In the third article of our Africa Energy series, Matt Venturas, the head of S-RM’s sub-Saharan Africa Corporate Intelligence team dives into the importance of maximising Africa’s abundant natural resources when considering what a just energy transition could look like in the region.
Fuelled by a combination of diminishing returns, security concerns, and mounting public and investor pressure, African states and the international oil companies operating therein have been actively seeking ways to diversify their energy mix with renewable options. In the past two years, we’ve seen a series of oil supermajors exiting or downsizing their onshore investments on the continent, which has created room for smaller independents to explore assets previously unavailable to them. This, alongside new discoveries promising significant outputs, has reshaped the African oil and gas landscape as we know it. While the emphasis on greener solutions remains high on the agenda, the conversation has turned to how African governments can maximise their abundant natural resources to ensure economic upliftment – a key factor when considering exactly what a just energy transition looks like in Africa. These opportunities, however, are not without challenges, and any investors entering new markets should do so with their eyes open to potential issues related to partners, local regulatory and political environments, and the likelihood of disputes down the line.
The case for oil and gas in Africa – an evolving landscape
A contentious topic emerging from successive COP summits is the extent to which the global phasing out of fossil fuels factors into the United Nations Paris Agreement goals. It is generally accepted that such a transition will be necessary in order to meet the Agreement’s climate targets; however, with commentators noting that Africa will potentially be a leading oil and gas producer in the coming decade, many governments seem inclined to cash in on their untapped resources. Despite the anticipated focus on cleaner energy, it was telling to see oil and gas taking centre stage at Africa Energy Week hosted in Cape Town last month, and this was swiftly followed by African governments publicly voicing their intention to pursue new exploration and production opportunities at COP29. The Namibian government contingent were particularly vocal in their intent to explore and develop oil assets in the Orange, Namibe, Walvis, and Lüderitz basins in the anticipation of significantly increasing the country’s gross domestic product. In mitigation, Namibian delegates reiterated their dedication to pursuing more sustainable oil production – but the practical implementation of such an undertaking remains to be seen.
In addition to Namibia, Angola continues its resurgence as a desirable exploration destination – in part buoyed by the imminent privatisation and perceived growing competence of state oil company, Sonangol, and a series of attractive upstream opportunities and flexible licensing arrangements. Many existing players have either retained or extended their presence in country, and several first time entrants are looking to gain a foothold. In Nigeria, we’ve seen a gradual exodus of oil majors like Shell, Exxon Mobil, and TotalEnergies from onshore oil blocks in favour of offshore opportunities. While the latter equates to more capital-intensive exploration, it is perceived by many to be a safer bet in light of rising community tension and security concerns in the Niger Delta. This has opened the door to onshore acquisitions by many indigenous oil firms and smaller independents, who ostensibly believe they have the capabilities to navigate this complex landscape and achieve sustainable and significant growth in the oil and gas industry.
Image: Oil & gas operations, Gabon 2022
Market commentators and industry experts have also posited that oil and gas production will be central to the future industrialisation of many African countries, supporting in bridging the energy deficit and serving as a catalyst for much-needed economic upliftment for a growing population. Given Africa’s relatively negligible contribution to global emissions, the desire to capitalise on the continent’s resources by host governments and international oil companies is an understandable one. In the coming years, it is anticipated that Africa will solidify its status as a leading oil and gas exploration and production destination, as a combination of new licensing rounds and – in some instances – investor-friendly regulatory reforms, come to the fore. In addition to those already mentioned, North African players Egypt, Libya, and Algeria; in addition to East, Central, and West African markets like Tanzania, Uganda, Mozambique, Senegal, Gabon, Republic of Congo, and Sierra Leone, to name a few, all look set to develop their oil and gas assets.
Given Africa’s relatively negligible contribution to global emissions, the desire to capitalise on the continent’s resources by host governments and international oil companies is an understandable one.’’
Local content as a catalyst for economic upliftment
Many commentators would argue that African countries have long been reliant on the technical expertise and capital injections of foreign investors entering their markets. One of the more recent positive developments in the African energy industry, however, has been the push towards formalised local content policies aimed at increasing the direct benefit of local companies and communities. For some time, Nigeria has led the pack on this front. We’ve seen the impact of mandated local content requirements prioritising not only local ownership and operations, but also the facilitation of skills transfer and local stakeholder engagement throughout the oil and gas supply chain. Indigenous oil, gas, and industrial companies like Seplat Petroleum, Chappal Energies, and Dangote Group (which operates a refinery) have emerged as veritable local success stories, and other countries like Uganda and Senegal have sought to replicate this success, often in collaboration with their more experienced Nigerian counterparts.
