The Resource Remix: Europe's Gas Crunch, African Supply, and the Energy Transition

The Resource Remix is a podcast from the Natural Resource Governance Institute exploring new futures for commodity-exporting countries in the energy transition. 

In this third episode of NRGI's podcast, available on Apple Podcasts, Google Podcasts and Spotify, NRGI’s Silas Olan’g converses with Crystol Energy CEO Carole Nakhle and Theophilus Acheampong, economist and political risk analyst, and senior lecturer at the University of Dundee.

NRGI · The Resource Remix - Episode 3 - Europe's Gas Crunch, African Supply, and The Energy Transition

During their conversation, Nakhle, Acheampong and Olan’g explore the implications of Russia’s war in Ukraine on global energy markets, how it has prompted many countries to reevaluate their dependency on Russian oil and gas, and what Europe’s subsequent demand for gas means for African countries. They discuss whether the current geopolitical climate and market dynamic presents African oil- and gas-producing states with opportunities or risks.

With COP27 on the horizon, the three experts deliberate on whether recent developments will influence African producer countries’ energy transition plans, and to what extent. Acheampong points out how the crisis has exposed how energy security seems to come above all else, including achieving climate goals. With prevailing energy poverty across the African continent, Acheampong argues that African countries shouldn’t have to choose. Concurring, Nakhle affirms that, while domestic energy supply should be the priority for African countries, ensuring the energy transition and safeguarding energy security are not mutually exclusive. But, she adds, this hasn’t happened in practice so far, noting that governance should underpin any efforts to achieve both.

On to the topic of financing the energy transition, Olan’g highlights that the European Union, and other wealthy importers, haven’t yet met their existing climate finance commitments. Acheampong but adds that investment opportunities also exist elsewhere and must be considered. 

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Transcript:

Silsa Olan’g, NRGI: The 27th Conference of the Parties will take place in Egypt this November. The so-called African COP will be the first major climate conference in the wake of Russia's invasion of Ukraine. The war has had implications on global energy markets. Much attention has focused on how African countries from the Cape up to the Mediterranean have reacted to the shockwave. For many years now we have heard that fossil fuels must go. But suddenly European countries are hunting high and low for natural gas, including in Africa. This dash for gas has exposed double standards in energy access and achieving climate goals. What opportunities might resource-rich African states have in these tumultuous times? And how will this affect African governments and citizens’ agenda at COP27?

Welcome to The Resource Remix, a podcast from the Natural Resource Governance Institute. We bring listeners dynamic perspectives on the cutting-edge issues affecting countries rich in commodities in the context of the energy transition. I am Silas Olan’g. I have been with NRGI for more than a decade. And now serve as the organization's Africa energy transition advisor based in Dar es Salaam, Tanzania. Two guests join me today to dive into the prospects for African countries in this new energy market landscape. Our first guest speaking to us from London is Carole Nakhle. Carole is an energy economist, founder and chief executive officer of Crystol Energy, an advisory and research firm, and a member of NRGI’s Governing Board. Carole, welcome to NRGI’s podcast.

Carole Nakhle, Crystol Energy: Hello Silas. I am very happy to join you today.

SO: Thank you. We also welcome Theo Acheampong. Theo is an economist and political risk analyst and a lecturer at the University of Dundee in Scotland where he is speaking to us from today. Theo, you are most welcome to the podcast.

Theo Acheampong, University of Dundee: Thank you very much, a pleasure to be here.

SO: Thank you both so much for joining me in this episode.

Russian invasion has prompted moves by many countries to reassess their reliance on Russian oil and gas and reduce their dependence on its imports. Many articles have sprung up with commentators, discussing how world leaders desperate for energy are turning to Africa for its reserves of oil and gas, considering them as potential beneficiaries of Europe’s supply gap. In May, the EU published its energy strategy, but the strategy leaves many unanswered questions. Carole, now that it has been some months since the initial market shock, what is the clear-eyed view of the coming two to three years? Are some of the countries likely to profit from the current context of increased European demand? If so, which countries and in which way?

