Africa's Role in the Future of the Global Energy Sector

15 July 2013

The Knowledge@Wharton Network

As the developed world struggles with decisions concerning fossil fuels and their availability and cost, businesses in Africa and globally have started to think more about how extensive the continent's capability in that sector might be. While roadblocks still exist, panelists at a Wharton Africa Business Forum said that with patience and an emphasis on the right niches, Africa could be a major player in the world's energy future.

Nigeria and Angola already produce more than two million barrels of oil a day, panelists noted, and countries including Equatorial Guinea, Chad, Gabon, Côte d'Ivoire and Ghana have found some reserves. Nigeria also leads the continent in production of natural gas, having produced more than 23 billion cubic meters of natural gas per year since 2009. Other countries have started to develop reserves as well, particularly Mozambique, South Africa, Côte d'Ivoire, Gabon and Senegal.

With 170 million people - the largest population in Africa - Nigeria in many ways is the focus of energy activity on the continent, panelists said, but the nation also presents a microcosm of the challenges that the energy production and distribution sectors face there.

"Seven years ago, [the Nigerian government] had a natural gas master plan," said Lolu Adubifa, CEO of Lavayo Energy, a power generation and oil and gas industry development and advisory firm based in Lagos, Nigeria's capital. "Where they are today - well, there has not been much progress."

Adubifa noted that he has learned to be patient but that it "takes a while to get that mindset." Many entrepreneurs, he added, think that they can quickly move a project from being 20% completed to 80%. "But in this industry and in Africa, you have to reset your mind to [viewing] 20% to 22% [as significant progress] because it takes so long to get government policy right and to push the industry forward. "Often it is difficult to even figure out what the regulations really are, especially when it comes to energy production, which panelists said many government officials see as a path to riches.

"The regulations are just not well thought-out. You are never sure why they are pushing in certain ways," noted Yomi Jemibewon, a principal at CardinalStone Partners, which invests primarily in Nigeria in the energy sector. "It takes a long time to get an answer. As a capital provider, you have to find out what game they are playing.... Regulators need to figure out what they want and stick to it or they will not get the investment."

Making the Move to Natural Gas
Government regulation is always a problem, even to the point of keeping the nation's population using antiquated forms of energy, according to Azeez Amosun of Oando Marketing PLC, Nigeria's leading petroleum marketing company."A large percentage of people are using charcoal and kerosene, even as Nigeria is developing its oil and natural gas resources," Amosun stated, noting that the government actually subsidizes the kerosene industry, keeping the price down so local consumers use it even though it is more dangerous and less efficient than other sources.

"It will still take a long time to get people to use natural gas, even if and when we get the government on the right track." Amosun's company has invested in gas stoves and started distributing them across the country. "People will use natural gas if the price is right," Amosun said, adding that gas is looked upon as a fuel for the rich, which is an impediment when marketing it to the general population. "We will have invested in five million gas stoves. It also makes sense for them to stop using charcoal and kerosene for health reasons, but until the price is right, they will not move to gas.

"When it comes to changing habits, Africans move at a slow pace, according to Jemibewon. "Why are so many people not using gas? There is a fear factor. They don't understand it. It is odorless and they can't see it," Jemibewon pointed out. "Someone can go down the street and get a small kerosene bottle, but they can't rationalize a large gas purchase."You have to look at the supply chain," he added. "Firewood is always available. And the government subsidizes kerosene, which is a difficult thing to overcome."

Clearing Traffic
Panelists noted that Africa also has serious infrastructure problems that need to be addressed, even in relatively developed countries like Nigeria. "I look at the Benin-Lagos road, and it is filled with trucks and traffic all the time," noted Dikko Atanu, head of gas and business development at Afren Nigeria. "Just getting the distribution of fuels can be really difficult."

According to Amosun, creating an infrastructure for the energy industry - whether it is building better roads or pipelines - will create jobs, which should incentivize government to loosen regulations. "It is just a long and difficult path to change the way people do things," he said. "That Lagos road to Benin is just a mess. It can take 24 hours to go what might [take] three otherwise."

While many governments in Africa have long controlled the extraction and distribution of natural resources, panelists said that Nigeria and Ghana are moving toward encouraging the private sector to invest as well. "Different countries are at different stages. Fifteen years ago, if you wanted to get a marine vessel [to transport workers to refineries and other facilities], you had to go through a broker, and brokers did not want to deal with some small, local company, but with an international company," noted Jemibewon. "Today, the government wants to develop local providers. Ghana is where Nigeria was 15 years ago. But I think Ghana will move in that direction. A flurry of cash will speak first and in time, they will do what is better for everyone."

Seeking Investment
Atanu said that the cost of energy is relatively low in Sub-Saharan Africa, which has served to curtail outside investment. Some Chinese firms have entered the market, he noted, but Western oil companies that have had a presence in the region for many years are still the most likely to invest. "Besides, culturally, Nigerians are not a good mix with Chinese," Adubifa stated. "They just do not do business, or anything else, in the same way. There are Chinese in Nigeria, but they are not getting the same kind of traction because they do not understand the culture.

"If the countries of West Africa, which are the most advanced at this point, fail to capitalize on their markets, panelists said, the focus of investment may shift to East Africa, where the governments tend to be more progressive, or at least more stable. Each day, they noted, there are stories of energy finds in places like Mozambique, Kenya or Tanzania, all of which are more used to dealing with European or Western business models.

"The more stable the government is, the quicker the investment," Adubifa stated, though he noted that there is already about 25 times the investment in energy in Nigeria than in all of East Africa. "But if it explodes in East Africa, those countries will have better access to the Chinese and Japanese markets, and will be better able to deal with investors from those countries."

Category: Energy