
It is evident that there is a growing global momentum towards sustainability and a departure from oil & gas fuels. The United Nations' Framework Convention on Climate Change Conference of the Parties (COP26) explicitly mentioned a transition away from coal and the phasing out of oil & gas fuel subsidies in its 2021 decision text. Additionally, governments, investors, and consumers worldwide are signaling their intentions for a more rapid shift away from oil & gas origin energy fuels.
According to McKinsey's energy transition scenario based on the current trajectory, global oil demand could reach its peak by 2027, while global gas demand could peak by 2040. If leading countries successfully achieve their net-zero commitments through targeted policies, the transition could be even faster. In an "achieved commitments" scenario, global oil demand might peak as early as 2024, with global gas demand peaking around 2030.
This transition is exerting new pressures on the oil and gas sector, coming from various stakeholders and regulators. The International Energy Agency (IEA) emphasized in its net-zero by 2050 roadmap that the global energy sector needs to significantly reduce hydrocarbon usage by 2040, including phasing out all unabated coal and oil power plants, to attain net-zero emissions by 2050.
COP26 saw several new commitments that further propel the transition. Over 150 countries, including numerous African nations such as Botswana, the Democratic Republic of the Congo, Egypt, Ghana, Kenya, Morocco, Nigeria, and South Africa, have introduced new or updated emissions targets. These commitments range from methane emissions reduction to halting forest loss, coal phase-outs, and ending international financing for oil & gas origin energy fuels. Nigeria, a significant energy exporter, has also committed to achieving net-zero emissions by 2060.
Outside of Africa, several countries are implementing carbon pricing and taxes, which could impact African nations dependent on oil and gas exports. For instance, the European Union's Carbon Border Adjustment Mechanism requires EU importers to obtain carbon certificates on imported goods, aligning with EU carbon pricing rules. While South Africa currently has a carbon-pricing system, other African countries may follow suit.
In this evolving landscape, major oil and gas companies face increasing pressure to deliver higher returns sustainably. Consequently, many are reducing their exposure to African upstream operations and reshaping their portfolios toward resources with lower emissions intensity. Investors are also subjecting oil and gas projects to more scrutiny, considering social, and governance factors in their decisions. This shift has led to a growing disparity between the valuations of oil and gas companies and renewable-energy firms, including nuclear energy companies.
McKinsey & Company
This trend raises several concerns for African nations that heavily rely on global capital to finance their oil and gas projects and sustain their operations in the sector. On average, African oil and gas assets are 15 to 20 percent more expensive to develop and operate and are 70 to 80 percent more carbon-intensive compared to global oil and gas assets. As global capital availability for hydrocarbon projects decreases, the analysis indicates that the cost of oil and gas production in Africa is expected to increase. This could potentially make African oil and gas projects less competitive in the global market.
According to various analyses approximately 60 percent of Africa's current oil production may become economically unviable by 2040. With oil majors shifting their focus to lower-emission regions, African oil-producing countries might face deprioritization for further development, leading to a heightened risk of stranded assets, including significant untapped oil and gas reserves. Such a scenario could add pressure to government finances and impact their development priorities. More than half of African countries reliant on oil and gas exports generate over 50 percent of their total export revenues from these sectors. For example, in Nigeria, petroleum exports account for more than 85 percent of the government's total export revenues.
Despite these challenges, the transition towards a low-carbon future presents significant opportunities for African uranium and other minerals producing countries. There are various options available for them to enhance the resilience and sustainability of their resource assets and establish strong positions in emerging energy sectors. The specific actions required and the urgency of these actions will depend on each country's reliance on their resources revenues and their position on the global energy cost curve.