CN: Thank you, Silas. Well, first of all, before I answer the question, it is very important to clarify to the listeners and viewers that the crisis we are seeing today in Europe and elsewhere – because the record high gas prices that we are seeing currently are not only in Europe but also in Asia, even North America – it is not caused by Russia's invasion of Ukraine. It is, of course, that factor that the geopolitical development plays a very important role, but it would be naive to blame it all on the war, because some dynamics have been happening in gas markets over decades, including the development of LNG trade, which I think, last year or 2020, but probably last year, if I am not mistaken, for the first time overtakes pipeline trade. So, there is this globalization of gas markets. Of course, we are very far from what we have in oil markets, but the fact that you have more LNG trade happening than originally, markets that were independent of each other – so European would not really care about what was happening to the Asians, the Asians would not care what was happening in North America – this is not the case anymore today. Today if Asia catches a cold, Europe sneezes because of LNG trade, that's very important. I am saying that right up front, because it has implications for existing and potential producers, especially exporters of LNG, whether by pipeline, for example, from North Africa to Europe, or LNG exporters, including in West Africa, but even more so in East Africa, with the likes of Mozambique. They will be facing a completely different market than, for example, what they faced a few years ago. 

Now to go back to your question about the outlook for the gas situation in Europe — what that means for African producers, current and future. And I insist on “the future” because we shouldn't underestimate the role that East Africa will play in the next few years. But, first, in the short term, if I focus on this winter, because gas demand increases in winter in Europe, I am more pessimistic because you've got to see usually gas demand increase around this time. If winter is going to be as cold as it was a year ago, then we should expect the most important consequence, which is higher prices. And we're already seeing record prices across Europe, and then in the longer term, after that, things should start to ease up. But I am an economist, so I have to say that high prices may be the solution to high prices, and I say it may be, because it depends also on what governments are doing, and see, as you highlighted, that in your opening remarks about the kind of contradictions and new terms that we are seeing. Because for years, if not decades, the rich countries, the OECD countries, blamed or recommended the developing countries for giving subsidies to their people, energy subsidies for self-use subsidies. Guess what? They are doing exactly the same today and giving subsidies to the rich and poor alike. So that is one aspect. I had to get it off my chest because it really bothers me as an economist. 

But if we think about the high price signal, that is pushing consumers to adjust their demand. They are looking for an alternative, they are even thinking about which room to congregate into the winter and avoid using other rooms in the house if they have more than one room, let's say, in a house. We are seeing on the biggest scale the switching from gas to a targeted source of energy. Nuclear is one option, and renewables is another option. But ironically, we are seeing a shift to coal. We are seeing a shift to oil products, such as diesel. So that is another reversal and climate change and energy policies we are seeing in Europe. And they are scrambling to find alternatives for supplies coming from Russia because Russia for decades has been the largest, or was maybe, today's not anymore, the largest supplier of gas to the continent. But that means, maybe on the face of it, you would say, Okay, that's great. That will be an opportunity for African gas producers. But there are two things I want to highlight here. 

First, they are not the only ones eyeing the European markets. You have American LNG increased by more than 70 percent compared to last year for the first quarter of this year. They love to send their gas to Europe, and don't forget the American-sanctioned Nord Stream 2, the pipeline coming from Russia to Europe from last year. So, it is not after the war. It was long before the war started. So, for the Americans, the European market is very attractive. So African producers will have to face the reality that there will be greater competition from the Middle East, Qatar, for example, from elsewhere. Everybody wants to send their gas to Europe. But the second thing, and that's a big question. Does Africa have the capacity to increase its exports beyond what they have today?

Let me focus on North Africa, and I leave it there, and then I let Theo elaborate more on sub-Saharan Africa. But look at Algeria, look at Egypt, especially Algeria, its export potential has been declining because its production has not been rising as fast as its consumption. So local consumption has been growing very fast because of different unattractive, irrational policies, economically speaking, and as a result, if they don't keep up with investment, if they don't keep up with increasing production, and they don't slow down the growth in demand, I think we should be realistic about how much more Africa can send to Europe. I'll leave it there, and we can elaborate on the rest later on. 

