Europe’s ‘gas rush’ in Africa: risks and opportunities (for both)

Italy was perhaps the fastest country in the European Union to turn to Africa in its efforts to wean itself off Russian gas. Western nations are indeed imposing economic and political sanctions on Russia after it invaded Ukraine in late February 2022. Italy is potentially among the hardest hit as it imports around 29 billion cubic meters (bcm) of natural gas from Moscow each year – a figure just behind to Germany which represents more than 40% of its gas needs. Replacing Russia as the main gas supplier will not be easy.

ALGERIA, EGYPT AND BEYOND — In April 2022, Italian Prime Minister Mario Draghi signed an agreement with Abdelmadjid Tebboune, the Algerian president, to buy more natural gas. Sonatrach, the Algerian state-owned oil company, which already sells around 21 billion cubic meters (bcm) of natural gas to Italy each year, will supply an additional 9 billion m3 of gas to Eni, the main Italian energy company, from September 2022 However, Rome is still expected to source at least 20 bcm of natural gas from elsewhere, especially as Algeria will struggle to produce more so quickly. Egypt has already agreed to supply 3 billion cubic meters of liquefied natural gas (LNG) before the end of 2022. Italian Foreign Minister Luigi Di Maio, Roberto Cingolani, his counterpart at the Ecological Transition Ministry, and Claudio Descalzi, managing director of Eni, embarked on exploratory trips to Angola and the Republic of Congo at the end of April 2022 with the aim of filling the remaining void. Italian Eni also aims to start LNG production from its floating plant in Mozambique before the end of 2022. For Congo, a new LNG project will be launched in 2023 to produce around 4.5 billion m3 per year of LNG. In sum, Italy already has new gas agreements with at least five African countries, including Algeria, Egypt, Libya, Angola, Congo and Mozambique.

A LIFELINE FOR AFRICAN OIL AND GAS PRODUCERS? —- Other European countries are also on the lookout for African gas, visiting capitals similar to their Italian counterparts. Nigeria, which is Europe’s fourth-largest LNG supplier, supplying nearly 13 billion m3 of LNG in 2021, also takes center stage. However, unlike its North African counterparts, Nigeria does not have a gas pipeline to Europe. In fact, given the global energy transition program before the Russian-Ukrainian conflict, investors and financiers had reduced their exposure to oil and gas transactions. However, this may change in response to current trends. Globalization has indeed been in a state of transition amid the Covid-19 pandemic and Russia’s invasion of Ukraine while China – the backbone of most global value chains – has adopted an aggressive zero Covid-19 policy that has slowed its economy as the West tries to rein in the Kremlin to curb its expansionism, hoping to deter Beijing from similarly invading Taiwan in the future. In this context, visions on the energy transition have been revised as more pressing considerations, such as maintaining gas supply for the winter season, have come to the fore. Thus, it seems that African oil and gas producers, who had been worried about the negative consequences for their development prospects of an overly aggressive and hasty energy transition, have been offered a lifeline by fate.

NEW AFRICAN PIPELINES ARE NOT RISK-FREE —- To meet increased demand from Europe, African LNG producers like Nigeria should expand the capacity of existing LNG plants in addition to building new ones. Meanwhile, much of the natural gas that international oil companies (IOCs) currently burn would have to be liquefied into LNG for export to increasingly demanding Europe. This would be the case even for many African countries which, despite their vast reserves of natural gas, do not yet meet their own domestic gas needs for power generation, domestic cooking or a myriad of other uses. Long-term contracts with EU Member States will be essential. Qatar is asking for 20-year contracts, for example. African countries currently being courted should follow suit. Planned gas pipelines to Algeria and Morocco from Nigeria will depend on this long timeframe, although each may have its own idiosyncratic risks. For example, long-standing insecurity issues in the Sahel represent a major constraint for the Nigeria-Algeria gas pipeline. Meanwhile, a relatively more expensive Nigeria-Morocco offshore gas pipeline faces a high realization threshold due to more immediate and cost-effective alternatives.

LNG shipments are reliable and relatively cost effective in the absence of pipelines. Also, investment in more LNG production capacity is a more important imperative. Even so, current time pressures are fueling the momentum. To illustrate, in collaboration with the Islamic Development Bank and the governments of Nigeria and Morocco, the OPEC Fund for International Development contributed $14.3 million in funding to the second phase of the engineering study $90.1 million Nigeria-Morocco Gas Pipeline (FEED) in March 2022. The $25 billion, 7,000 km long Nigeria-Morocco Gas Pipeline will be an extension of the West African Gas Pipeline which already allows the supply of Nigerian gas to Benin, Togo and Ghana and will cross around thirteen West African countries. country when finished. Here too, progress has been made on the US$12 billion, 4,128 km Nigeria-Algeria gas pipeline, which is expected to produce 30 billion m3 of gas annually when completed, Nigeria and governments respective Sahelians having reaffirmed their commitment to the project at the regional level. meeting in February 2022. Yet there is much skepticism about the extent to which progress can continue in light of the intractable security situation in the Sahel region.

AFRICA MUST NEGOTIATE ITS OWN GREEN TRANSITION — Europe has been forced to reassess its energy transition agenda due to the Russia-Ukraine crisis and measures adopted to avoid an escalation of war. Global banks, which had already begun to reduce their exposure to fossil fuel transactions due to the West’s aggressive push towards green energy, have now begun to revise their strategies. African countries had indeed warned that moving too quickly to renewable energy would disrupt their development prospects, especially since external financing would be needed to continue exploiting their still abundant oil and gas reserves. Now, all of a sudden, Europe finds itself ready to finance new oil and gas projects. African countries and their Western counterparts must advocate for a more nuanced and accommodating arrangement on the global net-zero carbon emissions agenda, giving Africa more time to go “green” with sufficient financing for the do comfortably.

“Europe’s ‘gas rush’ in Africa: risks and opportunities (for both)” — Commentary by Rafiq Raji — Italian Institute for International Policy Studies / ISPI.

The commentary can be downloaded here