INTERNATIONAL ENERGY AGENCY (IEA) AND AFRICAN ENERGY CHAMBERS (AEC): ENERGY INDUSTRY OUTLOOK 2023
The International Energy Agency (IEA) World Energy Outlook report acknowledges a shock of historic scope and complexity as the world is currently experiencing its first major energy crisis. Although market pressures were present prior to Russia's invasion of Ukraine, but because of Russia's actions and a speedy recovery from the pandemic, which put stress on many global supply chains, including the energy industry, this has turned into a full-blown energy crisis. Russia has been by far the biggest supplier of fossil fuels, but its restrictions on natural gas to Europe and European sanctions on Russian oil and coal imports are cutting off one of the major energy trading routes. All fuels sources are impacted, but the gas market is the most severely hit as Russia tries to gain leverage by making consumers pay more for their energy based on supply challenges.
The World Energy Outlook further acknowledges that prices for spot purchases of natural gas have reached levels never seen before, regularly exceeding the equivalent of USD 250 for a barrel of oil. Additionally, coal prices have reached all-time high, while oil prices peaked at well over $100 per barrel in mid-2022 before declining. 90% of the global rising pressure on electricity prices is because of high gas and coal prices. This therefore is a reminder of the fragility and unsustainability of the current energy system. These times of crisis have put the spotlight on governments, and on how they react. Alongside short-term measures, many governments are now taking longer-term steps: some seeking to increase or diversify oil and gas supply; and many looking to accelerate structural changes.
The IEA in its World Energy Outlook (WEO) 2022 report explored three scenarios which are differentiated primarily by the assumptions made on government policies. The Stated Policies Scenario (STEPS) shows the trajectory implied by today’s policy settings. The Announced Pledges Scenario (APS) assumes that all aspirational targets announced by governments are met on time and in full, including their long-term net zero and energy access goals. The Net Zero Emissions by 2050 (NZE) Scenario maps out a way to achieve a 1.5 °C stabilisation in the rise in global average temperatures, alongside universal access to modern energy by 2030.
Some key highlights are:
● The global energy crisis sparked by Russia’s invasion of Ukraine is having far-reaching implications for households, businesses, and entire economies, prompting short-term responses from governments and a deeper debate about the ways to reduce the risk of future disruptions and promote energy security.
● With the loss of its largest export market in Europe, Russia faces the prospect of a much-diminished role in international energy affairs.
● High energy prices are causing a huge transfer of wealth from consumers to producers, back to the levels seen in 2014 for oil, but entirely unprecedented for natural gas. High fuel prices account for 90% of the rise in the average cost of electricity generation worldwide, natural gas alone accounts for more than 50%.
● The costs of renewables and carbon dioxide have played only a marginal role, underscoring that this is a crisis where energy transitions are the solution, rather than the problem.
● Price and economic pressures mean that the number of people without access to modern energy is rising for the first time in a decade. Around 75 million people who recently gained access to electricity are likely to lose the ability to pay for it, and 100 million people may revert to the use of traditional biomass for cooking.
● The world has not been investing enough in energy in recent years, a fact that left the energy system much more vulnerable to the sort of shocks seen in 2022. A smooth and secure energy transition will require a major uptick in clean energy investment flows. Getting on track for the Net Zero Emissions (NZE) Scenario will require a tripling in spending on clean energy and infrastructure to 2030, alongside a shift towards much higher investment in emerging market and developing economies.
● The cost advantages of mature clean energy technologies and the prospects for new ones, such as low-emissions hydrogen, are boosted by the Inflation Reduction Act in the United States, Europe’s increased push for clean energy, and other major new policies.
● The STEPS in the WEO is the first World Energy Outlook (WEO) scenario, based on prevailing policy settings that sees a definitive peak in global demand for fossil fuels. Coal demand peaks in the next few years, natural gas demand reaches a plateau by the end of the decade, and oil demand reaches a high point in the mid-2030s before falling slightly. In the Announced Pledges Scenario (APS), the drive to meet climate pledges in full sends demand for all the fossil fuels into decline by 2030.
AFRICAN ENERGY CHAMBER: THE STATE OF AFRICAN ENERGY
The African Energy Chamber (AEC) report provides a detailed analysis of how production and monetization will look like in 2023 for both African producing countries like Libya, Angola, and Nigeria in addition to global energy companies, given the combined effects of the COVID-19 pandemic and the Russian-Ukrainian war on the global oil market. The AEC report investigates what this means for African producers and the global market as the volatility in the oil market persists.
The AEC anticipates that Nigeria's oil production will rise from 1.65 million barrels per day (bpd) in 2022 to approximately 1.75 million bpd in 2023 and Libya's oil production will rise from 1.12 million bpd in 2020 to 1.3 million bpd in 2023, while Angola's oil production will decline from 1.13 million bpd in 2022 to approximately 1.1 million bpd in 2023. The report also examines the opportunities and challenges the African continent may face.
