Covid-19 And An Oil Price Collapse | Impact On Energy Security In Africa – Challenges And Opportunities
-Tina Blazquez-Lopez | Counsel | Bryan Cave Leighton Paisner LLP
The coronavirus disease (COVID-19) has arrived in Africa and it will need an African response if it is to be successfully managed. In early March there were few reported cases on the continent. As of the time of writing, Africa has passed the 10,000 reported case milestone with confirmed cases in almost all African countries (Africa Centres for Disease Control and Prevention).In this article we look at some of Africa’s unique challenges and opportunities in this pandemic as well as some of the legal issues that may arise in relation thereto.
Africa’s Unique Challenges
Africa has unique demographics, which may impact how the disease plays out on the continent. We understand that COVID-19 is most severe in older segments of populations and those with underlying health conditions. Africa’s population is young with the median age of its 1.3billion people being just 19.7 years. The median age in Europe is 43.1 years and in China 38.4 years.
On a preliminary examination, this may bode well for Africa. However, when we look more closely, we find that Africa has a disproportionate number of its population with underlying health conditions, which also affect the young. Diseases such as tuberculosis, malaria, polio and high blood pressure are common. Malnutrition causing growth issues and other health conditions including mental ill-health are also high and may make already vulnerable groups more susceptible to COVID-19. Diseases which attack the immune system such as HIV/AIDS are also widespread.
The healthcare system in a number of African countries has improved over the last decade but remains largely unsatisfactory. Hospitals lack capacity and the number of doctors and intensive care unit beds in proportion to population numbers is low compared to other parts of the world. Advanced medical equipment such as ventilators are also few and antimicrobial hand sanitisers and gels, face masks and gloves are also in short supply.
Limiting person-to-person transmission will be more difficult in highly populated African cities. Many people work in the informal economy and stay in areas where clean water for handwashing may be challenging and self-isolation practically impossible. This could lead to a bigger and more prolonged outbreak of COVID-19.
Power and Renewables – Availability and Access
Availability and access to power in Africa has become more urgent amidst the threat of COVID-19. As countries prepare to respond to the ensuring crisis, makeshift hospitals and care facilities are being assembled. However, given the current availability challenges, it is difficult to see how these facilities will be powered in a reliable way. Power outages and blackouts could cost lives and be detrimental to critical medical equipment.
As lockdown measures are implemented across the continent reliable power access is fundamental as business and individuals try to maintain business continuity and work from home. Energy required for daily activities such as lighting, refrigeration, internet access, phone charging and cooking are essential. For rural communities that are not connected to the grid this may be more challenging. In some cases mini-grid and off-grid solutions including pay-as-you-go solar power are filling the gap. This leap from have no electricity straight to using green power is significant and highlights the importance of investing in renewables and in maintaining a sustainable energy mix in Africa.
The foreign exchange impact of the virus on the global economy will likely affect investment in renewable energy. Key components, which are typically procured in US dollars, will now be significantly more expensive. Faced with depreciating currencies and increased capital costs, companies may delay or even halt the commissioning of new solar or wind plants. Governments around the world continue to cut interest rates and although the low cost of debt will be favourable to renewable energy companies, the fall in the global stock markets will make it increasingly difficult for investors to raise equity. Note also that many clean energy technologies such as batteries for electric cars, solar panels and wind turbines are sourced from China. If there is a significant slowdown in China this will have a knock-on impact on this market.
Cheap oil will also impact renewables. In many cases on the continent, the cost of solar or wind power is higher than for power generated by traditional gas-fired plants. In Nigeria, for example, the government is struggling with instituting cost reflective electricity tariffs. The government there has contributed over 1.5 trillion Naira in subsidies to the sector despite privatisation over 6 years ago. Distribution companies there have argued that the tariff structure does not guarantee a return on investment and have, in some cases, rejected power. It is important that the cost of power generation, transmission, and distribution is accurately reflected in tariffs in order to attract private investment in the sector and to allow renewables to compete effectively with fossil fuels. Investment in storage solutions, including stand-alone battery storage, will also add capacity and increase access to energy for the most vulnerable.
