Energy, Capital & Power spoke with Andrew Lane, Senior Partner and Energy, Resources and Industrials Leader at Deloitte South Africa about African markets and emerging trends and how to achieve an equitable balance in public-private partnerships.
Deloitte has offices in over 150 countries globally. What would you say makes Africa’s energy industry unique?
Well, right off the bat Africa is a developing continent. It still bears witness to the legacy of colonialism, and as a result, its industry is heavily reliant on the exports of raw materials. And then the flipside of that is that Africa is a very young continent, with a booming workforce, as opposed to the aging continents of Europe and North America which can place strain on their economies.
One major service Deloitte provides is risk advice. How have recent events such as COVID-19 affected the industry?
With the onset of the COVID-19 pandemic, we also saw the 2020 oil price crash and the market suffered. But the biggest learning for us was that it’s no longer good enough just to plan for the most likely future plus or minus a couple of sensitivities- you actually have to plan for radically different futures as well. And if you have a certain assumption about what the future is going to look like, you need to think about what happens if the opposite occurs and how to configure business flows to be resilient in either circumstance. Moving forward, agility will be the keyword for business strategy but it’s not easy to achieve- especially in extractive industries like the hydrocarbons sector which are long-term high capex pursuits by nature. Fortunately, at the moment, we’ve hit a bit of a bull-run for commodity prices and companies are recovering. But now, with Russia’s war against Ukraine and the breakdown of globalization, supply chains are being disrupted for many of our clients and it’s going to take both agility and resilience to push forward.
One recent trend we’re seeing is a move towards the energy transition- could you speak more to the forces driving this?
In my view, rising oil prices reflect investor sentiment as well as current global affairs. But it’s a complex argument we face around the future of fossil fuels, and the transition won’t happen as quickly as you might think. Nevertheless, many of the major mining companies are letting go of their coal assets and oil companies are bringing decarbonization-type services into their portfolio. It all comes down to supply and demand, but what we know for sure is that the market is shrinking for fossil fuels each year.
You have been working as a leader in Deloitte for a decade, plus several decades prior in the industry. What changes have you witnessed in that time which might point to the way forward?
In Africa, what I’ve seen is a tension between decarbonization and the energy deficit. The continent is energy starved, and we need energy to develop and grow. Africa isn’t a massive contributor to global emissions, however we do have some of the single biggest emitters in the likes of South Africa. It really is all a trade-off between climate and economic resilience as well as progress.
What about nationalization and local content laws? How imperative is it that IOCs embed themselves in the countries they’re working in?
The business of business is no longer just business. We’ve gone past the era where business’ only requirement is to deliver returns to shareholders. Now companies must play an active role in communities – societies as well as economies. This is especially true for extractive industries, where you essentially start off with a negative entry on your social and environmental impact balance sheet to compensate for. Quite apart from that, these countries are endowed with natural resources and so can expect some value to be delivered from their extraction, which is where local content comes in. Of course, they’re dependent on foreign investment for capital, but equally, companies are realizing that governments have teeth and can withhold regulatory access or physical access to reserves if these public-private partnerships do not meet an equitable balance.
How can that be achieved?
Firstly, governments need to create an investment-friendly environment because securing capital is ultimately a competition. But secondly, from the investor’s viewpoint, they just need to do the right thing- not wasting money begrudgingly ticking social impact and environmental compliance boxes but really getting in there on the ground and doing right by communities. It’s a classic prisoner’s dilemma but doing right is always the best path and not something that can be ensured through regulations.
Finally, what new trends and forces can we expect from the energy sector over the coming decade?
Gas is on the rise and will play a huge role across Africa. It’s also a great transition fuel, gaining attractiveness in government circles. The biggest challenge we’ll face though is in transitioning the continent away from just being a raw commodity exporter and building circularity into business. That’s an unfinished discussion with many new chapters to come.