Meanwhile, on the gas front, a large reduction in worldwide supply and a rise in prices are anticipated as western players leave the Russian market as a result of the invasion of Ukraine. Africa is therefore in a good position to replace Russia as Europe's primary gas supplier considering that it is the continent with the second-largest undeveloped gas reserves as of 2021.
The AEC in its report recognizes that current trends have highlighted Africa's unstable energy networks and exacerbated the continent's pervasive energy poverty, such as the Russian-Ukrainian War and global energy transition policies. The report further acknowledges that Africa must be self-sufficient in order to make the most of the investments required to advance the development of oil, gas, and renewable energy sources and to modernize its energy infrastructure for security and dependability.
Some key highlights are:
● The announcement of the European Union (EU) ban on Russian oil starting 5th December 2022 is set to remove 1.3 million bpd of Russian oil from European market and oil product imports ban starting February 5th will take out 1 million bpd of refined products.
● In the longer term, an average drop of 1.65 million bpd of Russian oil is expected over the period 2022 – 2030.
● 2022 global production is estimated at 81.16 million bpd and 2023 flows are estimated at a higher 85.3 million bpd.
● Libya outages drew down African liquids output in the first half of 2022, but supply is expected to be stable at 7 – 7.1 million bpd through the remainder of 2022 and 2023.
● Western sanctions and operator exit post-Russia’s invasion of Ukraine result in drastic drop in Russian natural gas output and overall global natural gas production in the short- to medium-term.
● Europe is expected to depend on large LNG imports to meet the demand and this is expected to result in high European gas prices, higher than East Asia LNG in the short-term.
● As Russian imports decrease and Europe relies on LNG imports, the current LNG supply in development pipeline is expected to fall short of the demand and requires new developments.
● Nigeria, Algeria, and Egypt are expected to lead African gas and LNG flows in the short-term.
● Brent runs high as net impact of EU embargo on Russian oil and demand strength continue the market turbulence started by COVID-19 almost three years back.
● An increase of about US$130 billion in cumulative capital expenditure (CAPEX) spending over the period 2022 – 2025 is expected as global spending uptick overrides the drop in Russian CAPEX.
● No substantial growth in near-term African CAPEX spending compared to the previous forecast, as most major project sanctions are expected to happen post 2025.
● Africa crude oil supplies resilient to post-Russia – Ukraine conflict markets as forecast remains same as pre-war and marginally raised compared to 2022 outlook.
● Nigeria, Libya, Algeria, and Angola – the main drivers of liquids supply through the decade.
● Libya is expected to see the maximum growth in the medium-term compared to 2022 liquids supply outlook provided internal conflicts subside, whereas natural declines taking down Nigeria and Algeria.
● 2022 rig demand sees a 20% growth versus 2020 and 2023 demand estimated to increase further by 30% over 2022 levels, indicating a busy market for drilling service providers.
● Drilling activity expected to increase marginally from about 895 wells in 2022 to 915 wells in 2023 and further to just over 1000 wells in 2025.
● Namibia’s mega discoveries inspire more wildcats in the Southern African region, with 10 more high impact wells (HIWs) scattered across Africa expected to be drilled in the coming 18 months.
● Sonatrach (Algeria), Nigerian National Petroleum Corporation (NNPC – Nigeria) and NOC Libya constitute most of the flows from NOCs in Africa.
● Eni, Total Energies and BP round off the top three majors in Africa in terms of production.
● As projects offshore and onshore in countries like Mauritania – Senegal, Namibia, South Africa, Mozambique, Tanzania and other upcoming oil and/or gas economies come online, these countries are expected to produce about 8% of Africa’s oil and gas output over 2026 – 2030, increasing to about 20% over the period 2031 – 2040.
● Rural access to electricity is low even in countries with high overall electricity access, thus pointing at the necessity to improve universal electricity access.
● High dependence on fossil fuels for power generation is expected to remain in the near-term given energy supply constraints.
● Natural gas is expected to constitute about 40% of the power mix over 2023 – 2030 but there is a lot of space for improvement as existing upstream gas potential is over 450 Tcf with about 65% of it still in pre-FEED state of development.
● Solar PV, onshore wind and Hydrogen are expected to be the main sources driving the renewable energy capacity in Africa through 2030s.
● Africa’s contribution to global solar PV, onshore wind, and hydrogen in 2022 – 2%, 1% and <0.5% with capacity volumes of 12.6GW, 10GW and sub -0.5GW respectively.
● African solar PV, onshore wind and hydrogen capacity to reach 70GW, 51GW and 50GW, respectively by 2035; Mauritania, Morocco and Egypt expected to be the leaders in renewables in the medium-term.
Both the IEA and AEC reports recognize the implications of the Russian-Ukrainian war and COVID-19 on the global and African energy markets, culminating into a global energy crisis. The IEA is therefore enthusiastic that the energy crisis promises to be a historic turning point towards a cleaner and secure energy system through the change in global energy markets and policies, while AEC is hopeful that Africa will be the solution to the increase in the global energy demand and use such avenue to boost its investments.