SO: Thank you very much, Carol. From what you're saying, several established producers, Algeria, Angola and Nigeria seem already well positioned to benefit from this demand. As they are already reaping higher revenues from the spike in oil and gas prices. Countries with projects due to start within the next year or so, such as Mauritius and Senegal, I think they will likely also benefit from the higher prices. Others, on the other hand, where investment decisions on key LNG projects are still pending, could end up suffering larger financial risks than benefits. I am thinking of Mozambique, for example, given security challenges, and, of course, my own country, Tanzania, due to ongoing negotiations and outstanding project design processes. Is there a risk of heightened expectations not being made for certain producer countries, especially in sub-Saharan Africa? And what are the risks associated for some countries in attempting to meet European demand? Theo, I would really like to hear your views on this. 

TA: Thank you very much, Silas. And again, it is a pleasure to be here. Let me also start with a much broader-level remark, and then we can look at the specifics. 

I think what is interesting is that we live in quite extraordinary times. In my relatively short life, I have seen at least three crises, if not maybe four. From the financial crisis of 2008-2009, and then the commodities price lump of 2014-2017, then we had COVID, and, just as the recovery was gaining momentum, now we're dealing with the aftershocks of the Russia-Ukraine war or conflict, and, of course, that has had some major repercussions in terms of the global energy geopolitics or the dynamics. For me, what is kind of interesting, as you already allude to in your opening remarks, is the fact that there seems to be a change in tone.

Only from a year ago, when a lot of the European and Western nations were saying, we're going on net-zero, and the environment is the key consideration, but rather we've seen energy security and issues of access and affordability becoming the dominant theme in the global energy debate going forward. And of course, some have even said that it is quite hypocritical in a sense that some of the developing countries, including those in Africa, haven't been given as much of an opportunity to also develop their own domestic energy resources, which are mostly fossil fuels, by the way. But I think the tone has changed and because Europe especially is looking to fill its energy supplies with alternative sources, Africa, then, of course, comes strongly into the question. As you rightly pointed out, in terms of the gap, or the size that needs to be filled, a couple of numbers may be able to help you put things in a better context.

Then we look at specifically which of sub-Saharan African countries are likely to benefit. If so, when and how? So? We know that Russia has about 17 percent of the world’s production of natural gas. I checked some numbers. It is about 25 Tcf and about 40 percent of the European or EU import historically has come from Russia. If we look at the African context, Africa has just about 7 percent of the world’s production of natural gas, and you're expecting to ramp this up to about 350 billion kilometers or 12.4 Tcf. The earlier production is about 9 Tcf. And if you look at how much the size of the gap is, I don't think that African countries would be able to fill that in the short term. 

So there are several issues, but it really comes down, in my view, to about four, some of which Carole talks about. The first one is the availability of spare capacity or how much countries would really be able to ramp up their production even the one year to be able to augment the sort of supply deficit that the Europeans are looking for. And related to that are also issues of logistics and infrastructure. If I take Nigeria, for example, which has the highest gas reserves in Africa at about 207 Tcf. Last year they were only able to produce 2 Tcf. And exported 1 Tcf out of that. Predominantly it comes down to financing issues. It comes down even to issues of theft of petroleum products, including the landscape or the regulatory landscape not being fully harmonized. So, I think it is not really a problem of reserves per se. But how fast African countries can ramp up that production. And this is where given the logistical issues, given that the gas markets are not fully formed, I don't really see any potential beneficiaries in at least the one-year outlook, I think. Of course, we've seen Italy trying to negotiate for more gas from the likes of Algeria and Egypt, and some of the production may go up, but in terms of sub-Saharan Africa, when I look at Nigeria, or Equatorial Guinea, or Mauritania, Senegal, or Mozambique, and Tanzania, or even Republic of Congo, I think, in the one year highly unlikely. Beyond that, in maybe two to three, you can even say four years, there is a possibility of that happening. But again, it takes a lot to develop these gas projects and policy will play a role, regulation will play a role, and ultimately even the direction of the war will play a role in terms of these alternative supplies from the likes of the US and the other Middle Eastern countries who are able to much more quickly ramp up capacity and take market share.

