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Can Africa Afford to ‘Strand’ its Fossil Fuels?
In recent years, “stranded assets” have attracted a lot of interest, as climate-driven changes to our physical environment amplify the calls for a seamless transition to low-carbon pathways.
More than 185 countries have agreed to leave two-thirds of proven fossil fuels in the ground, in order to meet the Paris Agreement climate target of keeping global warming below 2 degrees Celsius.
“Stranded assets” are natural resources, like minerals, that have suffered from unanticipated or premature write-downs, devaluation or conversion to liabilities even before their exploration, causing potential market failure.
In 2017, the International Energy Agency warned that oil and gas assets worth $1.3 trillion could be left stranded by 2050, if the fossil fuel industry does not adapt to greener climate policies. The risk of stranded assets presents a major policy issue for the African continent due to the dependence on natural resources.
Ninety percent of African countries depend on primary commodities, either for state revenues or exports, and two-thirds are dependent on minerals. The continent needs a long-term strategy on the future of exposed fossil fuels and minerals, yet the discussion has been relatively absent to date.
The risk of stranded assets
Most African countries are still increasing their oil production. New discoveries of oil and gas signal possible fortunes. Earlier this year, French oil firm Total made public its discovery of a large “gas condensate” in South Africa. The gas condensate – effectively a liquid form of natural gas – is a more prized fossil fuel than crude oil. In Kenya, British oil company Tullow Oil projected 2024 as the earliest likely date by which Kenya can expect to start reaping gains from its Turkana oil.
More so, Africa’s grasp on coal is, in part, the result of its acute power shortage. Strong economic growth since 2000 has sparked a notable increase in demand for energy from the private sector to drive the expansion of job-creating industries. For the continent, a latecomer to the fossil fuel boom, arguments for “asset stranding” have the potential to influence development gains and even interrupt economic transition.
There are certain nuances to consider – some assets will be stranded due to changes in markets and investment flows, as global extractive companies and investors adjust their portfolios to meet new, low-carbon regulations. Other extractive assets are at risk due to changing consumer demand, such as the growing use of solar energy and electric vehicles in developed countries.
Climate change is equally affecting Africa’s renewable resources – forests, land, fisheries and water resources – although this deviates from the classic case of asset stranding, which is a potent threat for the non-renewable sector.
The renewable resource sector is witnessing a rapid depletion or degradation of various ecosystems – from land, water, forests, fisheries and oceans – due to the twin pressures of urbanisation and industrialisation, underwritten by high population growth. This presents a dangerous situation.
It is crucial for the African Development Bank to raise awareness of the potential impact of asset stranding for resource-dependent countries, as well as mitigating actions that could create new jobs and resilient economies in the low-carbon transition.
Renewable energy offers opportunity
A renewable energy revolution could unlock Africa’s social and economic development. However, a change in the political economy is needed to move away from the current preoccupation with big power projects, centralised electricity production and a heavy reliance on coal. More attention, for example, can be given to localised and resource-efficient energy options like decentralised, community-owned local solar, wind and biomass projects.
It is on this premise that the African Development Bank’s African Natural Resources Centre (ANRC) developed a flagship project to analyse the risks and opportunities facing the natural resource sector in Africa under various low-carbon development pathways. The centre has conducted studies on low-carbon regulatory options for the petroleum sector in Nigeria, and the mining sector in South Africa. Research shows that mining companies in South Africa are increasingly adopting energy-efficient techniques to reduce their carbon footprint, as part of the country’s national climate strategy. Similarly, Nigeria has also introduced innovative climate-friendly initiatives such as the National Gas Flare Commercialisation Initiative, which aims to capitalise flared gas through a trading scheme, while increasing power generation.
The Bank is also supporting policy reforms to minimise the risks and impact of asset stranding in general, and the low-carbon transition by:
- Ensuring complementary policies and institutional coordination among African countries in order to meet Paris climate commitments (e.g. by financing the implementation of nationally determined contributions through the Africa NDC Hub), and national extractive sector policy and regulation, as part of a broader green growth strategy.
- Leveraging existing funding to countries to attract sustainable and green financing opportunities (such as carbon emissions trading and green bonds) for climate adaptation in countries with high carbon risk.
- Introducing green components into existing Bank funding vehicles (such as natural capital and biodiversity conservation) to reduce the risks and transaction costs of accessing climate financing by regional member countries and private actors in the extractive sector.
- Climate-screening countries’ extractive sector development strategies to ensure that carbon risks are fully addressed and mitigated, as part of broader technical advisory support provided by the Bank on resilience and green growth.
The bottom line is that there will be winners and losers from asset stranding, according to the nature of the resource (fossil fuels vs “green” minerals), the level of mineral or extractive dependence, and institutional preparedness (markets, policies and skills/labour force). Policy actions by African governments in the next decade will be critical to mitigating this risk. Therefore, there is a need for regional cooperation through existing mechanisms on mineral-based development, trade and economic integration, such as the Africa Mining Vision (AMV) and the African Continental Free Trade Area (AfCFTA).