Energy investments in Africa: opportunities and complexities
Africa is among the fastest growing regions in the world. As pointed out in the most recent OECD report, the continent’s economy is expected to rise by around 4 percent in 2016, with Ethiopia and the Ivory Coast leading the race, having both experienced double-digit growth since 2005. The IMF World Economic Outlook (WEO) released reports in mid-April showing that, despite significant headwinds resulting from global trends and regional specific risks, Egypt’s nominal US dollar GDP expanded by an average of 7.5 percent per year between 2012 and 2015.
There is much debate as to what exactly spurred Africa's impressive growth, and although no consensus has been reached regarding the relative importance of external versus internal factors, it seems evident that the continent has profited from the very favourable international context both for its exports and for attracting capital. According to the World Bank, the current key drivers of growth in the region are infrastructure investments, a rebounding agriculture industry and a buoyant services sector, enhanced by a significant increase in the volume of external financial investments and aid flows.
Energy projects are key growth drivers in Africa particularly for countries like Egypt, which are trying to become energy independent and net exporters of energy from both conventional and renewable sources. The continent needs growing commitment in the energy industry to fuel development, and this is what makes Africa attractive to many key players. ENI plans to invest around €20 billion ($22.5 billion) in 15 African countries over the next four years, mostly in oil and gas, as recently stated by the company's CEO Claudio Descalzi. French companies have announced that they will invest a total of €2 billion in renewable energy in Africa between 2016 and 2020, which is a 50 percent increase on the last five years. BP recently signed an agreement to invest $12 billion in Egypt to produce three billion barrels of oil equivalent. Endesa, Rosneft, Lukoil, Reliance Industries, RWE, EXXON Mobil, Saudi Aramco and General Electric are also poised to make major investments in the continent.
Although Africa seems to be a field of opportunities for energy companies, the business environment remains challenging.
In terms of ease of doing business, the continent lags behind, with most African countries placed at the bottom of the Global Competitiveness Index. Although the legal framework of each state may differ, the most challenging matters for energy investors usually concern a set of rather common issues, such as the fact that:
i) The incorporation of a local company might require local partners as majority shareholders and the legal protection of minority shareholders is usually quite weak
ii) The process of obtaining permits and authorisations (including construction permits) might be cumbersome and time consuming
iii) The lack of legal stability and transparency - particularly in the energy sector - may undermine the financing of large, long-term projects
iv) Property registrations might be restricted and registrations in land registries might neither facilitate transactions nor prevent the unlawful disposal of real estate
v) Taxes might be nominally low, but the fiscal wedge might be burdened by governmental fees, customs and deadweight charges related to inefficient bureaucracy
vi) Labour regulations often impose restrictions and quotas on the hiring and termination of workers. Consequently, doing business in Africa requires a careful analysis of company deeds, permits, licences, contracts and their enforceability, and an in-depth understanding of the applicable law to duly assess risk-adjusted ROI.
To address these sources of vulnerability; energy, oil and gas companies investing in Africa may avail themselves of the protections offered by the investment protection treaties entered into between their home state and the host state. Under these treaties, each contracting state undertakes to protect qualified “investments” made in its territory by qualified “investors” (natural and legal persons) of the other contracting state, as defined in the treaty.
These treaties grant a broad array of substantive protections against the host State’s discriminatory and arbitrary measures, unfair treatment and uncompensated expropriation. These treaties also ensure the free transfer of capitals and stability of the legal framework, and protect foreign investors in case of inconsistent action of the host State’s bodies and frustration of their legitimate expectations (also considering the host state’s right to set and implement its policies reasonably and in good faith). More importantly, most of these treaties contain an investor-state forum clause that allows investors to enforce their rights through arbitration directly against the host State, including under the ICSID Convention of 1965.
Certain African States have entered into an extensive network of investment protection treaties. For instance, Egypt has investment protection treaties in force with Italy, France, Germany, the UK, the Netherlands, Benelux, Spain, the US and Canada. Before investing, each investor should therefore review the investment protection treaties entered into by the state in which they are investing and channel their investments through a vehicle that qualifies for treaty protection, so as to maximise the security of their investments.
For these reasons, the energy sector and investment protection remain key factors in enhancing Africa’s growth.
This story originally appeared on African Business Review.
Words by Riccardo Bicciato, Lorenzo Melchionda and John Shehata of BonelliErede
Drax advances biomass strategy with Pinnacle acquisition
The Group’s enlarged supply chain will have access to 4.9 million tonnes of operational capacity from 2022. Of this total, 2.9 million tonnes are available for Drax’s self-supply requirements in 2022, which will rise to 3.4 million tonnes in 2027.
The £424 million acquisition of the Canadian biomass pellet producer supports Drax' ambition to be carbon negative by 2030, using bioenergy with carbon capture and storage (BECCS) and will make a "significant contribution" in the UK cutting emissions by 78% by 2035 (click here).
This summer Drax will undertake maintenance on its CfD(2) biomass unit, including a high-pressure turbine upgrade to reduce maintenance costs and improve thermal efficiency, contributing to lower generation costs for Drax Power Station.
In March, Drax secured Capacity Market agreements for its hydro and pumped storage assets worth around £10 million for delivery October 2024-September 2025.
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