Are Germany & Africa the newest energy allies on the block?

With the Russia-Ukraine conflict entering its sixth month, geopolitical entities are seemingly straining against pressures of the sanction-induced import-export imbalances.

The crisis, however, has exposed an energy disparity with countries worldwide reeling under soaring fuel and energy prices that has made its presence felt, seeping into cargo markets and translating into volume crunches and steep freight rates. IATA's May 2022 Air Cargo Market Analysis, corroborates this phenomenon, stating, "…the war in Ukraine still impairs capacity used to serve Europe, as several airlines based in Ukraine and Russia were crucial carriers in the region."

As global energy imbalances teeter on tight ropes, with the European Union's (EU) announcements of slashing Russian gas imports by two-thirds by the end of 2022, the EU has started looking towards African energy markets, particularly for liquified natural gas (LNG), in a bid to seek stability and fulfil demand.

LNG thus came to be a much sought-after energy commodity. Outlining the new energy dynamic for LNG, a research paper published in the Social Science Research Network, entitled 'North Africa Can Reduce Europe's Dependence on Russian Gas by Transporting Wasted Gas Through Existing Infrastructure', stresses on the need for this affiliation, "Russia's war against Ukraine is a wake-up call to reduce Europe's dependence on Russian oil, gas, and coal. It is also a defining moment to accelerate the energy transition to a net-zero society with more supply diversity, energy security, and resilience."

The paper states that there is a need to ramp up cleaner and greener energy dependence. "Europe needs to massively invest in a cleaner energy system. In the short term, this crisis should accelerate our focus on reducing waste gas from flaring, venting, and leaking – some 260 billion cubic meters (BCM) globally or 1.7x that of the European Union's gas imports from Russia. By capturing gas from flaring, venting, and leaking in North Africa, Europe could, within 12-24 months, start to substitute up to 15% of Russian gas via highly underutilised pipelines and liquified natural gas (LNG) terminals in the region. By capturing this wasted gas, Europe and North African nations can significantly reduce CO2-equivalent emissions without delaying the energy transition and greatly benefit from new revenue streams to reinvest in clean energy sources."

Green energy transitions are also the need of the hour, particularly in light of Germany's pledges to Africa in November 2021. Germany had committed to help Africa to end its coal regimes with aid coming in the form of $8.5 billion. The announcement was made at Glasgow's COP 26 summit. In light of this, a return to fossil fuel regimes with a natural gas pact between the two countries could only thwart Africa's climate commitments.

This month, we seek to explore this new arising energy equation and whether it holds the potential to soothe energy strains the world over. We also try to decode what this means for Africa's transport sector.

Let's first take a look at some literature surrounding Africa's natural gas reserves.

Adding up

According to statistics from the US Energy Information Administration, which lists out the natural gas availability as per country starting 2021, Russia has topped the list with 47,798 km3 proven reserves, while Nigeria is placed 9th on the list with 5,748 km3 proven reserves. Germany, however, stands 71st in the list, with a mere 23 km3 of proven reserves of LNG.

So, Africa's steadfast place in natural gas reserves remains unchallenged. The International Energy Association (IEA) compiled a report – Africa Energy Outlook 2022 – in June this year, deciphering and setting out a framework to guide the region's energy policies.

During the release of the report, the IEA Executive Director, Fatih Birol had said, "Africa has had the raw end of the deal from the fossil fuel-based economy, receiving the smallest benefits and the biggest drawbacks, as underlined by the current energy crisis. The new global energy economy that is emerging offers a more hopeful future for Africa, with huge potential for solar and other renewables to power its development – and new industrial opportunities in critical minerals and green hydrogen."

With this statement, Birol established the cause-effect relationship between energy policies splintered in the wake of the Russia-Ukraine crisis and Africa's emergence as an affordable supplier for energy necessities.

Birol further urged African nations to tap in on the immensity of the opportunity. "Multilateral development banks must take urgent action to increase financial flows to Africa for both developing its energy sector and adapting to climate change. The continent's energy future requires stronger efforts on the ground that are backed by global support."

According to the IEA, Africa's energy future is reliant on a traditional source of energy, however, the new decade is set to usher in an era of clean, renewable energy, and the African market looks ripe for the plucking. Another sector on a growth spiral is Africa's "expanding natural gas use". "While renewables are the driving force for Africa's electricity sector this decade, the continent's industrialisation relies in part on expanding natural gas use. More than 5,000 billion cubic metres (bcm) of natural gas resources have been discovered to date in Africa that have not yet been approved for development. These resources could provide an additional 90 bcm of gas a year by 2030, which may well be vital for Africa's domestic fertiliser, steel, cement and water desalination industries," states the IEA.

The report, "Africa's Energy Outlook 2022" charts the hurdles that lie in Africa's path as it consolidates its place in the natural gas market, "Near-term market opportunities must not distract from declining oil and gas export revenues in the future. New projects benefit from speed to market, minimising project costs and delays, and reducing methane emissions. Current price surges are providing a short-term boon to African producers, with new deals signed to deliver Algerian gas to Europe, along with renewed momentum to develop and expand LNG terminals in Congo, Mauritania and Senegal. With the European Union aiming to halt Russian gas imports towards 2030, Africa in principle could supply an extra 30 bcm in 2030."

