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Oil, Gas Sectors Critical Part of ESG Equation

October 11, 2021

ESG investing” has become incredibly topical with activist investors over the last couple of years, but while there is a lot of focus on the “E” and “G” elements, an argument could be made that there is a poor understanding of the “S” element and particularly how it pertains to the African continent.

As a reminder ESG investing looks at three elements: Environmental ( E ), Social (S) and Governance (G) related issues with stakeholders expected to not just look at the financial metrics on a transaction but also the non-financial metrics.

This throws up some interesting dynamics, particularly when not all three of these elements align – and this is a particularly key discussion for the resource sector in Africa at the moment.

There is no question that the energy sectors – specifically oil, gas and coal – have their detractors when measured against the Environmental element. After all, clean energy is the future isn’t it?

It is easy to berate a financial institution for backing a coal project or taking to social media to criticise a new investment in oil and gas infrastructure, right up until the point where the lights literally and figurately go out.

Oil and gas will remain a key component in the energy mix for the African continent for the next 5 to 10 years at least. One has only to look at the oil price which is currently trading at north of $70 per barrel at the moment to understand that while alternative energy is a growing option, it is a commodity which is here to stay in the near-term.

When it comes to Africa, we need to appreciate just how important this sector is.

Currently it accounts for roughly 20% of the Gross Domestic Product (GDP) of the continent and in places like Angola and Nigeria, it accounts for nearly 70% of the hard currency these countries generate and nearly 60% of government tax revenue.

While Nigeria, Mozambique and Angola are often identified as the key oil and gas players on the continent, there have also been developments in Kenya, Uganda, Ethiopia, Madagascar and Tanzania. As the Africa trade-bloc is developing and becoming integrated, this attracts further investment through the value chains.

In terms of supply, Africa’s share of global crude production has trended between 9% and 12% over the last decade and this attracted significant foreign investment which translates into jobs, development of capital markets, and other downstream benefits.

Recognising the strategic role of the sector in their economies, places like Angola and Nigeria have taken steps to improve Governance elements. In Angola, the President has put significant focus on cleaning up the image of the sector and courting foreign investors while the Nigerian house of assembly recently passed the Petroleum Industry Bill which is aimed at making it easier for investment into Nigerian oil and gas operators.

This leaves the “S” side of the equation.

While the sector still has work to do in terms of cleaning up its image, we need to remember that many of these projects have a 20 to 30 year lifespan and the project stakeholders all understand that if they can’t get social and community buy-in, their projects won’t get off the ground. In more extreme cases like Nigeria and Mozambique, infrastructure can become a target of social unrest and create untenable security situations which add to the cost of the projects.

Much like the mining sector in South Africa, the equivalent of “Social Labour Plans” are being developed to ensure that the benefits of the oil and gas projects are enjoyed by the impacted communities.

Apart from the obvious wins of job creation and hard currency investment into communities there are further downstream benefits. African governments depend on the revenues from the sector to reposition their economies on a path to sustainability and a just transition.

For instance, oil major Shell has played a pivotal role in investing in healthcare infrastructure to help in the fight against the likes of Ebola and HIV as well as being a major party in the first community-based health insurance program in the country. Similarly dual-listed oil and gas player Oando has trained over 2800 teachers and financially supported 88 schools via its Oando Foundation.

Building sustainable and predictable projects creates a win-win situation for all stakeholders.

In the eyes of activist or ESG investors, the equation is simple: Flick a switch and renewable and clean energy sources will be able to replace traditional energy sources. For Africa the transition will occur over a period of time with the focus on alleviating poverty and access to affordable energy.

On the African continent, a far more nuanced discussion needs to be had.

It could be argued that the sectors needs a bit of an image makeover – instead of a focus on how the sector is extracting resources from emerging markets, a deep-dive into the economic benefits and the opportunity it presents for Africa to develop in a sustainable way could paint a very different picture.

As an investment bank that specialises in funding oil and gas projects in Africa and has a deep understanding of the continent, we look forward to working on projects, which tick all 3 of the ESG elements in a socially conscious manner.

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