Africa Energy Bank set to finance fossil fuel projects

Continent to fund own oil and gas projects in wake of Western financial institutions’ hesitancy

ANALYSIS | RONALD MUSOKE | The African Petroleum Producers’ Organisation (APPO), an association of African petroleum producing countries, together with the African Export-Import Bank (Afreximbank) have zeroed-in on Nigeria’s federal capital, Abuja, to host the headquarters of the newly created Africa Energy Bank (AEB) as the continent insists on developing its fossil fuel projects.

The African Energy Bank is expected to address the funding challenges faced by Africa’s oil and gas industry as the rest of the world pushes ahead with the energy transition agenda. Indeed, there is a growing reluctance by Western financial institutions to fund oil and gas projects around the world citing the climate change crisis.

The Africa Energy Bank intends to provide funds for African energy projects, including emerging oil and gas projects across the continent. With an initial share capital of US$5bn, the bank will focus on financing energy projects across the continent, including both fossil fuels and renewable energy sources.

Afreximbank signed a memorandum of understanding in May 2022 with the African Petroleum Producers Organization (APPO) in a move that was intended to create a multi-billion-dollar energy bank on the continent.

The energy bank, according to the memorandum which was signed in Luanda, the Angolan capital, would provide private sector financing for new and existing oil and gas projects as well as energy development across the entire value chain. Following the bank’s unveiling last November, Afreximbank noted that it intended to partner with over 700 banks in Africa to chart a profitable pathway for the African energy sector.

Nigeria’s selection followed a meticulous review process, with the decision made during the 45th Extraordinary Session of the APPO Ministerial Council – held virtually on July 4, 2024 and chaired by Bruno Jean Richard Itoua, Congo Brazzaville’s Minister of Hydrocarbons. Heineken Lokpobiri, Nigeria’s Minister of State for Petroleum Resources (Oil) assured the Council that Nigeria would provide the necessary facilities for the bank’s timely and effective establishment.

A review by the African Energy Bank headquarters ministerial selection committee evaluated a plethora of criteria including socio-economic factors, safety, security and accessibility. The thorough selection process underscored the careful consideration given to Nigeria’s capabilities and strategic importance.

According to the African Energy Chamber, the establishment of the bank in Abuja is not only expected to “strengthen Nigeria’s role in the African energy landscape but will also streamline funding for African projects, placing the continent on track for widespread industrialization and economic growth.”

The African Energy Bank will operate in the same way as the APPO-created Africa Energy Investment Corporation–a developmental financial institution created to channel resources towards the development of Africa’s energy sector. The bank will also serve as a vessel for mobilizing African-sourced finance.

Rather than utilizing international banks for pension funds, the bank will serve as an investment corporation that will channel these funds into African projects, thus ensuring high returns on investment while developing Africa’s energy sector to drive socio-economic growth through increased energy access.

The announcement of the energy bank’s headquarters was made ahead of the African Petroleum Producers Organization’s executive retreat on July 8-9 in Johannesburg, South Africa where discussions about the future of Africa’s oil and gas sector amidst the ongoing energy transition were held.

APPO has also established a strong partnership with the Organization of the Petroleum Exporting Countries (OPEC). The collaboration between these two organizations aim to advance African oil and gas projects though shared expertise, coordinated efforts in market stabilization and investment opportunities.

Recently, OPEC held the OPEC-Africa Energy Dialogue, in which APPO attended. The third high-level meeting of this dialogue emphasized the importance of cooperation between OPEC, APPO and the African Union Commission to cultivate a sustainable intra-African oil and gas industry.

This partnership demonstrates APPO’s commitment to engaging in collaborative action to address Africa’s energy needs as well as advancing sustainable development on the continent.

“APPO has been a steadfast advocate for the continent’s oil and gas industry. Through its strategic initiatives and partnerships, such as the collaboration with Afreximbank to establish the African Energy Bank, APPO is not only addressing the financing challenges faced by the sector but also ensuring Africa’s energy security,” said NJ Ayuk, the executive chairman of the African Energy Chamber.

