The gathering of oil and gas companies at Africa Oil Week this year was characterised by a number of concerns regarding the sector’s prospects. Held in Cape Town in early November, the most immediate worry expressed at the event centred on plummeting oil prices and the impact of this trend on investment flows into new exploration.

Oil prices have been on the decline since the middle of 2014 when oil was commanding prices in excess of $100. By November, they had fallen to under $80 a barrel. At that price, the viability of the kinds of new frontier exploration that typify activities in Africa look particularly risky.

Weak oil prices have already had a huge impact on Africa’s largest economy, Nigeria, where the government relies on hydrocarbons for 80% of its revenues. Due to fears over tumbling prices, the Nigerian Stock Exchange all-share index went into freefall in November. In a bid to defend its currency, the Central Bank of Nigeria (CBN) has used its foreign reserves, which have descended to a four- month low, in order to avoid the need to increase interest rates or devalue the naira. By the end of the Africa Oil Week conference, on 7 November, Nigeria’s foreign exchange reserves had dropped for more than two weeks, sliding to $38 billion. It is estimated by Deutsche Bank that Nigeria needs an oil price of $126 a barrel to balance its budget. Were the oil price to continue its precipitous fall, a rise in interest rates and/or a devaluation of the currency would seem inevitable for Nigeria. This would deal a serious blow to President Goodluck Jonathan’s election prospects next year.

However, for all Nigeria’s woes, Rolake Akinkugbe, the Head of Energy and Natural Resources Coverage at First Bank of Nigeria, reminded the Africa Oil Week conference that only a minority of Africa’s 54 countries actually possess known oil and gas reserves. Even fewer actually export hydrocarbons, and as she pointed out, the effect of lower oil prices is generally welcome news to Africa’s majority of non-producers.

The next sub-prime crisis?

Another major concern for the oil and gas industry currently comes from the threat of climate change. More pressure has been exerted on the industry recently following the publication of a landmark report by the Intergovernmental Panel on Climate Change (IPCC). The publication issued the starkest warning yet that the world is on a path to a temperature rise of four degrees, a scenario scientists say would be “catastrophic”.

As Rajendra Pachauri, the IPCC chief, warned: “We have little time before the window of opportunity to stay within two degrees [of warming] closes. To keep a good chance of staying below two degrees, and at manageable costs, our emissions must drop by 40% to 70% globally between 2010 and 2050.”

Given these warnings, the oil and gas industry in Africa fears new emissions legislation could curb their activities. The burning of fossil fuels accounts for around 37% of all global greenhouse gas emissions, and 7% of global oil and gas supplies come from Africa. There have of course been plenty of similar alarms raised by experts and scientists in the past, but what makes the newest report particularly significant is the political backing it has received.

UN Secretary-General Ban Ki-Moon threw his weight behind the panel’s findings, stating: “Human influence on the climate system is clear, and clearly growing.” Meanwhile, US Secretary of State John Kerry claimed that “those who choose to ignore or dispute the science clearly laid out in this report do so at great risk for our kids and grandkids.”

Most significantly, however, US President Barack Obama and China’s President Xi Jinping announced in November after meeting in China that their respective countries – the former with the world’s highest per capita emissions, the latter with the world’s largest absolute emissions – would commit to targets to lower their carbon emissions.

The current flurry of activity around climate change comes ahead of UN talks in Lima, Peru, this month, which will set the groundwork for a global warming pact to be debated in Paris early next year. The tentative progress being made has encouraged some observers that negotiations are on track, but as ever, the devil will be in the detail. And Africa’s oil and gas interests will be keeping a particularly close eye on how any treaty talks differently about developed and developing economies. Many argue that any deal must be careful not to stand in the way of poorer countries industrialising and growing. This means that Africa’s obligations ought to be different to those of nations that reached high levels of industrialisation long ago.

Another way in which African oil and gas companies may avoid restrictions imposed by a climate change agreement comes in the form of Carbon Capture and Storage (CCS). CCS is a technology whereby fossil fuels are “stripped” of their dirty gas emissions that are then buried in underground reservoirs.

The first full-scale CCS plant, located in Canada, is reportedly operating relatively successfully, and in a surprise announcement, the European Union recently endorsed the process in its climate and energy package. If the technology were to be developed and the knowledge transferred to Africa, it could be used as an option to offset greenhouse gas emissions and therefore allow the continued exploitation of hydrocarbons.

The oil and gas industry could certainly do with these kinds of breakthroughs as a number of financiers and investors have warned that fossil fuels might be the next sub-prime crisis in waiting. Mark Lewis, the former head of energy research at Deutsche Bank, for example, says that if the Paris meeting results in emissions limits, the fossil fuel industry “would stand to lose $28 trillion of gross revenues over the next two decades, compared to a business-as-usual scenario. The oil industry alone would face ‘stranded assets’ of $19 trillion.”

Renewable competition

A further challenge that the oil industry will need to confront going forwards is competition from renewable energy. The rapidly declining price of solar panel systems and, to a lesser extent, wind turbines, makes them highly attractive propositions, especially with more African utility companies offering “buy-in” tariffs. Solving issues around energy storage and consistent generation would even further open up the possibility of grid-scale power plants using concentrated solar power.

There are currently systems being tried such as pumping water uphill during the times when electricity is generated then letting it fall to drive turbines and generate power at “off-times”, or attempts to use solar energy to heat molten salts which can store the energy to be released when needed. These are promising technologies, but in their current formulations, neither is particularly efficient.

However, scientists such as Nicolas Calvet, professor of mechanical and materials engineering at the Masdar Institute in Abu Dhabi, are constantly innovating and researching in the hope of developing more viable alternatives. And Calvet, who leads Masdar’s thermal energy storage research group, believes he may be onto a promising new system. Calvet believes using sand, which is both cheaper than salts and can store thermal energy at 1000°C rather than molten salts’ 600°C, could work even better.

It will be a while before we know how viable, efficient and scalable such a system would be, but either way it is clear that Africa’s oil and gas industry faces considerable challenges in the near future.

Whether from economic arguments against exploration, growing concerns around climate change, or competition from renewable energies, the delegates of Africa Oil Week will no doubt be polishing their crystal balls to work out what’s next for the industry.