New African bank to finance oil and gas as funding dries

As Western financing for oil and gas projects becomes increasingly difficult to secure the African Petroleum Producers' Organisation (APPO) is establishing a new bank that will finance oil and gas projects in Africa. The Africa Energy Bank aims to attract investment from countries such as Saudi Arabia, the United Arab Emirates, Qatar, and Kuwait, while addressing the funding challenges faced by national oil firms in Africa. The move comes as international financing institutions are scaling back their funding for fossil fuel projects.

The Africa Energy Bank was first announced last year in response to pressures faced by the continent’s oil and gas industry as international investment in hydrocarbons diminishes. At the time, the head of Afrieximbank, Benedict Oramah, emphasised the necessity to strike the right balance between the imperatives of mitigating climate change and the urgency of averting social upheavals as a result of increasingly difficult economic and financial conditions in Africa. For many African countries, oil and gas exports serve as a significant revenue source, contributing between 50% and 80% of total government revenue in some instances. Many are worried that the global shift to clean energy could leave these assets stranded.

Shareholding in the Africa Energy Bank will be open to all African nations and their respective national oil companies. However, participation will be limited to those who share the bank’s vision and do not represent sovereigns or investors from outside of Africa.

From 2016 to mid-2021, financial institutions directed at least US$132bn into 964 fossil fuel projects in sub-Saharan Africa. But a shift is underway, and pressure has mounted on these institutions to stop funding African fossil fuel ventures. At the 2021 COP26 summit in Glasgow, an array of countries and development finance institutions – many of them African – pledged to cease new direct public support for unabated fossil fuel energy. The following year, the G7 nations also committed to phasing out support for new foreign investment in oil, gas and coal projects.

In Africa, opposition to banks financing fossil fuel projects has been particularly pronounced in response to the proposed funding of the East African Crude Oil Pipeline (EACOP). The pipeline, spanning over 1,400 km from Uganda's emerging oil fields to the port of Tanga in Tanzania, has been met with criticism due to its potential negative impact on local communities, the climate and wildlife. Last year, the project's shareholders, which include TotalEnergies and the China National Offshore Oil Corporation, made their final investment decision. However, a portion of the project's debt funding remains pending. 

The #StopEACOP advocacy group says that numerous banks and insurers, including Citi, HSBC, Deutsche Bank, Standard Chartered, and Morgan Stanley, have already opted against supporting the project. Several African banks, such as ABSA, FirstRand, Nedbank and Investec, have also stated they will not fund the project. Standard Bank, the continent's largest lender by assets, is reportedly yet to decide whether it will finance the pipeline. The Johannesburg-based bank has faced scrutiny for its backing of fossil-fuel projects. In 2022, its commitments to coal mining, oil and gas, and fossil fuel-based power generation increased by 21% to ZAR119.4bn (US$6.2bn). Although this is nearly five times its exposure to renewable energy projects, its lending to green-power initiatives saw a substantial increase of 84% over the year. Nevertheless, the bank recently defended its involvement in financing fossil-fuel projects, arguing that the continent's energy requirements must be weighed against environmental considerations.

The topic of a 'just transition' is increasingly discussed in Africa. This framework takes into account the reliance of numerous African countries on fossil fuels for their energy necessities. It also considers the economic and infrastructural hurdles that could impede an immediate, full-scale transition away from these energy sources.

While many Western nations have shown reluctance towards African oil and coal projects, they appear more receptive to natural gas initiatives, often seen as the ‘cleanest’ fossil fuel. In early 2022, the European Commission labelled natural gas as a climate-friendly energy source. The onset of the Ukraine war, which has strained European energy supplies, has further catalysed this shift towards supporting African natural gas projects. For instance, last year saw the deputy director-general for energy from the European Commission travelling to Nigeria to discuss opportunities for increasing gas supplies. At the same time, Germany showed interest in supporting the development of natural gas projects off the coast of West Africa. Additionally, Italy entered into an agreement in 2022 to elevate gas imports from Algeria.

References

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‘Germany is looking to west Africa to help solve its gas woes’, Quartz, 23 May 2022

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