Energy Capital & Power

Why IOCs Can Finance Africa’s Energy Transition

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International Oil Companies (IOCs) are, perhaps paradoxically, some of the only companies that possess the financial resources, skill sets, and innovation required to transform present-day energy and economic systems, in line with the clean energy transition. In Africa alone, the International Renewable Energy Agency estimates that $70 billion in annual investment is required until 2030 to implement an energy transition on the continent. As a result, traditional oil and gas companies must be viewed as a critical part of the solution to financing the decarbonization of energy and non-energy industries alike, rather than as an adversary to the clean energy agenda. In addition to boasting robust internal financing mechanisms and economies of scale, it is due to the limitations of other sources of financing on the continent, including local governments, commercial lenders, and multilateral development banks, that oil and gas majors have emerged as a strategic driver of Africa’s clean energy transition.

IOCs, now referred to as International Energy Companies (IECs), possess sizable R&D spending capabilities that give them a competitive advantage in the clean energy space. In fact, major operators have been at the forefront of innovating and implementing deep decarbonization initiatives, including carbon capture, utilization, and storage (CCUS), methane efficiency, zero-emissions production, and hydrogen. Last April, ExxonMobil announced its plans for a $100-billion carbon capture project, called the ‘Houston CCS Innovation Zone,’ to be located along the Houston Ship Channel. The U.S. major has over 30 years of experience in CCUS technology and was one of the first companies to capture more than 120 million tons of carbon dioxide. Houston-based Occidental Petroleum is also spearheading a large-scale carbon capture project in the Permian Basin, which will eliminate one million metric tons of atmospheric carbon dioxide per year upon completion.

Due to their superior financial solidity from ongoing hydrocarbon production, IECs are able to acquire existing clean energy technologies and integrate them into their core business segments. Earlier this month, bp released a strategic update stating plans to increase capital expenditure in transition growth businesses, including bioenergy, convenience, electric vehicle charging, renewables and hydrogen, to more than 40% by 2025 and generate earnings of $9-$10 billion from these businesses by 2030 financed through its hydrocarbon activities.

“In two years, we’ve delivered 11 major hydrocarbons projects, almost doubled our EV charging points, quadrupled our renewables pipeline and built a portfolio of significant hydrogen opportunities,” bp CEO Bernard Looney said last week, adding, “All this means we can now accelerate plans to seize the energy transition’s huge opportunities. We’re aiming to increase investment in transition businesses to more than 40% of bp’s capex by 2025 – yes, over 40% in a few years! Driven by five transition growth engines – bioenergy, convenience, electrification, renewables and hydrogen – we are aiming to generate earnings of $9-10bn from these businesses by 2030.” Looney continues “our fantastic hydrocarbons team plans to sustain earnings through the end of the decade […] giving us the cashflows and the confidence to lean into the future.” bp has taken a somewhat aggressive stance towards its renewable projects and yet still recognizes that its operations in markets like Libya, Senegal, Mauritania and Angola have an important role to play in securing short and medium term revenues for the business.

Similarly, TotalEnergies aims to strengthen its presence in renewables energies, with plans to achieve net zero emissions for all of its businesses by 2050. With a focus on scaling-up renewable developments across Africa, the company aims to reduce emissions at key projects through the utilization of solar, while bringing online new green energy projects. On the other hand, energy major Shell plans to invest in low carbon sectors such as transportation, with the company setting a target of growing its electric vehicle network to over 500,000 by 2025. Through its corporate ‘Drive to Zero’ program, Shell plans to become the number one electric charging solutions provider globally.

In addition to expanding their own clean energy segments, large-scale oil and gas companies are well-placed to decarbonize other high-polluting industries by entering sectors with opportunities for low-carbon investment. Chevron, for example, has tripled its planned investments into the energy transition through 2028 and fostered strategic partnerships within a number of diverse sectors, including agriculture and aviation, which are capable of contributing to global decarbonization objectives. Once again, IECs not only possess the capacity to innovate decarbonization technologies, but also deploy them to scale across energy and non-energy industries alike.

Finally, IECs represent a key solution to financing the African energy transition, in part due to a lack of viable alternatives. In sub-Saharan Africa, domestic financing is often associated with short-term loans and high interest rates, which are less suitable for large-scale energy projects. Limited local governmental capacity to generate funds for the energy transition, made worse by COVID-19 and strained public finances, has translated to a persistent energy infrastructure investment gap. Meanwhile, state-owned utilities are often riddled with sizable debts that deter most commercial lenders, leaving multilateral institutions and sovereign loans to back many of Africa’s clean energy projects. However, IECs and private sector players already have the financial brawn, technical know-how and in-country infrastructure to carry out large-scale energy development, thereby representing the optimal candidate for financing and implementing a successful energy transition on the continent.

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Kelly-Ann Mealia

Kelly-Ann Mealia

Kelly Mealia is Energy Capital & Power's Co-Founder and Chairperson.