Published on AJERAP 
Africa’s Oil and Gas Decarbonization: Does Asset Divestment Hold the Answer?
By Sulivan MgbendiThe Race Towards Decarbonization is On
The oil and gas industry is experiencing a profound transformation, driven by growing public opposition to the environmental impacts of fossil fuels, increased pressure from investors demanding sustainable returns, and challenges from policymakers who must balance decarbonization goals with energy security. industry stakeholders now widely recognize the inevitability of the energy transition, though they may differ in their views on its timeline. In response, many operators are developing strategies to reduce their carbon footprints, focusing primarily on the adoption of new technologies and the rationalization of their portfolios.
Is Asset Divestment the Solution?
In reaction to pressures from shareholders and environmental activists, international oil companies are increasingly engaging in global portfolio rationalization through asset divestments. This trend is particularly evident in Africa, where major players like ExxonMobil, Shell, and Chevron have begun divesting assets. However, the effectiveness of asset divestment as a decarbonization strategy is debatable, as it often shifts the problem rather than solving it. The assets divested by major oil companies may be acquired by entities with less commitment to the energy transition, such as inexperienced African independents or investment funds lacking strong environmental management practices. These acquirers, who typically have limited capital to deploy emission-reducing technologies in the short to medium term, are also subject to fewer reporting obligations. As a result, asset divestment could lead to increased emissions and lower standards of environmental reporting.
The Path to the Future
Despite the urgent calls for a rapid energy transition, oil and gas are expected to remain an essential part of the global energy mix through 2040. African nations have voiced significant concerns about the impact of defunding the sector, warning that it could exacerbate energy poverty across the continent. Critics argue that global energy policies, if disconnected from current realities, could leave millions of Africans without access to affordable and sustainable energy. Therefore, the global energy transition must consider critical factors such as affordability, accessibility, national security, and economic competitiveness. Nevertheless, oil and gas companies must rethink and adapt their business models to align with the world’s collective efforts to combat climate change.
Where Will Funding Come From?
As traditional banks and DFIs reduce their exposure to oil and gas projects due to environmental concerns, Africa’s oil and gas development will need to seek alternative funding sources. National oil companies (NOCs) within Africa may play a larger role by using revenues from existing operations to fund new developments. However, to do so effectively, NOCs must cut inefficiencies and adopt management practices similar to their international counterparts to enhance competitiveness and financial performance.
Additionally, private equity firms and specialized investment funds, particularly those less influenced by stringent ESG criteria, may find opportunities in Africa’s energy sector. Sovereign wealth funds from resource-rich countries, particularly in the Middle East and Asia, could also become key investors. Prepayments from commodity trading companies like Vitol and Trafigura are also crucial, offering upfront capital in exchange for future oil deliveries. These arrangements provide immediate funds for exploration and development without diluting ownership. While beneficial, these deals carry risks, such as dependency on future production and potential unfavorable terms if market conditions change. Nonetheless, they remain a vital lifeline for many African oil and gas producers, enabling continued operations amid shifting global financial landscapes.
Conclusion:
As the global energy landscape shifts towards sustainability, Africa’s oil and gas industry faces both significant challenges and opportunities. African governments and national oil companies must lead the development of their respective sectors to avoid the risk of stranded assets in a world increasingly focused on cleaner energy. While asset divestment might seem like a viable strategy for decarbonization, it often merely shifts ownership to entities with less commitment to environmental sustainability, potentially increasing emissions and environmental risks. Therefore, any divestment must be strategically managed with stringent oversight to ensure that new owners are equipped and incentivized to adopt sustainable practices. By doing so, Africa can redefine its role in the global energy market, ensuring that its oil and gas resources remain economically viable while contributing to a sustainable energy future.
About the Author:
Sulivan Mgbendi is a distinguished energy finance professional and a current MBA student at The Wharton School, specializing in Business, Energy, Environment, and Sustainability. With extensive industry expertise, he began his career in consulting, where he focused on deal advisory services, including tax efficient deal structuring for energy companies. His work was crucial in guiding companies through complex financial and regulatory challenges during the early divestments of oil assets by international oil companies. After his consulting career, Sulivan joined Seplat Energy PLC, where he held key finance roles in Lagos and London.