Africa’s biggest oil and gas discoveries do little for national economies

by MMC
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(Bloomberg) — The last thing Senegal needed in its long-running effort to capitalize on big oil and gas discoveries off its coast was political unrest.

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Africa’s new natural gas superstar was bubbling with optimism as BP Plc, Woodside Energy Group Ltd. and Kosmos Energy Ltd. agreed to develop fields off the coast of the West African country a few years ago. The findings have been touted as a turning point in a country where villages are still not connected to the electricity grid and more than a third of residents live in poverty.

“General electrification for the entire population will become a reality,” Sokhna Ba, the youngest member of Senegal’s parliament, said in an interview in Dakar, the capital, late last year. “The income could also be used to improve the living conditions of the population. »

But a series of delays to BP’s $4.8 billion Grand Tortue Ahmeyim, or GTA, gas project, the latest of which occurred only last month, has meant that won’t happen anytime soon. soon, prompting the country to say it could miss out on the International Monetary Fund’s economic growth. forecast in 2024. Today, the situation has been aggravated by the attempt to delay the elections which extend the mandate of President Macky Sall by almost a year, plunging into crisis the country which is among the most stable democracies in West Africa and increasing the cost of the necessary funds. for its energy aspirations.

Senegal joins other African countries that have struggled to exploit some of the world’s biggest oil and gas discoveries for decades. The discoveries rarely delivered on their promises, often doing more harm than good. Everything from project delays to political uncertainty and mismanagement has capped export revenues, forcing countries to borrow more and worsening their financial situations. Senegal’s debt is becoming more and more expensive, Mozambique has had to restructure its loans and Ghana has defaulted due to mismanagement of its oil and gas production.

The findings also did not contribute to improving the energy situation of homes. The continent’s domestic markets are no match for the lucrative markets beyond its borders. Foreign companies balk at developments that do not target export markets, leaving local economies with limited access to their own gas that can be used to generate electricity for households and industry. Nearly 600 million people, or a little less than half of the African population, do not have direct access to energy, even though 6% of the world’s gas and around 7% of oil are produced there.

“Natural gas is mainly exported, with African countries benefiting from the foreign exchange earnings, but it is true that domestic energy needs are large and unmet,” said Vijaya Ramachandran, director of energy and development at the Breakthrough Institute. a think tank based in California.

Africa is the only continent where the number of people without access to electricity has increased over the years. Most Africans connected to the grid consume less per capita than a refrigerator in the United States. According to the International Energy Agency, the continent’s universal access to modern energy costs $25 billion a year, the equivalent of building a liquefied natural gas (LNG) terminal.

But with the development of projects dependent on foreign companies and strong demand from Europe – particularly as an alternative to Russian gas – electrification in African countries has been neglected. Although the IEA says that up to two-thirds of the continent’s oil and gas production could potentially be used to meet local demand by 2030, this estimate depends on the convergence of interests of foreign companies and nations, which which was not the case.

The Senegal experience

Take the case of Senegal. Poised to become a major natural gas producer, export revenues of up to 100,000 barrels of oil per day and at least 2.5 million tonnes of LNG per year from the GTA project are already factored into the forecast economics of the country. But his hopes of exploiting the Yakaar-Teranga offshore gas field to help the country’s and region’s industries seem distant.

President Sall had designated this area – Yakaar meaning “hope” in the local Wolof language and Teranga translated as “prosperity” – as one that would boost electrification in West Africa. But expectations were turned upside down in November when BP, the operator which held 60% of the shares, left the field. BP wanted to export gas from Yakaar-Teranga, but Senegal wanted it for domestic use, Oil and Energy Minister Antoine Félix Diome told parliament.

As Senegalese national oil company Petrosen and Dallas-based Kosmos, which temporarily took over BP’s stake, are looking for a new, deep-pocketed partner, hopes of the field’s future development are fading. quickly. Khady Ndiaye, head of West Africa at Kosmos, said in emailed comments that the company was working with Petrosen to meet the government’s timetable.

“BP has its interests; Senegal too,” said Ba, the lawmaker. “The difference is that Senegal lacks the means and expertise to develop its resources. »

BP, which did not respond to questions about the project, is still the operator of the GTA development, with strong demand for LNG exports to Europe. GTA and another development, Sangomar, could still help lift Senegal’s growth to 8.3% this year, provided operators avoid further delays.

Elsewhere in Africa

Mozambique experienced a similar wave of excitement and disappointment after major gas discoveries launched in 2010 off the coast of the southeast African country. Shell’s plans for a gas-to-liquids plant and a fertilizer project led by Norwegian company Yara International ASA have been canceled, after citing strategy changes and market fluctuations.

In anticipation of revenues from LNG exports, Mozambique, one of the poorest countries in the world, had increased its annual growth forecast to 24% between 2021 and 2025. It restructured its Eurobond in 2019 , with a repayment schedule linked to expected revenues from LNG exports. a project which would be bought by TotalEnergies SE.

But an Islamist insurgency has delayed onshore settlement and associated revenues, increasing the risk of debt servicing. Mozambique’s situation has gotten worse, according to the International Institute for Sustainable Development, a Winnipeg-based think tank.

“GDP growth has declined, while debt, inequality, unemployment and poverty have increased,” the researchers write in a paper published in December. Future government revenues, which will only rise significantly from 2032, will also be exposed to an uncertain gas market and unprofitable projects could become a net liability, they said.

For its part, Ghana has failed to optimally manage its oil and gas resources. After major discoveries were made by Tullow Oil Plc. From 2007, Ghana had the opportunity to boost industrial development through gas-fired electricity. Instead, gas is burned in the fields. Despite its rich natural resources, Ghana has failed to honor its sovereign debt and the state’s power system has fallen behind schedule with independent power producers. A project to import LNG has been stopped.

Big impact

Large-scale energy projects in Africa typically face delays, with oil developments taking a decade, about twice as long as expected, according to the Natural Resource Governance Institute, a nongovernmental organization. Instead of generating windfall profits, these delays can weigh heavily on a small economy.

The IMF revised Senegal’s growth for 2024 from 10.6% to 8.3% “mainly due to delays in hydrocarbon production,” Papa Daouda Diene, an analyst at NRGI, said in an interview.

Faced with what they see as unreliable foreign partners, African national oil companies want to build and manage these assets themselves. The Senegalese Petrosen wants to eventually become the main operator of the Yakaar-Teranga project. The country is also installing local pipelines.

“We don’t want to wait, we want to start building the pipeline network. The idea is to be ready before the gas project is completed,” Joseph Medou, general director of Senegalese gas network Réseau Gazier du Sénégal, said in an interview.

The government will need to issue a Eurobond to raise funds for state participation in oil and gas projects, and in light of the uncertainty surrounding the energy transition, it should consider strengthening supervision of Petrosen, a Diene said.

Today, increased political tensions in the country will make borrowing more expensive.

As the Yakaar-Teranga project seeks a key partner and the BP-backed GTA project – once planned for 2022 – continues to be pushed back, Senegal, which last year borrowed $900 million to repay its debt in 2024, could sink into a deeper financial crisis. hole, said Ba.

“This debt will be paid by generations,” she said.

–With help from Matthew Hill and Laura Hurst.

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