With this said, as the EU mulls on inking energy deals with Africa, Germany emerges as the frontrunner. Badly bruised by new policies intended to hurt Russia, the country took severe blows along the way. Amidst talk of new energy deals, Germany and Africa may just be the new energy allies on the block.

In the thick of imposing sanctions, German Chancellor Olaf Scholz upheld Germany's reliance on Russia's energy exports and how these supplies remained "essential" for the country's energy health. "Europe's supply with energy for heating, for mobility, power supply and industry cannot at the moment be secured otherwise," the Chancellor conveyed in a public statement.

Germany's interest in sourcing LNG also stems from the fact that the country is trying its best to incorporate LNG into its transport and freight infra. The study – Decarbonization of on-road freight transport and the role of LNG from a German perspective – commissioned by the German Federal Environmental Agency, and compiled by the International Council of Clean Transportation along with the Institute for Applied Ecology, said, "According to the European Commission's impact assessment accompanying the CO2 standards proposal for heavy-duty vehicles, LNG engines could have up to 20% lower direct tank-to-wheel (TTW) CO2 emissions than comparable diesel vehicles and the shift to LNG lorries would also have a positive impact on air pollutant emissions."

Trickling into transport

So what kind of butterfly effect does this conversation around energy supplies have on transport?

First, let's deep dive into Africa's transport infrastructure.

The Programme for Infrastructure Development in Africa (PIDA), jointly developed by the African Union Commission (AUC), the New Partnership for Africa's Development Planning and Coordination Agency (NPCA), and the African Development Bank (AfDB), cites the poor state of transportation infrastructure in the African continent as seen in the transport systems currently at play, "In Africa's regional and continental transport system is deficient in terms of both quantity and quality of infrastructure and the level of services, and also in terms of investments and maintenance. Generally speaking, the system is very inadequate, and does not fulfil its function as a catalyst for the continent's integration and trade facilitation."

PIDA highlights that transport costs in Africa continue to top global charts. "Transport costs are among the highest in the world, which increases the cost of trade and makes products uncompetitive on international markets. For landlocked countries, transport costs can reach up to 77% of the value of exports. The transportation cost of a car from Japan to Abidjan costs $1,500 (inclusive of insurance costs) whereas the same operation from Addis Ababa to Abidjan costs $5,000."

According to the IEA, the pandemic and the Russia-Ukraine war have only exacerbated the problem, particularly in sub-Saharan Africa contributing to the dearth in energy resources and high commodity prices. "The global Covid-19 pandemic pushed sub‐Saharan Africa into its first recession in 25 years, severely affecting income from fossil fuel production, supply chains and foreign direct investment patterns. Higher energy and commodity prices in the wake of Russia's invasion of Ukraine have added to the problems in import-dependent countries," the energy association stated.

The IEA report also emphasises how a good transport infrastructure needs support from healthy energy sources. "Expanding transport infrastructure requires supporting energy infrastructure to be built in parallel, such as fuelling stations along roads, guidelines for rail, electricity for cell towers (cellular base stations) and data centres, and refrigeration for food and health supply chains. Road and railway infrastructure goals in the PIDA focus on connecting African countries and linking interior regions that produce mineral and agricultural products to coastal ports. These transport corridors could also be used as major corridors for electrical transmission and telecommunications infrastructure to reduce costs."

So let's delve into that a bit more and take a look at the IEA report again.

The IEA report states that Africa's transport infrastructure has to be developed in parallel with its energy infrastructure, alleviating transport troubles in the region. "Expanding transport infrastructure requires supporting energy infrastructure to be built in parallel, such as fuelling stations along roads, guidelines for rail, electricity for cell towers (cellular base stations) and data centres, and refrigeration for food and health supply chains. Road and railway infrastructure goals in the PIDA focus on connecting African countries and linking interior regions that produce mineral and agricultural products to coastal ports."

The IEA lays down solutions to boost intra-African trade, highlighting the need for "improved logistics infrastructure" and linking it with energy efficiency. The report states, "..critical infrastructure needs to be built, including energy, communications, road, rail and port infrastructure. Improving the efficiency and energy intensity of logistics would stimulate more trade. Improved logistics are needed to limit "empty miles" – driving an empty truck after goods have been delivered – to minimise costs and reduce strain on infrastructure. More efficient technologies, such as electric trucks, are likely to require financial support, such as grants or concessional finance. More efficient cold chain supply services are needed to support the targeted growth in agricultural trade."

Stressing the link between Africa's economic development and its energy policies, the report highlights, "Africa's economic development is heavily intertwined with its energy development….Seizing this opportunity calls for an economic transformation that goes beyond energy supply, including an expansion of key industries, including fertiliser, steel and cement, and the manufacture and assembly of appliances, vehicles and clean energy technologies. That would generate wealth, create jobs and reduce Africa's burden of imports generally, which is becoming an urgent concern in the wake of Russia's invasion of Ukraine."

The report further states that PIDA is functioning as a ray of hope for Africa's energy future. "There is one pipeline project, the Trans-Sahara Gas Pipeline to link Nigeria and North Africa. The pipeline project has a long history of delays due to security problems and waning public support, but is receiving increased attention in light of Russia's invasion of Ukraine as a means of bringing Nigerian gas to Europe..."

So with the EU's interest in African natural gas reserves, only time will tell whether this new energy deal may be the panacea to energy imbalances set forth by the Russia-Ukraine conflict.