Monthly Archives: June 2022

Africas 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 continents 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 continentincluding 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 (Exhibit 1).

Exhibit 1

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.

In this article, we unpack how the energy transitionand a potential restructuring of global natural gas supply sourcescould shape the future of Africas oil and gas sector, and we share high-level options that affected countries could consider to encourage the necessary investments and build long-term resilience at this critical juncture.

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, while governments, investors, and consumers around the world are signaling plans for a more rapid shift away from fossil fuels. McKinseys 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.

This shift is bringing new pressures to bear on the oil and gas sector from stakeholders and regulators. In its net zero by 2050 road map, the International Energy Agency (IEA) highlighted that the global energy sector needs to achieve a significant reduction in the use of hydrocarbons by 2040including the phasing out of all unabated coal and oil power plantsin order to reach net zero by 2050.

At COP26, several new commitments were made, giving further momentum to the transition. In total, more than 150 countries have put forward new or updated emissions targets, with several African countries, including Botswana, the Democratic Republic of the Congo, Egypt, Ghana, Kenya, Morocco, Nigeria, and South Africa, making various commitments to restrict methane emissions, halt and reverse forest loss, phase out coal, and end international financing for fossil fuels. Nigeria also joined some of the worlds largest energy exporters, including Saudi Arabia, in committing to net zero by 2060.

Outside Africa, many countries are also starting to implement carbon pricing and taxes, which could have an impact on African countries dependent on oil and gas exports. The European Unions Carbon Border Adjustment Mechanism, for example, will require EU importers to secure carbon certificates on imported goods corresponding to the carbon price that would have been paid, had the goods been produced under the EUs pricing rules. And while South Africa is currently the only African country with a carbon-pricing systemsigned into law at the end of 2019others could soon follow.

In this context, oil and gas majors are increasingly challenged to deliver higher returns more sustainably. As a result, many are opting to reduce their African upstream exposure and rebalance their portfolios across resources with lower emissions intensity. Investor scrutiny for oil and gas projects, meanwhile, is intensifying as capital providers factor environmental, social, and governance considerations into their decisions. This shift is contributing to a widening gap between oil and gas company valuations and renewable-energy company valuations.

More than half of African oil and gas producing countries rely on oil and gas exports for more than 50 percent of their total export revenues.

This trend creates several considerations for African oil and gas producing countries that are highly dependent on global capital pools to fund their hydrocarbon projects and maintain their oil and gas operations. African oil and gas assets are on average 15 to 20 percent more costly to develop and operate and 70 to 80 percent more carbon intensive than global oil and gas assets. And as global capital pools for hydrocarbon projects begin to reduce, our analysis suggests the cost of oil and gas production in Africa is expected to rise, making African oil and gas projects potentially even less competitive in global markets.

Under McKinseys achieved commitments energy transition scenario, the replacement of approximately 60 percent of Africas current oil production could become uncompetitive by 2040 (Exhibit 2). As oil majors shift toward lower-emission basins, Africas oil-producing countries could find themselves deprioritized for further development and facing an increased risk of stranded assets with significant oil and gas reserves remaining untapped. This could put further pressure on government spending and impact development priorities; more than half of African oil and gas producing countries rely on oil and gas exports for more than 50 percent of their total export revenues. In Nigeria, for example, petroleum exports make up more than 85 percent of the governments total export revenues.

Exhibit 2

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 (Exhibit 3). 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 gasgas produced as a byproduct of crude oil productionand therefore the resilience of gas production in Africa is linked, at least partially, to the resilience of the continents crude oil production.

Exhibit 3

Nigeria and Angola are examples of countries that have both lower oil-resource resilience and economies that are heavily reliant on the production of oil and gas. Countries in this archetype could consider implementing levers to strengthen the cost competitiveness of their resources, such as optimizing fiscal terms, addressing sources of cost premium (for example, insecurity), and improving the ease of doing business. These countries could further strengthen the resilience of their resources by considering initiatives to decarbonize their existing oil and gas operations and encouraging investment in lower-carbon energy infrastructure such as gas pipelines. This could reduce the risk of stranded gas resources. Countries in this archetype could diversify their energy revenues by fostering an enabling environment to encourage scale-up of renewable-energy projects that provide exposure to new energy revenue streams and help to ensure energy supply.

By contrast, Senegal and Cte dIvoire are examples of countries that are less reliant on the production and sale of oil and gas but have oil resources that are less resilient under a more rapid energy transition. Countries within this archetype could focus on spurring investment in renewable-energy or carbon-offset businesses, while also decarbonizing their existing production to extend their license to operate.