SO: Thank you very much. So yes, capacity is a real issue, and because we’re are looking into one year, two years is okay. But there is a big question as to how long Europe will continue demanding gas, given that they are also developing their own energy transition. So indeed, Europe is looking for gas now and not necessarily in the long term, which may lead to a disconnect somehow, because we're looking at, on the one hand, the capacity gap requires significant investment in Africa, for example, producing countries. On the other hand, Europe is also going for the countries, as you mentioned, the US and others. So I think Europe is looking really for renewables as well, and this is where the disconnect is.

This is a warning to gas-producing countries in Africa when setting their priorities, as you talk about setting up the policies, but if they are setting the policies looking into the European market, while the European market, again, is trying to focus on renewables, what does this mean in terms of a long-term engagement with Europe from African producer countries? 

CN: What you're touching on is a very important question that I asked myself recently when I wrote an article on policy confusion that you are seeing across the Western countries, in particular the EU and North America, and the UK as well. In the sense that we see these governments are asking, oil companies are asking oil and gas producers across the world, including Africa, to produce more oil and gas, and send it across to Europe to help them temporarily with the crisis. But, as we all know, oil and gas projects are by their own nature long-term. So by the time you take the investment decision to commit the capital, it will take a couple of years before you start producing, and then you're not going to produce for a year or two. You are hoping to produce for the next 20-30 years, and if the outlook for those 20-30 years is hugely uncertain, then why would you bother and commit today? So this is really the fair position and questioning that existing producers are telling those consumers. Those consumers are telling them we want your gas, but only to help us through the crisis, to help us through this winter, and maybe next, until we beef up our capacity of nuclear and renewable energy.

But let me tell you an example of a country that doesn't often come to my mind. And this is a European country, Norway. So, just to understand the position of African countries. Let's look at a country in Norway, that is the closest to the EU in everything culturally, values, principles, legislations, regulations, you name it.

Norway made it very clear in May. The Minister of Energy said it openly. If Europe commits to buying more gas for the long term, we can help it replace Russian gas. And that's why, a month or two later, if I am not mistaken, there was EU-Norway energy cooperation where the EU openly said that it supports Norway's continuous exploration and production of oil and gas for 2030 and beyond. So that was a clear reassurance that the EU gave to Norway to say, we'll continue buying your oil and gas, continue investing. Why would it be a different position for African countries? So African countries should also get the same commitment from European customers who are desperate for gas that they want to maintain their gas demand for many years to come. if they don't want it., there is China on its own. If you look at the expected increase and the demand for China for the next few years on its own, it can capture all the additional capacity in expansion in liquified natural gas and LNG. So this goes back to the point I said earlier about the globalization of gas markets. It is not any more Europe on its own telling producers, “send me your gas.” If Europe is not going to be more linear and understand the position of oil and gas producers in Africa, Europe will lose it to Asian consumers who are very hungry for natural gas.

SO: Thank you very much. As we approach COP27, it is important to consider the impact of recent developments on the energy transition that we have been speaking about and the implications for African producer countries and their energy transition plans. Theo, you have shared elsewhere how wealthy countries have not delivered on their climate finance promise to sub-Saharan African countries. Some people have suggested that African countries shouldn’t pursue plans to extract gas in a world of crisis and gas supply crisis, balancing the climate crisis and gas supply crisis somewhat competing. And can be tricky. Should issues, such as who gets to extract fossil fuels and which projects are financed, be revisited in the pursuit of a more equitable energy transition? Is Europe’s sudden interest in African gas hypocritical, especially as Europe pressures African country to meet green goals or potential revenues from gas is worth it? Theo, you have spoken a lot about that.

