New Financing Strategy Needed for African Hydrocarbon Projects

Segmented Approach Required to Attract Investors Amid ESG Concerns

by Ikeoluwa Juliana Ogungbangbe

At the 2024 African Refiners and Distributors Association conference held in Cape Town, experts highlighted the growing challenges in securing financing for major hydrocarbon projects in Africa, advising a strategic shift toward segmented financing. Shao Olumide, Senior Associate at Africa Finance Corporation, emphasized this approach during a panel discussion, noting the global investor shift away from hydrocarbon projects like fossil fuel refineries due to environmental concerns.

Olumide suggested that while investors might shy away from direct investment in refineries, they might still be interested in funding associated infrastructure such as roads, piers, and other terminal facilities necessary for the operation of these refineries. This nuanced approach could make funding more accessible by separating the more controversial aspects of hydrocarbon projects from those that are less so.

Dele Kuti, Global Head of Infrastructure at Standard Bank, also spoke at the conference, underlining the environmental, social, and governance (ESG) challenges that deter private sector financing. He shared that his institution faces regular protests for financing African fossil fuel projects, indicating the increasing public and financial pressure against hydrocarbon investments. Kuti noted the importance of strong equity partners to attract funding under these stringent ESG frameworks.

Illustrating the effectiveness of the segmented financing approach, Michael Mugerwa, General Manager of Refining at Uganda National Oil Company (UNOC), presented the Uganda Refinery project as a successful case study. The project is a part of the larger Kabaale Industrial Park (KIP), which includes various facilities such as Uganda’s second international airport nearing completion. Mugerwa detailed that different components of the KIP received funding from varied sources; the UK funded the airport, an unnamed European Union country financed the road network, but the refinery itself was financed from other sources, showcasing the practical application of segmented financing.

Olumide further advised hydrocarbon project developers to engage financial advisers to streamline the funding process. These professionals have deep insights into the financial sector and can identify potential investors interested in specific segments of larger projects. This strategy not only saves time but also aligns projects with investors’ interests, potentially easing the financing process.

The challenges of financing hydrocarbon projects are compounded by the ESG concerns that lead to prolonged approval processes. Kuti pointed out that the low credit ratings of most African sovereigns add another layer of difficulty in securing government guarantees for projects. Additionally, the financial strain is exacerbated in many African countries where the projects need hard currency valuation while dealing with a weaker local currency.

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