Countries with higher resource resilience and lower oil and gas revenue reliance, such as Egypt or Ghana, could focus on protecting their already resilient reserves by decarbonizing their existing oil and gas operations. This would help to maintain the competitiveness of their production in key destination markets such as Europe, which are likely to be subject to carbon border adjustment mechanisms. These countries could also focus on growing investment into renewable-energy businesses to generate new revenue streams.

Finally, Algeria and Libya are examples of oil-producing nations whose reserves are more cost competitive and for whom oil and gas revenues represent a large share of overall national revenues. These countries could prioritize protecting their cost-competitive reserves by taking measures to reduce emissions from their existing operations, while also exploring opportunities to diversify their energy revenues through investment in renewable-energy projects.

No matter where a country falls in this matrix, prioritizing the sustainability of oil and gas production will be increasingly important for all. To position themselves optimally in the energy landscape of the future, we highlight three dimensions on which African oil and gas producing countries could focus: decarbonizing and improving the cost efficiencies of their existing resource bases, increasing their energy supply through lower-carbon infrastructure projects, and investing in renewable energies.

Decarbonizing oil and gas production could help African countries reduce emissions while also extending their license to operate into the future. Focusing on sustainability and decarbonization also presents an opportunity for oil and gas producers to reduce their cost of capital and retain access to customers who are increasingly prioritizing production that has lower carbon intensity. For example, last year Occidental Petroleum delivered two million barrels of carbon-neutral oil to Reliance Industries in India. The emissions offsets for the transaction were sourced from a variety of projects and applied against the crude cargo shipment.

Technologies to decarbonize the extraction and production of hydrocarbons already exist and many are economically viable. A potential first step could be to optimize operations by minimizing heat and power demands and optimizing feedstocks to ensure more energy efficiency. Sustainable-design choices, for example, monetizing wasted gas from flaring, minimizing fugitive emissions, and deploying zero-carbon energy supplysuch as solar power for energy at the well pad are also now available for deployment and increasingly present economic benefits. Further downstream, CO2 released from large point sources such as oil refineries could be captured and used in other applications or permanently stored in deep geological formations, including depleted oil and gas reservoirs or saline formations. Beyond initiatives to directly decarbonize operations, oil and gas sector players could consider, as a last resort, offsetting their emissions or generating carbon credits by implementing nature-based solutions that protect or improve natural ecosystems that sequester atmospheric CO2. Such initiatives could include forest conservation, reforestation, and improved land practices, among others.

To improve the cost competitiveness of their resource bases, African oil and gas producing countries could consider a range of levers. First, national governments could explore optimizing their fiscal regimes to improve their resources position on the resource supply curve. For example, Nigeria recently passed the Petroleum Industry Act, which among other provisions introduced a fiscal framework designed to improve the cost competitiveness of the basin. Host governments could additionally consider initiatives to reduce operating costs, by addressing regional insecurity, for example. There are also regulatory levers that African producer countries could consider to improve the cost environment, including ensuring that local content regulations strike an appropriate balance between building local-industry capacity and reducing costs. Lastly, African oil and gas producing countries could implement measures to generally improve the ease of doing business, including streamlining the permitting processes and strengthening contract enforcement, which could also help to reduce operating costs.

As Africas demand for energy increases, the need for projects that boost energy supply on the continent will likely rise, notably in the core demand centers of its larger economies: Egypt, Nigeria, and South Africa. Investment in lower-carbon-energy infrastructure projects, especially gas pipelines, processing infrastructure, and liquified petroleum gas (LPG), could enable African countries to promote intraregional trade and boost global exports of African energy products, while also helping to strengthen regional energy access. To ensure bankability, these infrastructure projects would likely need to incorporate decarbonization or carbon offset levers.

For example, McKinsey analysis suggests that despite having the largest proven gas reserves on the continent, Nigeria could find itself in a situation in which gas demand outstrips gas supply by 2030 by at least three billion cubic feet per day. This presents a potential opportunity for investment in gas infrastructure such as gas pipelines, gas processing facilities, and coastal LNG regasification to connect currently stranded gas reserves onshore and offshore with domestic industrial, commercial, and power demand centers.

Certain natural gas investments are consistent with Nigerias recently announced commitment to reach net zero by 2060. Our analysis indicates that Nigerias net-zero 2060 plan will require significant expansion of on-grid electrification. In the short term this will come from flexible gas-based power generation to compensate for renewables intermittency until cost-competitive, long-duration energy storage solutions become available. Expanding on-grid electricity supply via increased gas-powered generation will require investments in gas pipeline and processing infrastructure to move natural gas from its source of supply to gas-powered generation plants. Increasing on-grid electrification could also help to displace more carbon-intensive decentralized power sources; McKinsey estimates that there is between 40 and 60 gigawatts of installed capacity of diesel and petrol generators in Nigeria, generating approximately 33 metric tons of CO2-equivalent (MTCO2e) each year12 percent of Nigerias total emissions.