There are also environmental benefits in investing in renewables that relate to public health. Oil and gas peaker plants and the widely used stand-by diesel generators are both expensive and polluting. Poor air quality can lead to pre-existing health conditions, cause respiratory diseases and weaken immune systems making them more vulnerable to viruses. Africa has an opportunity to leapfrog dependence on fossil fuels and to invest in its abundant renewables resources. If the global economy continues to contract, oil prices remains low and COVID-19 takes hold on the continent, this may be a missed opportunity.
On the demand side of the energy equation, COVID-19 presents tangible challenges. As people comply with stay home orders, many will be unable to service utility bills due to a loss of income. There are even more practical concerns for the most poor who do not have access to pre-paid meters, use pay-as-you-go options and typically have to travel to a payment point. Furthermore, the stay home orders are also likely to exacerbate the existing issues faced by utilities in term of collecting payments for electricity use.
On the supply side, the question as to what constitutes “essential services” in a pandemic is interesting. In Nigeria, all operators in the electricity industry have been asked to continue their service. However, in South Africa, there is news that Eskom has asked wind farms to reduce their operations due to a reduced demand resulting from COVID-19 and may call a force majeure (“FM”). Producers are naturally concerned about immediate debt repayments and will likely seek to rely on provision in power purchase agreements for deemed energy fees to cover power that would otherwise have been produced.
It is important that governments consider the impact of sweeping emergency regulations on smaller and sometimes informal energy service providers that help to plug the gap in rural areas. If such entities are not permitted to operate during this time this may thrust already vulnerable sections of the population into greater poverty.
This week, in the United States, oil fell to below zero for the first time. There is a historic oil glut and storage facilities across the world are rapidly filling indicating that the low prices may be around for a little longer than initially hoped. Usually, when there is an oil surplus, demand increases due to lower costs. However, as social distancing and lock-down measures are enforced around the world, demand for oil is low. This may deepen if demand in China, the largest crude oil importer, falls further.
At below $20 a barrel (Brent Crude as at 22nd April, 2020) countries such as Nigeria, Ghana, Angola, Algeria, Congo, Gabon, Equatorial Guinea and Libya whose budgets are heavily reliant on oil revenues are likely to experience a significant decline in income. For illustration purposes, Nigeria’s 2020 budget was based on an oil price of USD57 per barrel and Angola USD 55 per barrel. Both countries derive approximately 90 percent of their export earnings from the sale of oil. A collapse in oil price will, therefore, impact government investment and financing needed for projects. If negative oil prices become a trend, this could be extremely challenging for these oil exporting countries.
National, international and independent oil companies have already announced reductions in capital and operational expenditure. In Ghana, Aker Energy has announced the postponement of the development of its Pecan field until further notice due to the outbreak of COVID-19. Some oil (and gas) price hedging arrangements could also come under pressure and buyers may look to delay or suspend deliveries in an attempt to renegotiate contracts at a lower price. The current environment could see a number of contract defaults and related disputes.
On the positive side, the price of lifting oil in Africa is low compared to other parts of the world and this may also impact how Africa’s oil producing countries weather the ensuing storm. Improvements in digitisation in the industry will help to increase productivity, reduced cost, promote safer operations and to maintain asset values on the continent. Governments would also do well to diversify their economies away from the heavy reliance on oil.
Impact on Trade and Investment
The Nigeria Stock Exchange index is down year to date by 14.26%. Stocks in South Africa have fallen to 2013 levels and in Kenya, the Nairobi Stock Exchange has not been at such a low level since 2003. Moody’s has recently downgraded South Africa to below investment grade and other sovereign ratings across the continent may also be similarly downgraded.
The preventative measures have begun to interrupt key supply chain across the continent and will likely also cause a reduced global demand for African exports. The export of hard commodities such as copper, cobalt, lithium, manganese, chrome and metal ores (DRC, Zambia, South Africa); and soft commodities such as cocoa, tea, coffee and flowers (Ghana, Kenya, Ivory Coast, Rwanda and Ethiopia) will be impacted.