TA: Yeah, very interesting question. And let me piggyback to what Carole said earlier. If Norway can still produce oil and gas in 2030 and beyond, if the UK in their new energy strategy clearly outlined the role of oil and gas, even in the US, again, oil and gas being a mainstay even in 2030 and beyond, then I ask myself, why must it be different for Africa in that sense? Because at the end of the day what this crisis has shown above all else is that energy security comes first. And Africa for that matter must also prioritize meeting its own domestic energy security needs. And then the rest, of course, for export to wherever the market may be. And as Carole actually told us, the market is not necessarily in Europe, and if you do a 30-40-year demand projection, the market is elsewhere outside of Europe, and the technology is also available now to even produce some of these fossil fuel resources and reduce the carbon intensity of that production process. 

In my sort of limited world where I sit, I don't really see a disconnect between the climate objectives and energy security in terms of access and affordability, what we typically in literature will call “the energy trilemma,” and more so, for Africa, because, again, what this conflict has shown, and even COVID has also shown is that we have very fragile energy systems, you have deepening or prevailing energy poverty on the continent, and we need all the resources to be able to address those concerns around energy security, and in that regard the fewer choice to plug that gap, I don't think African countries should be forced into the binary whole of having to choose between renewables and/or oil and gas in that matter. When you even talk specifically about the overall emissions, if you take Africa as a whole, it is actually less than 4 percent of the total CO2 emissions cumulatively to date. If you look even specifically within the energy systems of many African countries, I argue, that it is largely already decarbonized except for South Africa, where coal is the most dominant. So I think the issue of the just and equitable transition is very much paramount at the heart of the continent. 

But it shouldn't be made to look as though you have to choose one particular technology option and/or the other. When it comes to the financing issues again, this is where you see quite a bit of geopolitics also at play. So we know from some estimates, including a very recent study done by the climate policy initiative that Africa as a whole, needs about 250 billion every year between 2020 and 2030. We are already two years into that. If you look at last year's numbers and the flux, the continent got just a little around 30 billion coming in terms of these financing flows. And, interestingly, most of them actually went into mitigation, less into adaptation, where the research also shows African countries are heavily exposed, and even on the financing flows, many of these are coming in as loans interest-bearing commercial laws, and less as grants. So, in a sense, you see a lot of African countries caught in this quagmire. But I don't think that the solution should be one to force a technology choice on African countries, one even in Europe, the main producers as to exploring their oil and gas deposits and number two, the issue of the financing, I think, is going to be absolutely critical, especially at COP where many of the financing flows would need to be increased, and when it comes to things of the mitigation financing, and of course, the other one, which I forgot to mention, is the issue of loss and damage for historical emissions.

SO: I cannot agree with you more. Indeed, in a recent media appearance, my colleague, Thomas Scurfield also noted that European Union and wealthy countries, in general, must meet their existing climate and finance commitment before new European Union investment commitment and funding pledges can be taken seriously, particularly in Africa, where they have not made those bridges.

Building on sustainable and reliable domestic energy systems is another crucial aspect that's just mentioned. I think in the end, in the EU energy strategy this has not been clearly addressed, and many of the commentators in the Western media also noted that. But today, 600 million people in Africa still lack access to electricity and Europe wants to find as much gas as possible in Africa and other regions. It doesn’t sufficiently support energy access for market references on the need to diversify its own energy sources. I think, Carole, you mentioned this before. What are and should be the priorities for export business domestic consumption in Africa? I would like to hear from both of you. 

CN: For long we all believed that in the case of gas, and in particular in the case of Africa especially, I think, the priority should be given to the local market, to the domestic market. Because if you want to really have economic development, you need to give access to energy.

You need to allow that access by developing the local market, by putting the regulations in place, the right pricing systems in place, to build the infrastructure. So if you have gas, and that's why gas by large remains a regional business, and a big chunk of the gas produced is consumed locally, why would it be any different in Africa? I think the main problem in Africa is domestically because of the institutional side, because of the investment climate, and these are things that African countries need to really work on improving the governance of the sector. If they are to seize your portion of the golden opportunity that no other country maybe has in this way, or onahe same scale, not only in terms of oil and gas resources and reserves. 

