Will Big Oil’s appetite for low carbon energy puncture EA balloon?

Tuesday May 28 2019

A solar power plant in Soroti District in Uganda.

A solar power plant in Soroti District in Uganda. Since 2014, 10 international oil companies have collectively invested about $20 billion in future energy solutions including offshore wind power, solar projects and advanced battery technologies. PHOTO | ISAAC KASAMANI | AFP 

NJIRAINI MUCHIRA
By NJIRAINI MUCHIRA
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Multinational oil and gas companies’ increasing shift towards low carbon investments is threatening the future of discoveries in East Africa, a region that was regarded as a frontier for hydrocarbons.

Apart from exploration, trepidation is also engulfing the region that raising the staggering $5 billion needed for infrastructure like pipelines and refinery for crude and natural gas could prove to be a Herculean task due to cuts in investment in fossil fuels.

As East African governments float exploration blocks for licensing to prospective investors hoping for more oil and gas discoveries, it appears oil majors are directing resources towards low carbon projects.

Uganda, Kenya and Tanzania have announced plans to license several blocks to investors to reawaken exploration activities that have been dormant in recent years.

Uganda, in particular, is aggressively marketing its second licensing round for oil blocks hoping to attract big firms through bidding after a similar initiative in 2017 attracted only small-sized firms to undertake exploration and drilling.

“The main objective of implementing the licence round is to establish additional petroleum resources and reserves to ensure sustainability of oil production and economic viability of the refinery and the crude export pipeline,” said Irene Muloni, Energy and Mineral Development Minister.

Kenya on its part is seeking to concession 33 blocks within four sedimentary basins covering approximately 500,000 sq. km while Tanzania has several open acreage both onshore and offshore open to investors.

“The EAC attaches great significance to co-operation in the exploration and development of energy resources available in the region. As agreed in the EAC Treaty, partner states shall take concerted measures to co-operate in the efficient and sustainable management of natural resources for the mutual benefit,” said John Munyes, Kenya’s Petroleum and Mining Cabinet Secretary.

In seeking to attract investors, EAC countries are being encouraged by the fact that capital expenditure by Big Oil companies is on the rebound after the 2016 collapse that was precipitated by oil prices plunging to $30 per barrel.

A report by audit firm PricewaterhouseCoopers shows that global spending on exploration and drilling activities fell by more than 60 per cent from $153 billion in 2014 to about $58 billion in 2017.

Significant impact

By the end of 2017, the volume of new oil and gas discoveries was at its lowest since the early 1950s with only 3.5 billion barrels of liquids (crude, condensate, and natural gas) discovered in 2017.

“Exploration spending is forecast to recover modestly over the near term at a seven per cent compound annual growth rate,” states the Oil and Gas Trends 2018-19 Report.

The upward rally of crude prices which are averaging $70 per barrel currently, have reignited the renaissance in investments in exploration activities by oil companies.

However, investments in low carbon projects is on the rise as companies bow to pressure from investors and environmentalists to cut down on emissions at a time when the world is grappling with climate change.

Effectively, a growing number of companies are adapting business models to align with a low-carbon energy transition, that could have a significant impact on exploration investments in East Africa.

A key project financier, the World Bank, has already announced that it will no longer finance upstream oil and gas after 2019 as part of its Climate Change Action Plan developed following the Paris Agreement.

“With some key institutional investors shifting away from fossil fuels the region is staring at a funding deficit to develop its resources,” said Charles Wahungu, Kenya Civil Society Platform on Gas and Oil co-ordinator.

He added that going by the emerging trends, it is going to be a challenge for East Africa to find licencees for the available exploration blocks.

Renewable sources

That several oil majors like BP, Eni, Equinor, Total and Shell are increasing investments in low carbon projects and exploring deals in renewable sources of energy and clean technologies could have impacts in East Africa.

Since 2014, 10 international oil companies collectively invested about $20 billion in future energy solutions including offshore wind power, solar projects and advanced battery technologies.

Of the big companies. Shell leads with plans to spend up to $2 billion annually on clean energy technologies out of a total budget of $30 billion while Equinor intends to spend about 20 per cent of its budget on renewables by 2030.

“Low-carbon technologies and regulatory change is disrupting the established order of the energy industry. The shift to a low-carbon economy presents the question of what role oil and gas companies will play in this transition, and what their strategic options are in the more immediate and longer term,” said Luke Fletcher, senior analyst at CDP, an international non-profit firm.

He added the oil and gas industry is amongst the most emissions intensive, with the production and use of oil and gas accounting for over half of global greenhouse gas emissions associated with energy consumption.

This translates into more than 17 gigatonnes of carbon dioxide equivalent per year, with about 90 per cent of these emissions coming from the downstream use of hydrocarbons.

Discoveries of oil and gas have made East Africa a frontier for oil and gas with then region currently being home to two billion barrels of oil and 57 trillion cubic feet of natural gas.

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