In terms of imports, China is a large market from which many items are sourced in Africa. Some factories remain closed and the production of items such as clothing and textiles, electronics, toys, other consumer goods will be reduced. This is an opportunity for Africa to move away from exporting raw materials to value added manufacturing. As the world moves away from its over-dependence on China, Africa could potentially position itself to play a more central role in the global supply chain.
We are also likely to see reduced tourism, inflows by way of remittances and foreign direct investment in Africa, particularly from China. China long overtook the US as Africa’s largest trading partner and has invested in a number of infrastructure projects on the continent including road, railways and power assets. China also has interests in a number of mines in the copper belt region and Chinese banks and state institutions have extended a number of credit facilities across the continent. As the Chinese and other governments focus on their own efforts to limit the economic effects of COVID-19 in their home countries there may be limited capacity to invest in Africa.
Africa’s Unique Opportunities
Africa also has unique opportunities in this pandemic. First is recent experience with dealing with viruses such as HIV, Ebola, Malaria and Lassa fever. Africa understands disease outbreaks given that it has had to deal with many. Hence, significant infrastructure such as temperature screening at borders was instituted at some African borders long before the same was implemented in Europe and America. There are also a number of brilliant African medics and scientists who are currently using their experience combatting other diseases to help find a vaccine for COVID-19.
One of the biggest opportunities for the continent lies in investment in permanent healthcare infrastructure and the delivery of healthcare. There are significant gaps at almost every level of the healthcare chain and structural improvements are required as a matter of urgency. Opportunities lie in everything from the design and production of medical equipment and hygiene products to surveillance of infectious diseases and in public education of the same.
Other than in the energy sector, there are opportunities for innovations in technology for crucial infrastructure in health, food, sanitation and water supply. Perhaps we will also see increased use of artificial intelligence in a number of sectors. Drones may be deployed to remote areas to transport key medical equipment, conduct tests and deliver consumer goods. Robots and robotics may also be used in hospitals to assist health workers to carry out tasks such as temperature controls and delivering medicine, limiting human contact. These businesses may present new opportunities for venture capital and private equity.
Some companies in Africa are already using technology to help fight COVID-19. In Nigeria, one company has developed an online tool, the COVID-19 Triage Tool to enable individuals to assess their risk category. South Africa’s government is also using WhatsApp chatbot to provide information on COVID-19. South Africa’s Nedbank has also recently announced that it is accelerating the rollout of its digital strategy across Africa to limit face-to-face banking in light of COVID-19. Other opportunities lie in data collection, building statistical capacity and also in track and trace technologies.
COVID-19 will also inevitably change the way we do business in Africa. The preference for in-person-meetings may develop into new ways of engaging. There is much room for digital disruptors and crowdfunding platforms to support some of these initiatives may also be enhanced on the continent.
Finally, COVID-19 is a reminder and opportunity for Africa to diversify its economies from, in some cases, heavy reliance on natural resources. Those African countries where the agricultural sector is thriving may e.g. be better able to withstand disruptions in the food chain.
Some Legal Issues to Consider
Undoubtedly, many will turn to their lawyers to seek advice as to whether COVID-19 constitutes a FM, allowing for a delay or suspension in performance of their contractual obligations.
Although the concept of FM is recognised in most legal systems, some of the principles developed in different jurisdictions on the continent and elsewhere may give rise to differences in application and interpretation. Therefore, it is important to check first: (i) the governing law of contract; and (ii) whether the relevant contract in fact contains a FM clause.
Under English law, and in other common law jurisdictions, FM is a contractual provision negotiated by the parties; it is not implied as a matter of law. Therefore, the courts will not infer meaning and a party seeking to invoke FM must be able to demonstrate that the contract specified the specific occurrence and that the event in some way prevents or impedes performance of the contract. Key words to look for in a FM clause include “disease,” “epidemic”, “pandemic,” or “quarantine”. This may also be captured under “Acts of God,” “Acts of Government” or by general phrases such as “other circumstances beyond the parties’ control.”
