TRADITIONAL ENERGY PROJECTS FACE UP TO FUNDING CHALLENGES

There remain a small clutch of banks that are still committed to the EACOP financing, including South Africa’s Standard Bank, Sumitomo Mitsui Banking Corporation and Mitsubishi UFJ Financial Group (MUFG), both of Japan, and Industrial and Commercial Bank of China (ICBC).

adds to the reputational risk they face if

Financing for EACOP is now shifting towards China, given the role of

Chinese contractors involved in the construction. But even Chinese stateowned banks are not immune to reputational/environmental pressure, as evidenced by ICBC’s withdrawal from the Lamu coal power project in Kenya.

“Any banks that attach themselves to the EACOP project can expect to draw

TotalEnergies may also face a review of its $4.7bn loan agreement with the US Export-Import Bank (US project now that it is trying to get this restarted.

The French major acknowledged that will now face greater scrutiny over the loan secured for its development.

The news in early May of this year that Standard Chartered Bank would

African Crude Oil Pipeline (EACOP), a 1,443km insulated pipeline that will transport Ugandan crude from Kabaale to Tanga Port in Tanzania, came as a setback not just to the Kampala government but to putative oil and gas project sponsors across the continent.

The bank joined more than two dozen other lenders that have turned down participation in the TotalEnergieson a 60:40 debt:equity ratio, with the loan component estimated at $2-3bn.

Yet while the Petroleum Authority of Uganda has said funding for the pipeline remains on track and multisourced from different regions, the challenges it has experienced in pulling together commercial lending and insurance support for EACOP points to a wider challenge facing hydrocarbons developments in Africa.

It also raises broader questions that is dominated by environmental, social and governance (ESG) related issues, whether large-scale CO2 emitting projects stand a realistic chance of

“Western banks are certainly feeling the pressure on new fossil fuel developments like EACOP and its associ- for Energy Economics and Financial Analysis. “The fact that drilling will occur in a national park in Uganda only

If the project, halted by Islamist insurgents in 2021, is restarted, US Eximbank, which has committed the opment, said it will carefully review the ative will assess potential risks and ensure that the project fully aligns with ESG standards.

This underscores that it is not just oil projects that are facing funding constraints; despite natural gas’s credentials as a transition fuel, and with gas-to-power (GTP) projects associated with lower emissions than coal or heavy

As France’s Société Générale has importance of ESG with an increasing ing markets could further shift capital towards those who will embrace such been creative in project structuring. Equally, innovation and new technologies should provide it with greater insulation from ESG-related pressures.

Also, commercial banks now have more sophisticated means of managing lobby group of banks with commitments to ESG, noted in late 2022 that 53 of its members either have a policy have set an emissions reduction target. Forty-two banks have measured their emissions footprint, and 31 banks have emissions reduction targets to be achieved by 2030.

Two banks have chosen to set separate targets for upstream and tiate between the emissions reduction opportunities of upstream and downstream operations. ive legal decisions. In January 2023, the UK Court of Appeal ruled against campaigning group Friends of the Earth’s legal challenge to a British government decision to approve $1.15bn of export credit financing from UK Export Finance (UKEF) for and gas-to-power projects. For example, the UK government has said it will support for fossil fuels overseas other than in limited circumstances.

That provides a measure of reassurance to ECAs and lenders that when ECA support is in place, it will be more challenges to these.

That leaves more onus on devel- opment finance institutions (DFIs) and multilateral development banks (MDBs) to provide support. And here, there is scope for optimism for traditional energy project backers. In March 2023, Bloomberg reported that the World Bank will support the development of Mozambique’s giant natural gas resources – so long as it is the cheapest way to boost energy access.

That appears to mark a break with previous Bank policy. In 2017, the World support upstream oil and gas after 2019. in exceptional circumstances, “considergas in the poorest countries where there is a clear benefit in terms of energy within the countries’ Paris Agreement

Circumstances since the Ukraine crisis have made conditions marginally easier for hydrocarbon schemes in Africa to raise lending support. As tional energy projects have also led African institutions to evolve their own solutions. In May last year, in a bid to support energy transition strategies in Africa, the African Export-Import Bank (Afreximbank) and the African Petroleum Producers’ Organisation signed a memorandum of understanding (MoU) to establish the African Energy Transifunding for oil and gas projects.

Mozambique’s gas is being exported to Europe, so this gas could keep Europe from reverting to less clean energy sources.

Similarly, there have been commitments from Afreximbank to support ventures such as EACOP, with $200m extended in late 2022, along with a $100m commitment from the Islamic Development Bank.

In 2022, the Fund for Export Development in Africa (FEDA), a development impact-oriented subsidiary of Afreximbank, announced that it has bution infrastructure platform in the West Africa region. FEDA’s investment would provide access to cheaper and cleaner fuels for underserved industrial customers across the region using

CO2 emission by replacing environment-polluting fuels currently in use.

Overseas ECAs and development finance groups have signalled their own willingness to continue support for traditional energy projects. In January of this year, Japan Bank for International Cooperation and MUFG announced they would provide a $71m

That leaves a lifeline for oil and gas project sponsors in Africa, especially for projects that can show a greater relevance to ESG considerations, and which also alleviate global requirements for dirtier fuels – such as coal and heavy fuel oil – while meeting demand for cleaner-burning alternatives.