Achieving energy security for Africa in a low oil price environment

Declining investments in upstream activities in Africa’s oil and gas industries threatens the potential for energy security for the continent’s over 1 billion people.

In February this year, Shell Oil announced it was postponing Final Investment Decision (FID) on Bonga South West in deepwater Nigeria as part of its global cost-cutting programme.

“For 2016, we have exited the Bab sour gas project in Abu Dhabi, and are postponing final investment decisions on LNG Canada and Bonga South West in deep water Nigeria. Operating costs and capital investment have been reduced by a total of $12.5 billion as compared to 2014, and we expect further reductions in 2016,” said Ben van Beurden, Shell Oil CEO, while presenting the company’s 2015 financials.

The Bonga Southwest/Aparo (BSWA) project is one of the world’s largest deepwater oil and gas development project. It includes the construction of a new Floating Production, Storage and Offloading facility, with an expected peak production of 225,000 barrels of oil per day and 270 million standard cubic feet per day of gas.

Also Tullow Oil, an oil exploration company that predominately searches for and produces oil in 15 African countries has canceled offshore exploration and deep sea drilling, to focus on on-shore projects after its shares fell below 85 percent over the past four years. The company’s share price bottomed at 66 percent since the end of January and saw its net debt swell 30 percent in 2015 to stand at a colossal $4billion arising from huge CAPEX costs in a low oil price environment.

Devastating effects

The result of declining investments in oil and gas is taking a toll on government revenues and leading to shocks within the economy of African oil producing nations. Protest greeted Ghana’s energy sector levy that spiked a 30 percent hike in prices of petroleum products and over 50 percent tariffs in electricity and water rates as crude oil prices dipped below $30 per barrel.

Nigeria’s 2016 budget proposals ran into troubled waters when crude oil prices fell lower than the benchmark of $38 dollar per barrel thus creating over $2billion budget deficit.  Local oil and gas companies who took loans when oil prices were above $100 per barrel are left with huge debts that now threaten the performance of Nigeria’s commercial banks.

“We are making substantial changes in the company, reorganizing our upstream, and reducing costs and capital investment, as we refocus Shell, and respond to lower oil prices. As we have previously indicated, this will include a reduction of some 10,000 staff and direct contractor positions in 2015-16 across both companies,” said Beurden.

Energy security blueprint for Africa

Energy security has many dimensions: long-term energy security mainly deals with timely investments to supply energy in line with economic developments and sustainable environmental needs. Short-term energy security focuses on the ability of the energy system to react promptly to sudden changes within the supply-demand balance. Lack of energy security is thus linked to the negative economic and social impacts of either physical unavailability of energy, or prices that are not competitive or are overly volatile.

Africa lacks energy security because it is vulnerable to volatility in international oil market supply and demand. When there is serious supply disruption, very few African countries can muster short-term emergency response measures. For example, scarcity of Premium Motor Spirit (PMS) in Nigeria is crimping the informal economies of West African countries like Benin, Togo, Chad etc.

Therefore, to achieve energy security for African countries, pragmatic actions are now required to be woven into the fabric of energy policy. One major policy thrust that can set Africa on the path for energy security is by promoting energy policies that encourages diversification of both energy types and supply sources.

Diversification of energy mix should form the first pillar of Africa’s energy policy. Natural gas should be explored to generate electricity due to its clean nature and efficient burning properties. Nuclear energy also ranks as viable option though there are concerns in terms of safety and security. Renewable energies particularly solar provide options too.

Africa should also work to facilitate better function of and more integration of energy markets. Africa’s current market design does not lead to sufficient investments because it lacks integration and formal structures that will aid free markets. Government subsidies in Nigeria continue to stifle the potential of Nigeria becoming a hub that can service the whole of West Africa.

Achieving energy security for Africa will require rethinking of technical and regulatory barriers restricting integrated energy markets. Ghana has one of Africa’s stiffest local content policies that analysts say are restricting investments and sets unrealistic goals including the provision for 90 percent Ghanaian participation in the upstream, midstream and downstream segment of the oil and gas sector in a country where technical competence is sorely lacking.

It is also important that African countries incorporate energy efficiencies in their policy framework. According to Myles McCarthy, director of implementation at the Carbon Trust, switching to LED lighting is the quickest and simplest action any business can take to reduce energy usage. A traditional 60 watt incandescent bulb would produce about 750 to 1,000 lumens – a measure of lighting power – but 95 percent of the energy used to create that light would typically be wasted in heat.

Some examples of these energy efficient technologies are installing compact fluorescent lights (CFL) light emitting diode (LED) lights, or natural  skylights reduces the amount of energy required to attain the same level of illumination compared with using traditional incandescent light bulbs.

Prior to the current dip in oil prices, crude sold over $100 per barrel last year but African oil producers frittered the surplus income away on frivolous spending. Oil windfalls should serve as the impetus to diversify the economy away from oil. Arunma Oteh Vice President and Treasurer, World Bank, at recent lecture in Lagos said, “the role of oil in accelerating Nigeria’s development is to provide it with financial resources to make strategic investments to diversify the economy.”

Therefore oil and gas should play two key roles in Africa’s economy. It should provide rental revenue in the form of tax and royalties and it should drive domestic economy.  The oil and gas sector in Nigeria contributes 95 percent of revenue but contributes only 14 percent of GDP and provides job security for a few thousands.  African government should use rental incomes from oil and gas to boost the rest of the economy as this is the surest path to energy security.

ISAAC ANYAOGU