If the contract does not contain a FM clause, parties may seek to rely on the common law concept of frustration, which addresses whether events occurring after the conclusion of a contract may allow a party to treat the contract as being discharged. Frustration is limited in its application and courts are reluctant to treat contracts as frustrated as it conflicts with the principle that parties have effectively allocated risks.
COVID-19 may constitutes a frustrating event in the following circumstances: (i) changes in law which make it illegal to perform contractual obligations; (ii) delayed delivery in a contract where supply is time critical to the very nature and existence of the contract such that delay amounts to non-performance; and (iii) the fundamental assumptions on which the parties decide to contract no longer exists. Parties will need to show that the event has changed the very nature of contractual performance, not just making it more expensive or onerous. Even if arguable, there is no guarantee that such claims will be successful as a number of other factors will need to be carefully considered. Legal advice should be taken in all cases.
Parties may also look to material adverse change (“MAC”) (or material adverse effect) provisions in their finance and acquisition agreements. Again, there are no standard MAC clauses and these can be vague and wide in scope to include a MAC on “the business, operations, property, financial condition or prospects” of an entity. Some MAC clauses, most likely seen in emerging markets, may also refer to a MAC relating to “the national or international financial markets, or economic or political conditions”. It should be noted that MAC clauses are usually intended as a “catch all” provision and thus rarely relied upon. COVID-19 may provide some interesting test cases on this.
Nobody knows when “business as usual” will resume. However, what we do know is that Africa is weeks behind the rest of the world in dealing with COVID-19 and has fewer resources to stimulate its economies. Despite the preventative measures, businesses and individuals must continue to pay utility bills and service other financial obligations including those related to leases, cars, homes and other premises and governments must not default on their Eurobonds. If community spread takes hold, governments, businesses and individuals on the continent will be at significant risk of defaulting on some of these fundamental obligations and, in extreme cases, may enter insolvency/bankruptcy proceedings unless they can restructure their obligations. As a result, banks will also carry large non-performing loan portfolios.
COVID-19 has affected and will continue to affect all aspects of human life and, therefore, permeates almost every aspect of law. As a consequence, we may see cases in all areas of legal practice including civil liberties, personal injury, business interruption, banking and financial services, employment, whistle blowing, premises and product liability, insurance and medical malpractice. Although some may use the virus to excuse pre-existing issues, there will be genuine test cases brought before the courts, including class actions. These may even be against governments and government entities, hospitals and other medical service providers. Being able to demonstrate causation will be paramount to the success of any such claims. It is imperative that specific legal advice is sought in all cases.
African and international development finance institutions have been relatively quick to act. This is indicative of the scale of the public health emergency arising from COVID-19. The Africa Finance Corporation and African Export-Import Bank have already announced COVID-19 targeted facilities. The African Development Bank also recently listed a first “COVID-19” social bond on the London Stock Exchange. The G20 (via a virtual meeting) has now also agreed a moratorium on bilateral government loan repayments for lower income countries. The deal is also supported by the Paris Club of creditors. Some of Africa’s high net worth individuals have also contributed to the relief effort.
The fact remains that the opportunities identified in this paper and elsewhere require access to capital. Solutions must be custom made, decentralised and tailored to the local context. Leaders and policy makers must devise innovative models to increase liquidity in markets to reduce default risk, support small and medium sized enterprises and those working in the informal sector. This may include forms of bridge finance, working capital facilities and, in some cases, equity investments.
Ultimately, it will be the resolve of governments and individuals in Africa that determines the course of the outbreak. If Africa can leapfrog landlines, grids and formal banking systems then perhaps Africa can potentially accelerate its own development and find solutions to some of the challenges that it faces in this crisis. Government must focus on efficient testing, training and building capacity on the continent. Creating reliable infrastructure and employing principles of transparency and good governance will also be crucial. Mobilising and empowering Africa’s youth will also be important.
COVID-19 has shown just how interdependent and interconnected our modern world is. There will not be a global solution for COVID-19 without an African solution. Our economies are intertwined and our security depends on that of others. The challenge will be to find new ways to work together as a global community in a way that will harness this interdependence.
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