Mitigating Perceived Risk in African Energy Investment

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A high-level panel comprising African public and private sector energy leaders discussed strategies for mitigating project development risk during the African Energy Chamber’s Invest in African Energy reception in Dubai on Thursday, which aimed to connect international financiers with African energy projects.

Africa is widely recognized as an attractive investment destination due to abundant natural resources, an above-average drilling success rate, a rapidly expanding domestic market, growing purchasing power and associated needs for power, technology, innovation and industrialization. However, the continent continues to experience a high degree of perceived risk.

Under the theme, “Africa’s Advantage: Countering the Myth of Africa-Specific Risk,” the panel comprised Egbert Faibille Jr., CEO of Ghana’s Petroleum Commission and Elison Karuhanga, Partner of Uganda’s Kampala Associated Advocates, and was moderated by Amena Bakr, Chief OPEC Correspondent and Dubai Deputy Bureau Chief for Energy Intelligence.

With COVID-19, crude oil price volatility and the energy transition triggering reduced investor appetite, heightened transparency has become critical to sustaining foreign direct investment flows and mitigating perceived risk. Recent efforts by several African countries to join the Extractive Industries Transparency Initiative (EITI) – a global standard for the responsible governance of oil, gas and mineral resources – have demonstrated a continent-wide desire to improve transparency.

“Investors need to understand that our projects are safe and responsible,” said Elison Karuhanga, speaking on the ongoing development of the East African Crude Oil Pipeline Project. “There is a lot of misinformation about the pipeline. It is part of a larger upstream project that will be producing around 250,000 barrels per day. The Uganda oil and gas project is expected to produce 13 kilograms of carbon dioxide for every barrel of oil, which is quite competitive globally. The African average is around 30 kilograms per barrel, so it will be one of the lowest carbon-emitting projects. It will be extremely transformational.”

“Africa’s story has not been told. Instead, it has always been told by people who are not from Africa,” echoed Egbert Faibille Jr. “Due process is followed.”

Another means of countering perceived risk is the establishment of public-private partnerships, whereby private sector companies and financiers can better acquire local knowledge and foster relationships on the ground to mitigate unknown, above-ground variables. Geopolitical stability, regulatory and fiscal certainty and government transparency play a weighted role in a country’s ability to attract private capital, particularly in the oil and gas industry, which often requires some degree of partnership or production sharing with the host government.

“We have several blocks open for direct negotiation and three available for farm-in opportunities,” noted Egbert Faibille Jr., speaking on opportunities for upstream investors to enter Ghana. “We have some fields that are in pre-development, so if we are able to get contractors, we should see a surge in production by 2030.”

Because of their scale, midstream, downstream and integrated projects often require a combination of financing, ranging from international and local commercial banks to export credit agencies to development finance institutions. Strengthening existing commercial relationships with international lending institutions would significantly enhance a project’s ability to raise sufficient funds with more favorable terms and conditions. Increasing the capacity of local financial sectors would also help offset the impact of perceived project development risks by lending local regulatory expertise, along with local currency financing solutions for offtake agreements.

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