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14 September 2022

Africa at risk of stranded assets as customers abandon natural gas

By Connor Watts

$400 billion of new investments in natural gas extraction is estimated to be on the horizon for Africa, according to a new report from Energy Monitor.

$233 billion is expected to be invested in new gas fields while only $56 billion is planned for gas-fired power plants, heavily implying that this additional gas output is primarily for the sake of exporting into foreign markets, where local populations may see next to none of the benefits.

Africa has more than 600 million people lacking access to electricity and 930 million lacking access to clean cooking fuels, but most governments remain keen to extract gas to bring in export revenue, with who knows how much syphoned off to private individuals, something which is not so easy to do with solar and wind.

But as countries in Europe and North America move away from natural gas at a record pace due to Russia’s war in the Ukraine, and the resulting energy crisis, the African continent risks losing some of its biggest customers as demand peaks and carbon taxes are put in place in the pursuit of net-zero.

At Rethink we expect gas prices in Europe to remain high until the end of 2024, as substitutes are implemented within major markets and demand for natural gas will suffer a sustained fall from then onwards.

After this point we have no reason to expect demand for natural gas to rebound because there will simply be better alternatives. Renewable energy is already cheaper than gas in most markets and as energy storage capabilities become more sophisticated, the problem of intermittent power generation will largely be addressed.

If market forces aren’t enough to put the final nail in the coffin for natural gas, carbon border taxes will. Europe already has plans to introduce a carbon border tax, and it is expected that North America will follow suit soon after.

This will further inflate the price of natural gas within their borders as companies are financially punished for their continued contribution to climate change. An effective carbon border tax would further accelerate the demise of natural gas industries, in turn promoting new entrants that abide by the constraints of a border tax.

All this puts a timer on fossil fuel investments aiming to supply the European and North American markets, and further ruins the medium and long-term economics of these investments.

This makes the lack of investment into renewables all the more baffling when multiple key markets are begging for more renewable energy. All this investment has considerable opportunity costs when they could be funneled into renewable energy instead.

The reaction of industry to the energy crisis in Europe being to invest more in natural gas shows how little understanding there is of future circumstances and how regional demand will change as a result.

What use will these facilities be beyond 2025 when Europe has significantly reduced its gas consumption?

How will they find new customers when that means building new pipelines? Further increasing the cost of what is already the inferior product in most markets.

Ultimately what these investments prioritize isn’t economics or what is clearly a natural progression in energy generation, it focuses on ensuring the consolidation of power and influence within these countries.

You can’t monopolize the sun or the wind, and that is why gas still has a place within Africa.