“By prioritizing traditional energy sources, APPO aims to support the continued development of oil and gas projects while simultaneously facilitating a balanced energy transition in Africa.”

More fossil fuel projects coming

According to a report published by a consortium of African civil society organizations in 2022, there are atleast 45 African countries where oil, gas and coal companies are either exploring or developing new fossil fuel reserves, building new fossil fuel infrastructure such as pipelines or liquefied natural gas (LNG) terminals or developing new gas-and coal fired powered plants.

Another oil and gas projects analytics report published in April, this year, by Globaldata, notes that about 470 oil and gas projects are scheduled to commence operations across the continent over the next five years. Of these, 120 projects are upstream, 160 are midstream, 92 are downstream while 99 are categorized as petrochemical projects. The report outlines total upcoming capacity and 2028 market size scenarios, highlighting all new build and expansion projects by capacity, and capex.

Yet, even with this boom, the African Energy Chamber’s State of African Energy report published in 2022, capital expenditure in Africa declined from US$ 60bn in 2014 to US$22.5bn in 2020, noting that significant levels of investment especially from African financial institutions are still required.

Interestingly, even though the bulk of the exploration and development of the fossil fuel projects is being done by Western companies, some are beginning to shy away from investment in hydrocarbons, leaving the continent without access to capital wich it urgently needs.

The bulk of exploration for new oil and gas resources in Africa is being carried out and financed by foreign companies. For instance, of the 45 countries where the oil and gas industry is prospecting for new finds, 18 are what the industry calls “frontier countries” in reference to countries that have little or no existing oil and gas production.

An analysis by Urgewald of Rystad Energy’s data, the total expenditure for oil and gas exploration in Africa rose from US$3.4bn in 2020 to US$5.1bn in 2022. However, African companies accounted for less than one third of this sum.

Usually, energy sector projects in Africa typically seek financing from development finance institutions and multi-lateral development banks. Many of these institutions have, however, imposed policies restricting fossil fuel financing in recent years.

This partly explains why countries like Uganda are yet to commercialize its oil resources, almost two decades since it made the discovery. Mozambique has also faced a difficult journey on the road to becoming a major gas producer.

The reason is that major international banks and investment funds are also wary of being associated with fossil fuels. Other international oil companies are under pressure from their investors and other stakeholders to reduce their carbon footprint.

Energy experts say although global energy firms are still interested in exploiting Africa’s oil and gas resources, the biggest challenge for African governments and their international oil and gas companies is now finding sources of finance to develop those projects.

“The bar for projects now to get to production has really risen,” Bathelémy Faye, a partner at Clearly Gottlieb, a law firm, told African Business recently.

But, thanks to major oil and gas projects underway in Africa – such as the Greater Tortue Ahmeyim, Mozambique LNG, Uganda’s Lake Albert Development, Senegal’s Sangomar Field Development and others – APPO stands ready to support these initiatives by ensuring access to necessary financing. Other countries where large upstream oil and gas expansion is planned in the near future are Nigeria, Algeria, Angola, Libya, and Mauritania. In fact, oil and gas companies are preparing to add at least 15.8bn barrels equivalent to their production portfolios in Africa over the next five years.

Some analysts in Africa say although Africa’s huge fossil expansion plans appear to be contradictory to the Paris Climate Agreement goals, the global energy transition should be approached with a bit of caution and context for the African continent.

They say Africa is still grappling with the “crisis of energy poverty” with over 600 million people lacking access to electricity. “There are so many things that are happening when it comes to the energy landscape in Africa,” said Amani Abou-Zeid, the African Union Commissioner for infrastructure and energy at the International Renewable Energy Agency (IRENA) Assembly in Abu Dhabi in April, this year.

Commissioner Abou-Zeid noted that Africa’s exploitation of all its natural gas resources will only marginally increase Africa’s share of global emissions. “No one can preach to Africa when it comes to emissions and our positions and our commitment to the climate issue,” she said.