- Three reports released by the African Climate Foundation analyzed the potential impact of natural gas extraction on the economies of a series of countries in Africa.
- Research for the reports was carried out in partnership with Willis Towers Watson, a British-American insurance risk adviser.
- The groups found that a global transition away from fossil fuels could lead LNG investments in Mozambique, Tanzania and elsewhere to become a drain on public finances in the long term.
- The reports suggested that as the cost of renewable energy declines, LNG-producing governments will also come under pressure to pay expensive, inefficient subsidies for domestic gas consumption.
Should African countries use natural gas to power their economies until they can build more climate-friendly renewable electrical grids? The question has been at the heart of an acrid debate this year, pitting would-be fossil fuel powerhouses like Senegal and Mozambique against climate activists on the continent, who say a new round of resource extraction would just bring more corruption and pollution. And while only a year ago Europe vowed to pull funding from gas projects in Africa, now it’s touring the region with a new face on as it looks to make up for energy shortfalls caused by sanctions on Russia over its invasion of Ukraine.
A new series of reports released by the African Climate Foundation last week should strengthen the resolve of anti-gas voices. According to the group, making new investments into liquefied natural gas (LNG) would be bad for African economies, particularly under scenarios where the world starts making deeper cuts to its carbon emissions. And as the price of renewables drops, attempts to use natural gas to bring much-needed electricity to households and industries on the continent will likely be a costly drain on public finances, the reports said, requiring governments to spend heavily on fossil fuel subsidies.
“Obviously the story looks different in different countries, but while it might meet a short-term need of export revenues, in the longer-term countries not only have stranded asset risk, they’ll also be subject to things like the carbon border adjustment mechanisms that will ultimately penalize fossil fuel-dependent economies,” said Ellen Davies, a senior research adviser with the ACF.
The ACF’s reports were written in partnership with Willis Towers Watson, a British-American insurance advisory firm, which analyzed the potential impact of global climate policies on proposed gas projects in countries like Mozambique and Tanzania. With major energy importers in Europe and East Asia looking to shift away from intensive fossil fuel use, export windfalls from gas produced by those projects could be short-lived. Even existing producers like Nigeria, Algeria and Egypt could find themselves locked into domestic gas infrastructure that’s more of an economic burden than a boon, the group said.
“In scenarios with faster global decarbonization, lower natural gas demand and lower long-term prices will reduce the value of existing African natural gas industries and damage the economic viability of future LNG projects,” it wrote.
In Mozambique, for example, where massive offshore LNG reserves were discovered in 2010, under a scenario where world governments take action to keep global warming well below 2° Celsius (3.6° Fahrenheit), nearly $70 billion of the country’s expected gas revenues would be at risk. And in the event that global “net-zero” carbon emissions were accomplished by 2050 — a long-shot, but one which remains the stated goal of the United Nations, among others — nearly all of Mozambique’s gas fields would wind up being unprofitable.
The reports also warned that the flurry of interest in African gas by European countries hoping to solve their immediate energy crisis is a temporary phenomenon, and that when it subsides, gas producers will likely find themselves with a glut of product and few buyers.
“There’s so much excitement over high prices and demand, but Europe’s plans remain to transition by 2030, and African countries are really just a stopgap for Russia at the moment,” Davies said.
The group’s analysis comes with two major caveats: in the short term, LNG exports will be profitable, even if decarbonization efforts pick up steam; and in scenarios where the world continues on its current trajectory of fossil fuel use, even expensive new projects such as Mozambique’s will be economically viable. But those scenarios could prove to be pyrrhic victories: Mozambique, for example, is one of the most climate-vulnerable countries on Earth, suffering from a series of devastating cyclones in recent years.
While a world where fossil fuel use is not severely curtailed might be good for the balance sheet of gas exporters in Africa, it would come at the cost of severe flooding, coastal erosion, and extreme weather.
The reports also cast doubt on the central argument made by those who favor increased LNG extraction: that some of the production could be redirected toward domestic use, addressing severe rates of energy poverty. Nearly half of the total population of the African continent currently lacks access to power, and producers like Nigeria are aiming to build pipelines and other infrastructure to send some of the gas they produce to businesses and households within their borders.
But according to the ACF, as the price of renewable energy technology continues to fall, investments made into that kind of infrastructure could trap countries into burning LNG that will eventually be more expensive than green alternatives like solar, hydropower and wind.
And to ensure that gas is affordable for domestic businesses and customers, governments like Nigeria’s will have to continue paying expensive subsidies that will only become more burdensome as local demand rises. That increased demand would also eat into the amount of gas available for export — which is the revenue stream that pays for subsidies — putting those governments in a difficult position and forcing them to shift spending away from other priorities.
In one of its case studies, for example, the ACF and Willis Towers Watson analyzed a Mozambican proposal to earmark 25% of the LNG extracted from its offshore Cabo Delgado fields for use in domestic industrial plants. Under the plan, locally-owned factories would be able to use some of the gas to manufacture fertilizer and other products that would help modernize Mozambique’s economy. But to make the scheme viable for the oil majors financing the project, Mozambique’s government would either have to significantly raise domestic gas prices or eat into public funds.
“[The] government may have to use gas revenues from LNG exports to fund subsidies, rather than using them to finance economic development,” the report said.
To make matters worse, products that are manufactured with the use of subsidized gas in countries like Mozambique or Nigeria could run into a brick wall once they were exported. As part of its climate plans the European Union would, under a “carbon border adjustment mechanism,” slap heavy taxes on imports that were produced using fossil fuel-heavy manufacturing. The proposal has been sharply criticized as unfair by African leaders.
The ACF’s research will not be well-received by those advocating for the use of natural gas as a transition fuel, who say that until wealthy countries make good on their pledges to fund green grids, their less-well-off counterparts like Nigeria and Mozambique have no choice but to use the resources they have for now.
“You have a significant number of countries in Africa where less than 50% of the population has access to energy,” said Jean-Paul Adam, director of technology, climate change and natural resource management at the U.N. Economic Commission for Africa. “They have a huge infrastructure gap, and I think everyone understands that those countries will need to increase fossil fuel [use] to give them the base generation to then bring on board renewable energy.”
Davies said that while she agrees that rich countries’ failure to follow through on their promises is putting many African countries in a difficult position, the ACF’s research shows that natural gas isn’t the solution they’re looking for.
“One of the big arguments made in favor of developing our gas resources on the continent is that it will enable us to address the energy access gap. And while gas obviously technically can play this role, the economics on the whole favor exports. So those developing resources on the continent have very little interest and incentive to favor domestic consumption over global markets,” she said in a press briefing.
Banner image: A natural gas terminal off the coast of Rimini, Italy. Similar facilities are being planned or built in countries like Senegal, Mozambique, and Tanzania. Photo courtesy of Elisabetta Zavoli.