We forget that Africa is very rich in the critical minerals needed for the energy transition. And that's why I will go back to the point that you made. We don't need to choose between oil and gas and green energy, because Africa is blessed with resources that allow the production of both to meet the energy transition while safeguarding energy security. But the experiences show that it is not if you have the resources in the ground you're going to benefit. Look at Venezuela — they have the largest proven reserves in the world, and yet they are not among the largest oil producers in the world because of what was well-known as the resource curse. So let me keep my answer brief to your question, and say, the domestic market should take precedence, but that will not be developed automatically, you need to put in place the right institutional framework to allow that to happen so that everybody benefits from the resources that you have, and the export market can be developed in parallel but should not be given priority over the domestic market.

TA: Just to add a bit to Carole's point, an interesting point, we've been doing some bit of exercise just to see if you doubled Africa's current electricity output to bridge the access deficit, how much more emissions would that contribute if you even had a major chunk of that coming by way of natural gas. And what is quite remarkable is that even if we double the output of power on the continent using the same energy mix as currently pertains, it Is still going to contribute less than 5 percent of the total cumulative greenhouse emissions in that regard. The point here is that seeking to export gas from Africa for me is not necessarily a bad idea, but as Carole said, the important thing is also to develop the regional gas markets. 

I have been involved in a few studies, and you can find that there are significant constraints in terms of developing these markets. However, we have an opportunity now with the Africa Continental free trade area to work on some of these issues, such as having harmonized gas pricing, regime, the issues about the investment requirements, and I think some of the sovereign wealth funds on the continent need to think about pulling some of their resources together, because, after all, if the money is not going to be coming from Europe and other places, if they decide to pull out the investment, we still need to develop these gas markets and there are other groups of money even domestically on the continent, with the sovereign world funds, but also some of the pension funds, et cetera, to put into some of these investment. And of course, you need to address all the regulatory and political risk issues and ensure that you are pricing the gas appropriately and doing that based on what must go to industry, and which ones must go for domestic consumption. Because if we don't develop those regional gas markets, and it is all about export, export, export, then, unfortunately, it is still going to be, in my view, the same old colonial extractivist model, which has dominated the geopolitical order for the last 400 years, with very little trickle-down effects for livelihoods on the continent.

SO: Thank you. To what extent do you think COP27 will be a moment for settling some of these questions? Are there many questions still out there?

TA: I think going into COP27, there are three key things: the issue of energy access, the issue of climate financing, and all around the issue of just transition. But I think really what is important here is that historically, Africa has not had a unified strategy on most of these issues. I think, going into COP, we, as a continent, must present a unified strategy, and the strategy should detail, in my view, our unique circumstances, but also highlight the role that oil and gas would play as an important fuel choice for any decarbonization pathway for the continent. I am not talking about other continents. I am only talking specifically about oil in Africa. In that regard, both oil and gas and renewables would for sure play a big part of that agenda.

I am just worried that the attempt to force this different pathway like it is this and not that, is going to push a lot of the already existing assets for reserves and make them potentially even become stranded in the first instance, and that would already have a cascading impact on the worst energy poverty that we were talking about with about half of the continent not having access to electricity, so the strategy is important, highlighting unique circumstances, and also advocating for more of the financing flows on the continent. And lastly, things around the critical minerals for transition where many of the countries on the continent have one form or the other. But to really make an opportunity out of it, it must be developed on a regional basis.

SO: Thank you, Carole and Theo, for joining me today for this episode of the NRGI podcast. This has been a very interesting conversation, leaving us with a lot of food for thought on what really constitutes a just transition. 

For our listeners: please check out the first two episodes on your preferred platforms. We are on SoundCloud, YouTube, Spotify, Apple Podcasts and Google Podcasts. Do join us in the next episode. Thank you.

Disclaimer: Views and opinions expressed in this podcast belong to the individuals featured and do not necessarily represent those of the Natural Resource Governance Institute. The recording and transcript have been edited and condensed for clarity.