Africa has considerable oil and gas resources that can help accelerate growth on the continent if used strategically. Although new resources are discovered progressively, they are not equally distributed; indeed, 38 African countries are currently net oil importers. High and volatile oil prices are thus a challenge for all of Africa; they represent an opportunity to be pursued for exporting countries and an obstacle to be tackled for importing countries. The broad objective of this report is to shed light on the key issues related to the social, environmental, and economic impacts of high and volatile oil and gas prices. This includes a discussion of Africa’s oil and gas status, from a worldwide perspective, and the continent’s major challenges and opportunities in the energy sector.

Introduction

Africa’s oil and gas industry is entering a new era. As the world looks to accelerate its transition away from fossil fuels, the pressures on the continent’s oil and gas producing nations are mounting. Our analysis has found that most are highly exposed to the global energy transition, as their economies depend on oil and gas revenues, while their reserves both cost more to produce and are, on average, more carbon-intensive than oil and gas from other regions.

At the same time, energy demand on the continent threatens to outstrip supply. Over the next two decades, rapid population growth and industrialization are expected to drive strong energy demand growth across the continent—including for fossil fuels. McKinsey modeling estimates that African energy demand in 2040 could be around 30 percent higher than it is today, compared with a 10 percent increase in global energy demand.

Africa accounted for roughly eight percent of the global oil output in 2021. Nearly 345 million metric tons of oil were produced on the continent that same year. The region generated 7.3 million barrels per day, one of the lowest production levels since 2000. However, oil remains a primary driver for the economy in producing countries, and its vast reserves may launch other African nations as new producers. The hydrocarbon sector has also shown its potential regarding natural gas, reserves of which exceed 625 trillion cubic meters.

Crude oil and natural gas production is distributed widely in Africa but heavily concentrated in the West and North regions. Located on the West African coast, Nigeria is the major and more mature African oil producer, accounting for around 20 percent of the continent’s production in 2021. Lybia, Algeria, Angola, and Egypt follow, composing the five leading African oil producers. Moreover, these five countries also constitute the largest producers of natural gas in Africa. Together, they accounted for over 90 percent of the continent’s output in 2020. In terms of oil refinery capacity, strong variations are registered among the five countries, ranging from 833 thousand barrels per day in Egypt and 80 thousand barrels per day in Angola. With the main African oil and gas producers in West and North Africa, the regions accounted together for some 10 percent of global oil exports in 2021. That same year, Nigeria led crude oil exports, with 1.6 million barrels of oil sold on the international market per day. The country also exported large quantities of natural gas, around 50 billion standard cubic meters, following Algeria and Egypt. Natural gas exports from both Northern African countries reached 85 billion and 62 billion standard cubic meters. Consequently, fossil fuels play a crucial role in producing countries' economies. For instance, crude oil and natural gas accounted for nearly seven percent of Nigeria’s GDP, and contributed 19 percent of Algeria’s GDP.

Apart from the established main producer countries, other African nations have been rising as potential players. As of 2020, Africa counted over 15 upcoming liquids projects. The main one is located in Uganda, with an estimated resource volume of 945 million barrels of oil equivalent. Moreover, roughly 40 percent of global gas discoveries in the last decades were in Africa. As the third-largest holder of natural gas reserves in the region, Mozambique has a promising future in the sector.

While these dynamics bring challenges that will need to be negotiated, they also create a clear opening for the continent to take stock and reconsider its energy approach. If oil and gas producing countries in Africa consider steps to create enabling environments, improve access to available capital pools, and attract the right skills and capabilities, they could both meet the energy needs of their developing populations and position themselves strongly in a new energy landscape.

The ongoing invasion of Ukraine, which has had deep human, social, and economic impacts across countries and sectors, adds another layer of consideration. European gas prices have increased by more than three times over the past 12 months, based on our data analysis. And since the start of the conflict, the European Commission has announced a plan to make Europe independent of Russian fossil fuels before 2030 through a combination of acceleration of renewable energy and diversification of natural gas supplies. This could result in increased demand for oil and gas from the African countries that have the reserves and infrastructure in place to help meet that demand. It is increasingly clear that the global momentum toward sustainability and away from fossil fuels is accelerating. For the first time, the United Nations’ Framework Convention on Climate Change Conference of the Parties (COP26) explicitly referenced a shift away from coal and the phasing out of fossil fuel subsidies in its 2021 decision text,2 while governments, investors, and consumers around the world are signaling plans for a more rapid shift away from fossil fuels. McKinsey’s “current trajectory” energy transition scenario suggests that global oil demand could peak by 2027, while global gas demand could peak by 2040. If leading countries achieve their net-zero commitments through targeted policies, the transition could be even faster. Under this “achieved commitments” scenario, global oil demand could peak as soon as 2024, while global gas demand could peak around 2030.

Despite these challenges, the shift to a low-carbon future could create significant opportunities for oil and gas producing countries in Africa; several options exist for them to potentially strengthen the resilience and sustainability of their resource bases and build robust positions in the new energy businesses of the future. The speed and the urgency of the actions required, and which levers to pull, will depend to a large degree on the level of reliance that each country has on oil and gas revenues and where they sit on the global hydrocarbon cost curve. African countries can be categorized into four archetypes based on the resilience of their crude oil reserves and the extent of their economic reliance on oil and gas revenues. Countries with more than 50 percent of projected oil production at risk in the event of a more rapid energy transition (achieved commitments scenario) can be considered vulnerable, while those with less than 50 percent of production at risk are likely to be more resilient to global shifts. This analysis focuses primarily on the competitiveness of African crude supply, given the global nature of oil demand and supply dynamics. In general, countries with significant gas production could expect their gas reserves to be more resilient than their oil reserves under a range of energy transition scenarios. However, it is worth noting that in Africa, more than one-third of gas production is associated gas—gas produced as a byproduct of crude oil production and therefore the resilience of gas production in Africa is linked, at least partially, to the resilience of the continent’s crude oil production.

Conclusion

As the world prepares for COP27, African oil and gas producing nations have an opportunity to be proactive in a rapidly evolving global energy sector. Operating in higher-cost, higher-carbon basins has become increasingly difficult in the face of mounting pressure from stakeholders and regulators alike. Furthermore, as African economies look to industrialize to meet the needs of rapidly growing and urbanizing populations, a rise in energy demand could leave many countries facing energy supply challenges. While these challenges are real, so are the opportunities. Specifically, African stakeholders have a significant opportunity to decarbonize existing production to maintain access to capital and customers. They also have the chance to leverage the energy transition to lead in the creation of renewable-energy businesses that will help to meet the growing energy demand on the continent and create new revenue streams and jobs.

If successful, a strategic shift of this nature could unlock significant value for the continent while reducing the risks of climate change and help to secure a greener and more prosperous future for all Africans.