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
Carbon dioxide removal revenues worth £2bn a year by 2030
Carbon dioxide removal revenues could reach £2bn a year by 2030 in the UK with costs per megatonne totalling up to £400 million, according to the National Infrastructure Commission.
Engineered greenhouse gas removals will become "a major new infrastructure sector" in the coming decades - although costs are uncertain given removal technologies are in their infancy - and revenues could match that of the UK’s water sector by 2050. The Commission’s analysis suggests engineered removals technologies need to have capacity to remove five to ten megatonnes of carbon dioxide no later than 2030, and between 40 and 100 megatonnes by 2050.
The Commission states technologies fit into two categories: extracting carbon dioxide directly out of the air; and bioenergy with carbon capture technology – processing biomass to recapture carbon dioxide absorbed as the fuel grew. In both cases, the captured CO2 is then stored permanently out of the atmosphere, typically under the seabed.
The report sets out how the engineered removal and storage of carbon dioxide offers the most realistic way to mitigate the final slice of emissions expected to remain by the 2040s from sources that don’t currently have a decarbonisation solution, like aviation and agriculture.
It stresses that the potential of these technologies is “not an excuse to delay necessary action elsewhere” and cannot replace efforts to reduce emissions from sectors like road transport or power, where removals would be a more expensive alternative.
The critical role these technologies will play in meeting climate targets means government must rapidly kick start the sector so that it becomes viable by the 2030s, according to the report, which was commissioned by government in November 2020.
Early movement by the UK to develop the expertise and capacity in greenhouse gas removal technologies could create a comparative advantage, with the prospect of other countries needing to procure the knowledge and skills the UK develops.
The Commission recommends that government should support the development of this new sector in the short term with policies that drive delivery of these technologies and create demand through obligations on polluting industries, which will over time enable a competitive market to develop. Robust independent regulation must also be put in place from the start to help build public and investor confidence.
While the burden of these costs could be shared by different parts of industries required to pay for removals or in part shared with government, the report acknowledges that, over the longer term, the aim should be to have polluting sectors pay for removals they need to reach carbon targets.
Polluting industries are likely to pass a proportion of the costs onto consumers. While those with bigger household expenditures will pay more than those on lower incomes, the report underlines that government will need to identify ways of protecting vulnerable consumers and to decide where in relevant industry supply chains the costs should fall.
Chair of the National Infrastructure Commission, Sir John Armitt, said taking steps to clean our air is something we’re going to have to get used to, just as we already manage our wastewater and household refuse.
"While engineered removals will not be everyone’s favourite device in the toolkit, they are there for the hardest jobs. And in the overall project of mitigating our impact on the planet for the sake of generations to come, we need every tool we can find," he said.
“But to get close to having the sector operating where and when we need it to, the government needs to get ahead of the game now. The adaptive approach to market building we recommend will create the best environment for emerging technologies to develop quickly and show their worth, avoiding the need for government to pick winners. We know from the dramatic fall in the cost of renewables that this approach works and we must apply the lessons learned to this novel, but necessary, technology.”
The Intergovernmental Panel on Climate Change and International Energy Agency estimate a global capacity for engineered removals of 2,000 to 16,000 megatonnes of carbon dioxide each year by 2050 will be needed in order to meet global reduction targets.
Yesterday Summit Carbon Solutions received "a strategic investment" from John Deere to advance a major CCUS project (click here). The project will accelerate decarbonisation efforts across the agriculture industry by enabling the production of low carbon ethanol, resulting in the production of more sustainable food, feed, and fuel. Summit Carbon Solutions has partnered with 31 biorefineries across the Midwest United States to capture and permanently sequester their CO2 emissions.
Cory Reed, President, Agriculture & Turf Division of John Deere, said: "Carbon neutral ethanol would have a positive impact on the environment and bolster the long-term sustainability of the agriculture industry. The work Summit Carbon Solutions is doing will be critical in delivering on these goals."
McKinsey highlights a number of CCUS methods which can drive CO2 to net zero:
- Today’s leader: Enhanced oil recovery Among CO2 uses by industry, enhanced oil recovery leads the field. It accounts for around 90 percent of all CO2 usage today
- Cementing in CO2 for the ages New processes could lock up CO2 permanently in concrete, “storing” CO2 in buildings, sidewalks, or anywhere else concrete is used
- Carbon neutral fuel for jets Technically, CO2 could be used to create virtually any type of fuel. Through a chemical reaction, CO2 captured from industry can be combined with hydrogen to create synthetic gasoline, jet fuel, and diesel
- Capturing CO2 from ambient air - anywhere Direct air capture (DAC) could push CO2 emissions into negative territory in a big way
- The biomass-energy cycle: CO2 neutral or even negative Bioenergy with carbon capture and storage relies on nature to remove CO2 from the atmosphere for use elsewhere