AFRICA'S ENERGY DEVELOPMENT NEEDS FINANCIAL SOLUTIONS

The following article by Martin Kavanagh, a partner based in our London office and the co-Head of the firm’s Africa Practice Group, was first published by Business Day ahead of AOW 2023, which took place in Cape Town in October 2023. Herbert Smith Freehills sponsored the Finance and M&A Forum and our partners played key roles on five panel discussions, helping to further raise awareness of the firm and our market-leading Africa Energy Group.

Developing Africa’s energy resources and providing for its quickly growing population requires innovation on a number of fronts – especially technology, policy and sustainability. However, underpinning all of these development frontiers is finance. It’s critical for there to be financial innovation if Africa’s energy resources are to be effectively developed.

Those needs are significant. The continent remains riven by energy poverty, and about 640 million African people remain without electricity, the African Development Bank reports. Every country on the continent has committed to the energy transition envisaged under the Paris accords.

This presents Africa with a complex challenge. Not only must it ramp up energy provision to lift half of its population out of poverty, but it must do so while embracing renewables, and find ways for its businesses to benefit from its rich oil and gas resources, much of which are exported outside the continent for consumption worldwide.

It is a delicate balancing act, which will require complex financial solutions. This is particularly true because of the different corporate finance environments around the continent.

Different laws govern the financing of major energy projects in the OHADA zone, CEMAC-ECCAS, CEDEAO-ECOWAS and the UEMOA-WAEMU regions, for instance. Likewise, every global energy major and independent has a set of compliance requirements to negotiate.

Energy development must ultimately navigate a complex legal environment to bring resources to market and to allow the energy and financial benefits to accrue to the citizens who deserve them. The energy businesses, as well as the financial institutions that power them, need established law firms with deep relationships across these regional jurisdictions.

There are immense opportunities for economic growth, energy security and technological advancement. A recent report identified 200 companies exploring or developing new fossil fuel reserves in Africa – offshore platforms, liquefied natural gas (LNG) terminals, pipelines or gas and coal-fired power stations.

However, it was found in the same report that while investment in developing Africa’s hydrocarbon resources is accelerating, less than a third of the $5.1bn worth of capex being invested into African resource development was by African companies. This needs to change.

Achieving it will require financial innovation to structure deals that favour African energy businesses – and the African people. Part of the obvious problem is that local financial institutions are generally only able to lend in local currency, and even those that can lend in dollars, for example, lack the capacity to support the high capital cost of these large projects.  Global lenders are thus always required for large projects, and with international debt comes an external point of view on "African risk".

If customers are international, much of the credit risk can be dissipated, but if we seek to have more resources used "at home" on the continent, we will need to find more ways to have viable customers on the continent, whose credit is sufficient to support a large global financing. In many ways this is a key piece in the puzzle of how to have more African resources consumed in Africa and an area that multilaterals are trying to address.

A counteracting force is working against this as well. As the world tries to reduce its reliance on fossil fuels, many international agencies have decided that they will not support hydrocarbon development in Africa and particularly for the development of onshore facilities such as thermal power and refineries. These projects thus end up being developed for the purpose of exporting the hydrocarbons to Europe, the US and Asia, because only international companies can finance the development of the resources.

The consequence of a well-meaning policy is to continue energy poverty and deny African states the ability to use their own resources. This is an immense set of challenges at the best of times – but even more so in frontier regions where the oil and gas sector is still being developed.

The African renewables sector is similarly a hotly contested sector, with diversified hydrocarbons businesses active alongside new players, and regulations often still in the development phase. But it is one of the social responsibilities of political, financial and energy leaders to navigate these complexities, and to find the financial solutions that will unlock Africa's full energy potential.

The endgame could cause the continent to become a major player in the global energy market, reducing its reliance on imported energy and meeting that almost insatiable demand for energy to power development and industrialisation.

Bringing resources to market requires a sophisticated set of transactions. Partnerships must be formed to build upstream infrastructure; ensure energy efficiency; negotiate offsets, community development and renewables components; and to market the product and integrate it into the existing energy network.  Policy-makers and finance institutions in the "north" must prioritise lifting people out of energy poverty in lockstep with energy transition, and not ask Africa to work at a different rate to that expected in their home countries.

When the deals are made to secure the continent’s energy future, they must benefit everybody – but most importantly, the people of Africa.

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