African fossil fuel projects face up to funding challenges

The news in early May of this year that Standard Chartered Bank would not be financing the East African Crude Oil Pipeline (EACOP), a 1,443km insulated pipeline that will transport Ugandan crude from Kabaale to Tanga Port in Tanzania, came as a setback not just to the Kampala government but to putative oil and gas project sponsors across the continent.

The bank joined more than two dozen other lenders that have turned down participation in the TotalEnergies-backed project, which is to be financed on a 60:40 debt:equity ratio, with the loan component estimated at $2-3bn.

There remain a small clutch of banks that are still committed to the EACOP financing, including South Africa’s Standard Bank, Sumitomo Mitsui Banking Corporation and Mitsubishi UFJ Financial Group (MUFG), both of Japan, and Industrial and Commercial Bank of China (ICBC).

Yet while the Petroleum Authority of Uganda has said funding for the pipeline remains on track and multi-sourced from different regions, the challenges it has experienced in pulling together commercial lending and insurance support for EACOP points to a wider challenge facing hydrocarbons developments in Africa.

It also raises broader questions as to whether in a financing climate that is dominated by environmental, social and governance (ESG) related issues, large-scale CO₂-emitting projects stand a realistic chance of reaching first base.

“Western banks are certainly feeling the pressure on new fossil fuel developments like EACOP and its associated oil fields,” said Simon Nicholas, energy finance analyst at the Institute for Energy Economics and Financial Analysis. “The fact that drilling will occur in a national park in Uganda only adds to the reputational risk they face if they finance the project.”

Financing for EACOP is now shifting towards China, given the role of China National Overseas Oil Corporation (CNOOC) in the project and other Chinese contractors involved in the construction. But even Chinese state-owned banks are not immune to reputational and environmental pressure, as evidenced by ICBC’s withdrawal from the Lamu coal power project in Kenya. “Any banks that attach themselves to the EACOP project can expect to draw fire regardless of where they are based,” said Nicholas.

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Mozambique LNG project faces scrutiny

TotalEnergies may also face a review of its $4.7bn loan agreement with the US Export-Import Bank (US Eximbank) for the Mozambique liquid natural gas (LNG) project that it is trying to get restarted.

The French major acknowledged that the Area 1 Mozambique LNG project will now face greater scrutiny over the loan secured for its development.

If the project, halted by Islamist insurgents in 2021 , is restarted, US Eximbank, which has committed the largest share of financing for the development, said it will carefully review the loan package. The financial institution’s review of the Mozambique LNG initiative will assess potential risks and ensure that the project fully aligns with ESG standards.

This underscores that it is not just oil projects that are facing funding constraints; despite natural gas’s credentials as a transition fuel, and with gas-to-power (GTP) projects associated with lower emissions than coal or heavy fuel oil-fired plants, pressure is also affecting LNG schemes.

ESG concerns

As France’s Société Générale has noted, it is difficult to ignore the growing importance of ESG with an increasing number of buyers developing specifications for green (carbon neutral) LNG in their purchasing policies and the financing markets could further shift capital towards those who will embrace such specifications. ESG matters are increasingly influential in shifting capital flows. However, the LNG industry has been creative in project structuring. Equally, innovation and new technologies should provide it with greater insulation from ESG-related pressures.

Also, commercial banks now have more sophisticated means of managing ESG, and the LNG market is likely to be a beneficiary.

The Net-Zero Banking Alliance, a lobby group of banks with commitments to ESG, noted in late 2022 that 53 of its members either have a policy on oil and gas financing in place and/or have set an emissions reduction target. Forty-two banks have measured their emissions footprint, and 31 banks have emissions reduction targets to be achieved by 2030.

Two banks have chosen to set separate targets for upstream and downstream oil and gas, to differentiate between the emissions reduction opportunities of upstream and downstream operations.

Meanwhile, LNG projects in Africa are also benefiting from some supportive legal decisions. In January 2023, the UK Court of Appeal ruled against campaigning group Friends of the Earth’s legal challenge to a British government decision to approve $1.15bn of export credit financing from UK Export Finance (UKEF) for the Mozambique Area 1 LNG project. That provides a measure of reassurance to export credit agencies (ECAs) and lenders that when ECA support is in place, it will be more difficult for campaigners to mount legal challenges to these.

A lifeline for oil and gas projects

Development finance may nonetheless struggle to support future LNG and gas-to-power projects. For example, the UK government has said it will no longer provide new direct financial support for fossil fuels overseas other than in limited circumstances.

That leaves more onus on development finance institutions (DFIs) and multilateral development banks (MDBs) to provide support. And here there is scope for optimism for traditional energy project backers. In March 2023, Bloomberg reported that the World Bank will support the development of Mozambique’s giant natural gas resources – so long as it is the cheapest way to boost energy access.

That appears to mark a break with previous Bank policy. In 2017, the World Bank said it would no longer financially support upstream oil and gas after 2019. That is now qualified, with it stating that in exceptional circumstances, “consideration will be given to financing upstream gas in the poorest countries where there is a clear benefit in terms of energy access for the poor and the project fits within the countries’ Paris Agreement commitments.”

Circumstances since the Ukraine crisis have made conditions marginally easier for hydrocarbon schemes in Africa to raise lending support. As one World Bank official noted, most of Mozambique’s gas is being exported to Europe, so this gas could keep Europe from reverting to less clean energy sources.

The difficulties confronted by traditional energy projects have also led African institutions to evolve their own solutions. In May last year, in a bid to support energy transition strategies in Africa, the African Export-Import Bank (Afreximbank) and the African Petroleum Producers’ Organisation signed a memorandum of understanding to establish the African Energy Transition Bank, with a specific remit to raise funding for oil and gas projects.

Similarly, there have been commitments from Afreximbank to support ventures such as EACOP, with $200m extended in late 2022, along with a $100m commitment from the Islamic Development Bank.

In 2022 the Fund for Export Development in Africa (FEDA), a development impact-oriented subsidiary of Afreximbank, announced that it has invested into Ecow-Gas, an LNG distribution infrastructure platform in the West Africa region. FEDA’s investment would provide access to cheaper and cleaner fuels for underserved industrial customers across the region using LNG, said Afreximbank. It said that this would promote efforts to minimise CO₂ emissions by replacing environment-polluting fuels currently in use.

International ECAs and development finance groups have signalled their own willingness to continue support for traditional energy projects. In January of this year Japan Bank for International Cooperation and MUFG announced they would provide a $71m loan to finance a floating storage regasification unit in Senegal.

That leaves a lifeline for oil and gas project sponsors in Africa, especially for projects that can show a greater relevance to ESG considerations, and which also alleviate global requirements for dirtier fuels – such as coal and heavy fuel oil – while meeting demand for cleaner-burning alternatives.