Let’s not be naïve –Africa needs oil and gas

After a delay forced by the Covid-19 pandemic, Mauritius Commercial Bank was finally able to open its West African headquarters in Lagos, Nigeria. “We just had to have a presence in Nigeria. We could not rely on hearing essential information and critical developments through the newspapers. We had to have people on the ground,” says CEO Thierry Hebraud enthusiastically.

With MCB already having hubs in Nairobi and Johannesburg, in addition to its home in Port Louis, Hebraud says the new Lagos office is crucial “as we previously did not have a presence in West Africa. Now we have a presence in English-speaking West Africa, we are looking to establish another office in Abidjan because we believe we need a presence in Francophone Africa as well.”

Nigeria itself is a mouth-watering prospect. “Nigeria has a population of 200m people and is growing fast. It is one of the most important countries and economies on the African continent,” he says. “It was clear to us that we needed to be there.”

Hebraud explains that MCB’s need for a presence and local knowledge in Nigeria is particularly crucial as “the country represents our biggest exposure outside of Mauritius”.

This is largely because MCB is heavily involved in financing the oil and gas trade in Nigeria and across the continent. Around eight years ago, it invested resources in building up the bank’s expertise and value offerings in this financially complex sector. Providing letters of credit and guarantees in the purchase and sale of oil and gas, as well associated derivative products is one of its fortes.

Many Western banks are shying away from activities related to oil and gas in light of political and consumer pressure to reduce their exposure to fossil fuels. The British bank Barclays, for example, has pledged to stop directly financing new oil and gas projects and to start moving capital towards firms involved in decarbonisation initiatives. New York-based JPMorgan has already reduced its fossil fuel financing by 42%.

Hebraud however is blunt about what he sees as the reality on the ground: “Africa needs oil and gas. Africa accounts for less than 4% of global CO2 emissions – the G7 alone accounts for 25% of emissions. 600m Africans still have no access to electricity and another 150m only have irregular access. By 2030, more than 40% of the world’s youth will be Africans,” Hebraud explains. “It is essential that we improve living standards for this growing young population and allow the continent to economically transform.”

“To do that, they will need energy. Of course, there is plenty of potential to develop renewable energy in Africa – and we do it; we are currently financing solar energy solutions for example,” he adds. “But we should not be naïve about it: oil and gas will continue to be part of the equation for a long time to come.”

While many banks are diversifying away from fossil fuels in light of environmental, social, and governance (ESG) considerations, Hebraud says that “for us the ‘S’ part of that is fundamental. Financing the oil and gas trade is essential for economic development in Africa. That is how we see our responsibilities as an African bank.”

These considerations played a key role in MCB’s decision to open its new office in Lagos. Hebraud says that with the new office up and running, “We are now developing relationships with international oil and gas companies, local oil companies in Nigeria, as well as Nigerian banks. Nigeria is a particularly interesting market at the moment because international oil companies are withdrawing and selling stakes to local companies.” 

Hebraud argues that as an African bank with extensive experience financing oil and gas trades and armed with local knowledge and a team of experts, MCB is well placed to partner with local oil producers and provide much-needed financial solutions.

This includes hedging services to protect local firms from price volatility on commodity markets, as well as leveraging MCB’s investment-grade rating, which allows the bank to access capital at relatively cheap rates, in order to extend competitively priced loans to local firms aiming to expand their operations.

Internationalising MCB

MCB’s focus on Africa’s oil and gas market is part of a broader strategy aiming to tap into the vast reserves of minerals such as lithium and cobalt that are essential for rechargeable batteries, and also critical for green technologies like electric vehicles and solar panels.

The International Energy Agency (IAE) predicts that greater demand for green technology will in turn see demand for nickel double, demand for cobalt triple, and demand for lithium rise tenfold.

“Metals and minerals are a new sector which we are working on, helping to finance Africa’s capacities to extract critical minerals and also to develop higher-value activities such as processing and financing,” Hebraud says.

“As with oil and gas, we are approaching this opportunity in a very safe, structured way. With the type of financing we are using, trade commodity financing, we ask our clients to hedge to protect themselves from fluctuations on commodity markets. But this is undoubtedly a key growth sector for Africa.”

This fits in nicely with the banking group’s determination to ‘internationalise’ its operations. “MCB is the first bank in Mauritius and we have a 40-50% market share. While there is a limited capacity to grow our market share in our own country, we are not going to double the amount of business we do in Mauritius. So, 30 years ago, we started the internationalisation of the bank.”

He adds: “Ten years ago, we started internationalising through oil and gas, and now we are looking at doing so through critical minerals,” he adds. “Mauritius is an International Finance Centre (IFC) country and investment-grade rated. Mauritius is also the only African country that has free trade agreements with both India and China – that counts for a lot.

“Given these advantages – and given our work to develop our offerings across trade financing, transactional banking, and private equity – we have managed to design a specific offering and speciality,” Hebraud says. “Our sweet spot is supporting transactions worth between $100m to $150m – those which are too small for global banks to be interested in but are often too large for local banks to manage.”

Discussing new trends and technologies, he says “AI is not necessarily about substituting people for technology, but it is a way for us to free up time for our people to be closer to our clients.” 

Hebraud is also optimistic about the future of cryptocurrencies in Africa. While the extent to which MCB can explore the crypto space is limited by regulatory obstacles, Hebraud says they have already applied for a crypto custody licence in Mauritius and will be paying close attention to developments in the digital assets space.

Taking over from departing Western banks

With European banks increasingly exiting the African market, he is also hopeful that MCB can fill the gaps left even as major American banks, such as JPMorgan, start to enter. “I’m not sure banks like JPMorgan will be a major competitor for us because we are not interested in state project financing – we are very corporate driven,” he says. “We have limited appetite for sovereign risk, which is what the big international players like doing.”

Mauritius’ status as an investment-grade rated country, as well as the relationship MCB has with local banks across Africa, means the bank is ideally positioned to continue adding value to its partners across the continent.

Hebraud jokes that “Mauritius is a country of 1.2m people – a small district of Lagos or Nairobi. Our African partners look at this small country as their younger brother – but their smart younger brother.”