Security and Diversity of Supply: Two golden rules of the energy sector, have been dashed.
The new credo is ‘Insecurity and No Diversity of Supply’.
What started as an oil war between Saudi Arabia and Russia to gain or maintain market share has produced uncertainty and destabilization across the entire energy sector. Add the corona virus to the mix and you have the perfect storm.
How long will traders and end users tolerate such a situation? Yes, traders on the spot market can gain a few windfall moments but in the long term this disruption could herald an established entry for renewables. End users want stability and more now than ever are willing to pay a small premium to ensure stability of their fuel supply.
How will this volatility affect Africa? Here’s a place where the oil majors have key assets and control major portions of the value chain; where little attention has been given to renewable energy.
Here’s a continent which the World Energy Outlook 2019 forecasts to have unprecedented growth in the next 20 years.
In its “Stated Policies Scenario” The World Energy Outlook 2019 declares that energy demands woud rise by 1% per year to 2040. Low-carbon sources led by solar photovoltaics (PV) supply more than half of the growth, and natural gas, boosted by rising trade in LNG accounts for another third. Oil demands flatten by the 2030s and coal use edges lower. The key is “the momentum behind clean energy technologies is not enough to offset the effects of an expanding global economy and growing population. The rise in emissions slows but with no peak before 2040, the world falls short of shared sustainable goals.”
A second scenario entitled “Sustainable Development Scenario” maps out a way to meet sustainable energy goals in full, requiring rapid and widespread changes across all part of the energy system. These scenarios are fully aligned with the Paris Agreement by holding the rise in global temperatures to well below 2 0C and pursuing efforts to limit it to 1.5 0C.
Back to the Future
Prior to the ensuing energy dispute, the “Sustainable Development Scenario” might have sounded like a birthday wish. Something to give you a feeling that your good intentions will indeed save the planet. And then get on with the business on hand. Now the future has arrived and in harsh terms. Do we really think that the oil majors will act as a white knight and come to the rescue? Pursuing projects with the hope of adding on some symbolic renewable energy projects? The real fear is not changing from fossil-based fuels to renewables. Rather it is the fear of not being to see or totally fathom how a renewable future will look. We should have no illusion about the state of paralysis of the oil and gas sector.
According to a recent study by the Institute for Energy Economics and Financial Analysis the largest oil and gas companies for years have lived beyond their means and paid more money to investors than they can reasonably afford. Analysis found that the five largest Big Oil majors — Exxon Mobil, Chevron, Royal Dutch Shell, BP and TOTAL— spent $536Billion on shareholder dividends and stock buybacks since 2010 while bringing in just $329Billion in free cash flow.
“The oil majors are consistently under-performing the market and may believe that shareholders won’t notice, as long as they receive generous dividends,” said Tom Sanzillo, co-author of the report and director of finance for the institute, a think tank that supports renewable energy. “As these companies continue to sell off assets and acquire more debt, they reveal a sector in disarray.”
This study covers the period of the last oil bust from 2014 to 2017, when a lot of companies limited their reductions in dividends in buybacks — as revenues fell more sharply — to stop investors from abandoning their firms. BP also was a shrinking company during most of the last decade, selling off many assets after the 2010 Deepwater Horizon tragedy in the Gulf of Mexico.
Rystad is predicting that if the price of oil remains at the $30 level this could lead to cuts of $100Billion production and exploration budgets. In 2021 there could possibly be cuts of another $150Billion, leading to bankruptcies in the oilfield sector.
The World Energy Outlook 2019 notes that under “the Stated Policies Scenario”, the rise in Africa’s oil consumption to 2040 is larger than that of China, while the continent also sees a major expansion in natural gas use.
WEO-2019 continues:” The big open question for Africa remains the speed at which solar PV will grow. To date, a continent with the richest solar resources in the world has installed only around 5 gigawatts (GW) of solar PV, less than 1% of the global total. Solar PV would provide the cheapest source of electricity for many of the 600Million people across Africa without electricity access today.”
By 2040 Africa’s urban population is slated to grow by more than half a Billion, much higher than the growth seen in China’s urban population between 1990 and 2010. China’s production of steel and cement sky rocketed. Africa’s infrastructure will probably not follow this course but the energy implications for the urban growth will be profound. For example, air conditioning or other cooling services.
Total external debt for sub-Saharan Africa jumped nearly 150% to $583Billion in 2018 from $238Billion ten years earlier, according to the World Bank. This could become unsustainable as the average public debt increased from 2010-2018 to 59% GDP up from 40%.
The World Bank has operations of some $20Billion on the continent, while the African Development Bank has commitments of some $10Billion. Both banks have a wide variety of financing tools at their disposal for a variety of projects: be that wind, solar, or geo-thermal. Yet the problem is not one of financial engineering nor technical competence. Both banks have these resources available.
Rather what is required is the vision and strategy to create an African Energy Transition Roadmap coordinated by the World Bank, African Development, IMF and Africa’s national governments. Such a roadmap should also include public-private partnerships in order to leverage project economics, Instead of a Joseph’s coat of many colours in which only regional, national or project interests are featured. Such a roadmap should meet the criteria of the “Sustainable Development Scenario” set out by WEO 19. Certainly when the energy value chain is being totally re-invented its time to make the quantum jump to bring Africa to the frontline where economic innovation and technical breakthroughs are being done.
Gerard Kreeft, BA ( Calvin University, Grand Rapids, Michigan, USA ) and MA (Carleton University, Ottawa, Ontario, Canada), Energy Transition Adviser, was founder and owner of EnergyWise. He has managed and implemented energy conferences, seminars and master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe. He writes on a regular basis for Africa Oil+Gas Report.