A little more than a year ago, in November 2019, the European Investment Bank (EIB) declared its intention to phase out funding for fossil fuels. Specifically, it said that it would no longer grant loans for projects involving crude oil, natural gas, and coal as of January 1, 2022 (with a scant few exceptions for gas projects that meet rigorous environmental criteria).
In making this announcement, the EIB made history. It became the first major multi-lateral financial institution to make a public commitment to abandon fossil fuels in the name of combatting climate change.
Its pledge did not go unnoticed. In October 2020, Antonio Guterres, the secretary-general of the United Nations (UN), called on the world’s publicly funded development banks to follow suit. Less than a month later, all 450 of these institutions — including, incidentally, the African Development Bank Group (AfDB) — agreed to bring their lending policies into line with the Paris climate accord.
The agreement did not include a categorical ban on fossil fuel loans, since some of the lenders involved, such as the Asian Development Bank (ADB), were unwilling to make this commitment. However, a group of European lenders did exactly that — and they were hardly alone in doing so.
You see, public development banks aren’t the only institutions to have made climate commitments. Since the beginning of 2020, a number of major private lenders — including but not limited to giants such as Barclays, HSBC, and Morgan Stanley — have rolled out plans to reach net-zero in greenhouse gas (GHG) emissions by 2050. Others — such as Blackrock, a major asset management firm — have pledged to make more money available for renewable energy projects. And just a few weeks ago, South Africa’s Standard Bank Group joined the chorus, saying it would no longer fund fossil fuel projects unless the sponsors could demonstrate compliance with strict environmental standards.
And it’s not just the banks. Climate considerations are now driving some of the world’s largest oil and gas firms, with multi-national giants such as BP and Royal Dutch/Shell and slightly smaller operators such as Occidental Petroleum, aiming to hit the net-zero mark by 2050. They may also come to drive the U.S. government’s policies, as President Joe Biden has declared climate change one of the first priorities of his administration.
Is This a Tipping Point?
So what next? Should I follow the Bloomberg news agency’s example and talk about 2020 as a tipping point for climate activism? Should I try to extend the story I outlined above into the future and paint this year as the beginning of the end for fossil fuels?
That’s not what I want to do.
That’s not what I want to happen.
Instead, I’ll try to explain why I think the move away from financing fossil fuel projects has the potential to hurt Africa. And I’m going to do it by imagining what might happen if this move continues.
What Happens If Climate Concerns Dominate?
In this scenario, climate concerns come to dictate the lending policies of Western financial institutions. By 2025, all of the world’s publicly funded development banks have joined the EIB in declining to fund fossil fuel projects (even though a select few organizations are still managing to attract small-scale creditors after agreeing to adopt onerous and costly carbon offset arrangements). Private lenders have followed suit, making it known that they will only support renewable energy schemes (and that they prefer to do business with companies and governments that fall in line with their own net-zero pledges).
As far as the leaders of these financial institutions are concerned, they’ve done the right thing. They’ve done their part to uphold the Paris agreement and prevent the disasters caused by climate change. They’ve responded to the concerns of the public (and of their shareholders). And aren’t fossil fuels a risky investment nowadays? After all, demand never quite recovered after the COVID-19 pandemic hit, and prices have stayed rather low. Oil and gas are quite out of fashion now, really!
The View from Africa
But the view from Africa is likely to be different.
In Africa, climate considerations and ideological commitments to eliminating GHG emissions may well take a back seat to more urgent questions about how to encourage economic growth and supply basic necessities to the continent’s growing population. In countries with large natural gas reserves such as Mozambique, Tanzania, South Africa, Nigeria, Algeria, Equatorial Guinea, Ghana, Cameroon, Senegal, and many others, politicians, businessmen and everyday people should ask their western counterparts why they should decline to extract a resource that could be used to produce electricity cheaply and reliably for both households and businesses. They should ask why they should forego the opportunity to develop an industry that creates jobs, both directly and indirectly, and promotes trade with neighboring states that also need energy. They should ask why they are being discouraged from using the least polluting of the fossil fuels and pushed towards renewable energy solutions that are less reliable and more expensive per unit of power generated. They should ask why Africa should be punished for western nations GHG emissions. They should ask what happens to energy poverty. They should ask who will pay reparations to Africa if Africans have to abandon their natural resources.
They may also ask why they should make the same sacrifices as Western countries when they don’t have the same advantages as those countries — including, say, the complement of legacy, gas-fired power plants needed to ensure that electricity supplies continue all day and night, without interruption, even at times when the wind isn’t blowing, and the sun isn’t shining.
Africans should also question the need to leave crude oil in the ground – and they should! For many of them, their oil industry and service companies are a major source of income. And while they may be willing to see that source phased out gradually, they’re not likely to assent to plans for killing them off abruptly.
Also, what about independent African exploration and production companies? What about African oilfield service companies and midstream operators? Shouldn’t they have a say in their future too?
Meanwhile, what about all the time and resources that a number of African leaders have invested in creating policies that encourage international oil companies to invest in their countries, from improved fiscal regimes to transparency laws to win-win local content policies? There’s no question that these leaders were interested in oil revenue, but there is so much more to gain from these policies, from much-needed technology transfers to business and growth opportunities for local entrepreneurs. In the wake of the COVID-19 pandemic, African economies need these opportunities more than ever.
Leaving China As the Only Option
Amidst all these questions, there may be a few determined types who seek to push forward with upstream oil and gas development despite the lack of support from Western banks. Heads of state may try to subsidize gas projects (or provide other forms of support) in an attempt to build up domestic capacities and promote self-sufficiency in energy. Entrepreneurs may reach into their own pockets or work to drum up local support, in the hope of using abundant natural resources to turn out products for which there is demand.
Without access to Western capital, such initiatives are more likely to fail — or, at least, to falter. If so, their backers may very well look for support elsewhere. And they may find it in China, which has been very willing to provide financial and technical assistance for fossil fuel projects in Africa.
Personally, I find the prospect of Beijing becoming the main source of outside financing for African oil, gas, and gas-to-power projects to be concerning. I’m not saying this because I think African states ought to shy away from cooperation with China. I’m saying it because I want them to have as many options as possible. I want them to be ready to work with a wide range of partners, rather than fall into a pattern of not having to look further than satisfying China’s requirements.
And this won’t happen if Western lenders cut off funding for African oil and gas projects as a consequence of their commitment to curbing climate change.
Instead, China will come to have more influence than any other party over the African oil and gas sector. China, which has already put a number of African countries in the position of handing over important assets when they find themselves unable to keep up with loan payments. China, which has a less-than-stellar track record on environmental protection, despite being a signatory to the Paris climate accord.
Time to Make a Case for Oil and Gas
As I’ve already said, this is not the outcome I want.
Instead, I think Africa should have the chance to use its own oil and gas to strengthen itself especially with the coming into force of the Africa Continental Free Trade Agreement.
I also think Africa should have more than one option when it comes to financing petroleum projects.
Most of all, I think Africa should have the chance to make its own choices without undue pressure from Western institutions that don’t face the same challenges. Africans have to become more visible, more vocal and even more hopeful about the future and the energy sector.
As a result, I think African states ought to push back against the idea that it’s time for Western banks to stop all funding for fossil fuels. I think that African oil and gas producers ought to stand up for themselves and make a case for developing their own resources — particularly for using the least-polluting fossil fuels to deliver as much electricity as possible to as many people as possible.
And the time to make that case is now, while financing for oil and gas is still available.