Can African Oil and Gas Benefit From Europe’s Energy Crisis?

This commentary originally appeared in African Arguments on 29 March 2022 under the title "Will Africa Really Be ‘Europe’s Next Gas Station'’’?

These shifts, combined with Western oil and gas companies dumping their Russian interests, present an opportunity to other petroleum producing countries, albeit one tempered by actions to address the climate crisis. This has led governments and commentators to discuss African producers as potential beneficiaries of Europe’s supply gap, with talk of a “seismic shift” to Africa and of the continent as “Europe’s next gas station”.

Such headlines gloss over the complex reality. It is true that several established producers – such as Algeria, Angola, and Nigeria – are already reaping higher revenues from soaring oil and gas prices. Countries with projects due to start within the next year or so, such as Mauritania and Senegal, will likely also benefit from higher prices. However, most current producers have limited spare capacity to quickly ramp up supply and need to attract more investment before they can.

Investment decisions on key liquefied natural gas (LNG) projects in prospective producers, such as in Mozambique and Tanzania, are not likely until at least 2024 given security challenges in the former, and ongoing negotiations and outstanding project design processes in the latter. This means significant production is unlikely before 2030. Most of Mauritania and Senegal’s oil and gas reserves won’t be developed until later project phases. And any supply from prospects currently under exploration is likely even further off. It has historically taken sub-Saharan countries around 12 years to move from discovery to production – often longer than initially predicted by governments and companies.

While some African projects may come online more quickly, investors will make decisions based on an uncertain long-term outlook. The current spike in prices is a potent reminder of the fundamental unpredictability of oil and gas markets. Seven years on from the price spike in 1979, rates had fallen more than two-thirds from the peak of the crisis.

Three factors make the current outlook particularly uncertain. First is Russia’s role in the oil and gas market. Its supply to Europe will be affected by how its negotiations with Ukraine unfold, as highlighted by how prices have fluctuated in line with perceptions of how the talks are progressing. Russian supply earmarked for Europe could be diverted to Asian markets in the long term. This would reduce Asian demand for gas from elsewhere and offset the benefit of increased European demand for oil and gas from these producers.

The second factor is how much market share other non-African producers capture. Europe is not only looking to Africa to fill the gap. US LNG exports to Europe are surging, multiple additional large US LNG projects are ready for development, and European leaders are striking long-term deals in the Middle East. Many of these producers have more spare capacity and projects that can be greenlit more quickly than African producers.

Third, prospective suppliers must consider potential “demand destruction” and the pace of the energy transition. A lesson from the 1970s is that high prices and market turmoil often lead to a permanent reduction in demand through improvements in energy efficiency and development of alternative technologies. The current crisis could lead to even greater demand destruction given it appears to have reinforced Europe’s conviction to accelerate its energy transition away from fossil fuels. Beyond its goal to secure non-Russian supplies in the short-to-medium term, the EU also aims to leave fossil fuels behind for good.