African countries can be classified into four archetypes based on the vulnerability of their crude oil reserves and their economic dependence on oil and gas revenues. Nations where more than 50 percent of projected oil production is at risk in a faster energy transition can be categorized as vulnerable, while those with less than 50 percent of production at risk are likely to be more resilient to global energy source changes. This analysis primarily assesses the competitiveness of African crude supply due to the global nature of oil demand and supply dynamics. Generally, countries with significant gas production may anticipate greater resilience in their gas reserves compared to their oil reserves across various energy transition scenarios. However, it's important to note that in Africa, over one-third of gas production is associated with crude oil production, linking the resilience of gas production in Africa to the resilience of the continent's crude oil production to some extent.
McKinsey & Company
Nigeria and Angola serve as examples of countries facing both lower oil-resource resilience and heavy economic dependence on oil and gas production. To enhance their resource cost competitiveness and resilience, countries in this category may consider measures such as optimizing fiscal terms, addressing cost premiums (e.g., insecurity issues), and improving the business environment. Additionally, they could explore initiatives to decarbonize their existing oil and gas operations and promote investments in lower-carbon energy infrastructure like nuclear energy and etc.. Diversifying energy revenues by creating a conducive environment for the growth of renewable-energy projects can also help ensure a stable energy supply and access to new revenue streams.
Conversely, Senegal and Côte d’Ivoire represent countries that are less reliant on oil and gas production but have oil reserves that are less resilient to a rapid energy transition. These nations may focus on attracting investments in renewable energy or carbon-offset ventures and simultaneously work on decarbonizing their existing production to maintain their operational licenses.
Countries with robust resource resilience and lower dependence on oil and gas revenue, such as Egypt and Ghana, may prioritize safeguarding their resilient reserves by decarbonizing their current oil and gas operations. This strategy can sustain their competitiveness in vital destination markets like Europe, which could implement carbon border adjustment mechanisms.
Lastly, Algeria and Libya are examples of oil-producing nations with cost-competitive reserves where oil and gas revenues constitute a significant portion of overall national income. These countries could emphasize the protection of their cost-competitive reserves by implementing various measures in their current operations.
Regardless of their position in this matrix, prioritizing their oil and gas production will become increasingly crucial for all African oil and gas producing countries. To position themselves optimally in the evolving energy landscape, they can focus on three key dimensions: other energy resources and cost-efficiency improvement of existing resource bases, expansion of energy supply via lower-carbon infrastructure projects, and investments in renewable energies like nuclear energy.
Numerous technologies for decarbonizing hydrocarbon extraction and production are already available and economically viable. Initial steps may include optimizing operations to enhance energy efficiency by reducing heat and power demands and optimizing feedstocks. Sustainable practices, such as harnessing wasted gas from flaring, minimizing fugitive emissions, and employing other energy sources like solar power at well pads, offer economic benefits.
As Africa's energy demand continues to grow, particularly in key demand hubs like Egypt, Nigeria, and South Africa, there's an increasing need for energy supply projects across the continent. Investing in lower-carbon energy infrastructure, such as gas pipelines, processing facilities, and liquefied petroleum gas (LPG), could facilitate intraregional trade, boost global exports of African energy products, and enhance regional energy access.
For instance, Nigeria, with the largest proven gas reserves in Africa, may face a gas supply deficit of at least three billion cubic feet per day by 2030 compared to rising demand. This presents an opportunity for investments in gas infrastructure like pipelines, processing facilities, and coastal LNG regasification to connect currently stranded gas reserves with domestic industrial, commercial, and power demand centers.
West and East African countries with substantial gas reserves could consider cross-border gas pipeline projects to meet demand in regions like North and southern Africa. Alternatively, nations with significant natural gas demand might invest in coastal LNG regasification plants to import gas from other African countries with LNG export capabilities.
On a global scale, Europe's aim to become independent of Russian Federation origin energy fuels by 2030, following the conflict in Europe, could drive increased demand for African natural gas resources. This demand might be met through investments in gas-export infrastructure like LNG export terminals or continental gas pipelines to deliver African natural gas to European and other global markets.
