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African Oil, Gas Producers Can Help To Create An Inclusive Energy Transition, says McKinsey

Global management consulting firm McKinsey & Company says Africa’s oil- and gas-producing nations have the opportunity to embark on an inclusive energy transition and chart a course toward a sustainable future, amid a heightened focus on sustainability.

“As the world looks to accelerate its transition away from fossil fuels, the pressures on the continent’s oil- and gas-producing nations are mounting,” the firm finds, explaining that many African countries are highly exposed to the global energy transition, as their economies depend on oil and gas revenues.

African oil and gas assets are also on average 15% to 20% more costly to develop and operate and 70% to 80% more carbon-intensive than global oil and gas assets.

Simultaneously, energy demand on the continent threatens to outstrip supply. Rapid population growth and industrialisation are expected to drive strong energy demand growth across the continent – including for fossil fuels.

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The firm estimates that Africa’s energy demand could be as much as 30% higher by 2040, compared with 2022, and compared with a 10% increase in global energy demand over the same period.

“While these dynamics bring challenges that will need to be negotiated, they also create a clear opening for the continent to take stock and reconsider its energy approach.

“If oil- and gas-producing countries in Africa consider steps to create enabling environments, improve access to available capital pools, and attract the right skills and capabilities, they could both meet the energy needs of their developing populations and position themselves strongly in a new energy landscape.”

McKinsey notes that Russia’s invasion of Ukraine, which has had deep human, social and economic impacts across countries and sectors, adds another layer to consider.

European gas prices have increased by more than three times over the past 12 months. Naturally, Africa also has the opportunity to help close the gap in the market left by displaced Russian fossil fuel exports, particularly in Europe.

The firm estimates that global oil demand could peak by 2027, and gas demand closer to 2040, assuming that leading countries may not achieve their meet net-zero commitments faster, which is a distinct possibility.

In an accelerated energy transition scenario, 60% of Africa’s current oil production is at risk of becoming uncompetitive by 2040, and thereby at risk for assets to be stranded and for countries to be deprioritised for trade.

For countries such as Nigeria this could pose a major problem, since petroleum makes up more than 85% of its total export revenue.

McKinsey is confident that Africa can leverage some of the several options available to strengthen its resilience and resource sustainability.

Also Read: Building Greater Sustainability, Climate Resilience in West Africa

These measures will differ for many countries, depending on the economic reliance on fossil fuels and resilience of crude oil reserves.

For example, countries with a high reliance on oil and gas production for revenue can consider optimising fiscal terms, addressing sources of cost premium and improving the ease of doing business.

These countries could further strengthen the resilience of their resources by considering initiatives to decarbonise their existing oil and gas operations and encourage investment in lower-carbon energy infrastructure such as gas pipelines.

This could reduce the risk of stranded gas resources.

“Countries in this archetype could diversify their energy revenues by fostering an enabling environment to encourage scale-up of renewable-energy projects that provide exposure to new energy revenue streams and help to ensure energy supply,” McKinsey explains.

By contrast, Senegal and Côte d’Ivoire are examples of countries that are less reliant on the production and sale of oil and gas, but have oil resources that are less reliant under a more rapid energy transition.

These types of countries can focus on spurring investment in renewable energy or carbon-offset businesses, while decarbonising their existing production.

Countries with higher resource resilience and lower oil and gas reliance, such as Egypt and Ghana, can also focus on protecting their already resilience reserves by decarbonising operations, and grow investment into renewable energy businesses for new revenue streams.

For refined petroleum products, McKinsey suggests that African demand will grow from 4.1-million barrels a day today to about 5.3-million barrels a day by 2040, nearly half of which will need to be imported based on existing and planned refining capacity.

This could create opportunities for lower-carbon projects such as biofuels production, including bioethanol and biodiesel – to partially offset gasoline and diesel demand – or increasing liquid petroleum gas (LPG) production, bottling and distribution infrastructure.

For example, in Nigeria, carbon-intensive cooking, such as firewood, charcoal, and kerosene, generates an estimated 37-million tonnes of carbon dioxide equivalent a year – about 14% of Nigeria’s baseline emissions.

Also Read: Building Back Better from the Covid-19 Crisis

Expanding access to LPG in Nigeria by investing in distribution infrastructure could stimulate the uptake of cleaner cooking fuels for the more than 100-million Nigerians who rely on carbon-intensive cooking fuels, while also being a potential source of carbon credits.

A number of such infrastructure projects can be undertaken across Africa.

“Strategic shifts of this nature could unlock significant value for the continent while reducing the risks of climate change and help to secure a greener, more prosperous future for all Africans,” McKinsey states.

Source: Creamer Media’s Engineering news

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