Given the scale of oil and gas activities in Africa, the prioritisation of local content policies will remain central to any economic growth and sustainability agendas. Such policies are not without their challenges, though. Investors partnering with local firms need to ensure they have conducted their due diligence on any potential partners, and possible changes in regulation that may impact their operations down the line.
Moving the goalposts
Without derogating from the importance of local content, it is pertinent to note that oil and gas matters comprise a significant portion of investor-state disputes in Africa, underlying the importance of understanding local environments and counterparties, including key stakeholders in government. A review of these disputes provides a cautionary tale for any investor to take heed when entering these markets.
Energy deals on the continent are typically high stakes ventures and despite parties’ best intentions at the time of entering into arrangements, they are often subject to both internal and external factors like economic fluctuations, political instability, and other operational challenges – leading to disputes. In the last two years or so, we have seen numerous instances of government intervention scuppering deals and denting investor confidence in the region. Notable instances of this can be seen in Chad, where the government unilaterally nationalised Exxon Mobil’s assets and exploration permits after a sale had already been agreed; and in South Sudan, where Malaysian state-owned energy company Petronas has commenced legal proceedings in response to the government’s decision to block the sale of its assets in a deal reportedly valued in excess of USD 1 billion. In the latter instance, the South Sudan national oil company, Nile Petroleum Corporation, effectively seized ownership and operations of the assets.
Energy deals on the continent are typically high stakes ventures and despite parties’ best intentions at the time of entering into arrangements, they are often subject to both internal and external factors like economic fluctuations, political instability, and other operational challenges – leading to disputes.’’
Well-informed selection of a local partners is one avenue available to investors looking to shield themselves from political infighting and shifting government agendas, but it is far from foolproof. Governments regularly provide investors with a pre-selected list of local partners, often with links to influential figures and concealed beneficial ownership. This in itself can prove a fertile breeding ground for corruption and clientelism, dependent on the jurisdiction and parties involved. As such, it is critical that foreign investors considering opportunities in the African oil & gas sector carefully vet their potential partners. Without a comprehensive understanding of the political links, commercial track record, and allegiances of these partners, foreign investors run the risk of becoming mired in disputes post-investment.
While pre-investment due diligence is a crucial way to reduce investment risk, disputes can arise for a range of reasons post-investment. These can include, for example, changes in government or other political shifts which leave either foreign investors in general or specific actors out of favour; project delays and cost overruns; or a deterioration in relations between a foreign investor and their politically connected local partners. When the prospect of an investor-state dispute looms, it is always preferable for the investor to resolve the matter without resorting to arbitration. Successfully doing so requires a detailed understanding of the genesis of the dispute, the key government stakeholders involved, and the common ground between the disputing parties. Equipped with a robust understanding of these factors, an investor can go to the negotiating table with the local government confident in their position and maximise the chances of securing an amicable resolution as quickly as possible.
Inevitably, not all investor-state disputes can be headed off at the pass, and in some cases foreign investors are forced to resort to arbitration in order to protect their investments or recoup losses. While no investor entering a project hopes to end up in this position, it is prudent for them to be aware of the risk and – where a dispute cannot be resolved amicably – to equip themselves with the facts necessary to navigate the dispute successfully. During arbitration, this can include gathering evidence on key points of fact to demonstrate the unjust expropriation of assets or revocation of licences, or the role of government actions in undermining a project. Long before any award is rendered, investors should have a clear understanding of their enforcement strategy, including both the assets against which they intend to enforce and any pressure points which they can leverage to procure a settlement. By ensuring that they have a full understanding of the facts on the ground as soon as it becomes clear that a dispute is inevitable, investors can control their costs while maximising the prospect of successful recovery.
Conclusion
Notwithstanding the challenges apparent across the diverse African oil and gas sector, energy spending looks set to increase on the continent. Figures published by the International Energy Agency suggest that of roughly USD 110 billion of investment earmarked for Africa, approximately USD 70 billion will find its way to fossil fuel supply and power. The responsibility to ensure that the abundant opportunities are actualised sustainably lies with both public and private stakeholders, but there is increasing optimism that progress is being made.
To find out more about our work in the Africa oil and gas sector or to discuss this article in more detail with one of our corporate intelligence experts, please visit our Transaction Due Diligence and Disputes & Investigations practice pages.