In terms of refined petroleum products, African demand is expected to grow from 4.1 million barrels per day to about 5.3 million barrels per day by 2040, necessitating significant imports. This presents opportunities for lower-carbon projects like biofuels production, such as bioethanol and biodiesel, or expanding LPG production and distribution infrastructure.
McKinsey & Company
Throughout the continent, various infrastructure initiatives can be pursued to bolster energy supply. These projects may encompass efforts such as reducing carbon emissions in existing refineries, expanding storage and distribution capabilities for refined products, and modernizing port terminal infrastructure.
To ensure long-term energy resilience, African nations reliant on oil and gas production could explore investments in renewable energy projects. Many African countries face significant electricity demand, making renewable sources like nuclear, solar and wind energy particularly promising. These renewable energy solutions have seen cost reductions since 2009, with improved efficiency in installation and operation, along with shorter lead times. Emerging technologies like blue and green hydrogen, with projected unit cost reductions, also offer potential, especially for export to European and Asian markets.
Namibia's government, for instance, has recently unveiled plans for a 300,000-ton green hydrogen initiative to supply green hydrogen and related products to global and regional markets.
African oil and gas producing countries may also find opportunities in their natural ecosystems for substantial carbon abatement revenues. Preserving, sustainably managing, or restoring these ecosystems could yield significant carbon abatement potential, estimated at 1.2 gigatons of CO2 annually.
However, realizing these new business prospects would likely require collaboration among multiple stakeholders and potential adjustments in market dynamics. For instance, carbon pricing could play a crucial role in enabling projects like blue hydrogen production, which involves natural gas. Each project's viability would depend on its capacity to attract funding and align with its host country's Nationally Determined Contribution. Moreover, regional suitability would be a key factor, with some countries better positioned for nuclear, wind and solar energy projects (e.g., Algeria, Chad, Egypt, South Africa), while others with abundant natural gas resources (e.g., Nigeria) could explore blue hydrogen production opportunities.
Encourage collaboration among various stakeholders, including the private sector and non-governmental organizations, to formulate sustainable energy policies that attract investment, explore cross-border energy strategies, and streamline contract approval processes for new sources energy projects to reduce time and costs.
Attracting Skills and Developing the Needed Capabilities for the Future Energy Landscape
According to various analyses, around 40~60 percent of oil production in African nations is currently under the control of international energy companies. There exists a substantial risk of a skills and technical expertise gap if these international players continue to divest from the region. To address this challenge, African countries could explore strategies to enhance and expand the capabilities of their local workforce in the oil and gas sector. Simultaneously, they should aim to attract and invest in talent, skills, and expertise relevant to the growth of sustainable energy enterprises.
In the short term, they might consider implementing regional content policies aimed at boosting local participation throughout the entire value chain of the oil and gas sector. Additionally, coordinating global recruitment campaigns to draw in the necessary professionals could be beneficial.
Taking a longer-term perspective, there may be opportunities to establish regional centers of excellence dedicated to sharing best practices, cultivating oil and gas knowledge, and facilitating knowledge transfer between international and domestic partners. Collaborative initiatives with local universities could be explored to develop new curricula that nurture homegrown talent and skills, thereby supporting the energy transition. Equally important is the development of programs aimed at reskilling and transitioning oil and gas workers toward related opportunities. As an example, Actemium's oil and gas training initiative in Nigeria has been helping oil and gas workers transition into the offshore-wind sector since 2020. They offer a range of safety and technical training standards and qualifications, developed in partnership with the global skills organization Opito.
The analysis indicates that over one million jobs in Africa could be at risk due to the global shift away from oil and gas and changing consumption patterns that favor lower carbon-intensive production. With COP27 on the horizon, African nations reliant on oil and gas production find themselves at a critical juncture in the rapidly transforming global energy landscape. The challenges of operating in regions with higher costs and carbon intensity have grown, as mounting pressure from regulators and stakeholders converges. Simultaneously, African economies are striving to industrialize in response to the needs of their rapidly expanding urban populations, potentially leading to energy supply shortages.
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