Countries in West and East Africa with significant gas reserves could consider developing cross-border gas pipeline infrastructure to connect to regions where gas will be in significant demand, including countries in North Africa and southern Africa. Alternatively, African countries with significant natural gas demand could invest in coastal LNG regasification plants to allow gas to be imported from other African countries with LNG export capabilities.

Looking globally, there is also potential for increased demand for natural gas resources from Africa, after the European Commission announced a plan to make Europe independent of Russian fossil fuels before 2030, following the invasion of Ukraine. This demand could potentially be met through investment in gas-export infrastructure such as LNG export terminals or continental gas pipeline projects to deliver African natural gas to European and other global customers.

For refined petroleum products, McKinsey analysis suggests that African demand will grow from 4.1 million barrels per day today to approximately 5.3 million barrels per day by 2040, nearly half of which will need to be imported based on existing and planned refining capacity (Exhibit 4). This could create opportunities for lower-carbon projects such as biofuels production, including bioethanol and biodieselto partially offset gasoline and diesel demandor increasing LPG production, bottling, and distribution infrastructure. For example, in Nigeria, carbon-intensive cooking, such as firewood, charcoal, and kerosene, generates an estimated 37 MTCO2e per yearroughly 14 percent of Nigerias baseline emissions. Expanding access to LPG in Nigeria by investing in distribution infrastructure could stimulate the uptake of cleaner cooking fuels for the more than 100 million Nigerians who rely on carbon-intensive cooking fuels, while also being a potential source of carbon credits.

Exhibit 4

Across the continent, a number of such infrastructure projects could be undertaken to simultaneously enhance energy supply, including decarbonizing existing refineries, increasing storage and distribution capacity for refined products, and upgrading port terminal infrastructure.

To help secure energy resilience into the future, African oil and gas producing countries could also consider investing in renewable-energy projects.

To help secure energy resilience into the future, African oil and gas producing countries could also consider investing in renewable-energy projects. Given the high demand for electricity in many African countries, several alternative energy sources such as solar and wind energy have attractive outlooks. Since 2009, renewable-energy solutions have experienced rapid cost improvements. Installation and operational efficiencies have fallen in the past decade, with reduced lead times across both solar and wind energy. Blue and green hydrogen, nascent technologies with unit costs projected to decline, also hold potential for future export to European demand markets. The government of Namibia has recently announced plans to develop a 300,000-ton green-hydrogen project to supply green hydrogen (hydrogen produced from electrolysis of water using renewable energy) and derivatives to regional and global markets.

African oil and gas producing countries could also look to their natural ecosystems for significant new carbon-abatement revenue streams. For instance, protecting, sustainably managing, or restoring Africas plentiful natural ecosystemscould represent a carbon abatement opportunity of 1.2 gigatons of CO2 per year.

New business opportunities such as these would likely require support from a number of stakeholders. Market changes may also be necessary. In the case of blue hydrogen (hydrogen produced from natural gas through the process of steam methane reforming), for example, carbon pricing would be an important enabler.

Each new project would need to be assessed on its ability to attract funding and how well it aligns with its host countrys Nationally Determined Contribution, and the suitability of development in that region. For example, Algeria, Chad, Egypt, and South Africa are particularly well placed for wind and solar energy, while the availability of plentiful natural gas resources in countries such as Nigeria presents opportunities for the production of blue hydrogen.

While the speed of the energy transition is uncertain, there is no doubt that the world is moving toward a low-carbon future. African oil and gas producing nations will need to evolve their strategies to prepare for this, taking into account the particular challenges and opportunities at stake in their context. In charting a pathway toward the new energy landscape, we present here three broad actions that could be considered.

Create an enabling environment to stimulate investment

A supportive environment could enhance the development of renewable-energy projects.

African governments could consider initiatives to stimulate investment in the decarbonization of existing operations and in new energy projects while pioneering sustainable-energy opportunities in Africa. Some countries including Kenya, Malawi, and Rwanda have already introduced incentives such as tax holidays, value-added tax exemptions, and import-duty exemptions for renewable-energy businesses to encourage the sector to scale up. Kenya has also announced plans to launch an emissions-trading system that allows companies to buy emissions allowances through a carbon-credit and green-asset registry.

African nations could also consider facilitating collaboration among key stakeholders in the private sector, nongovernmental organizations, and others, to develop perspectives on sustainable-energy policies to stimulate investment, consider cross-border decarbonization approaches, and to enhance contract approval processes for renewable energy opportunities that reduce the time and costs incurred in the contracting phases.

Access available capital pools

Ensuring energy resilience and security in the new energy landscape may require different approaches to financing projects. Investment in renewable energy has increased tenfold in Africa over the past decade, from $5 billion from 2000 to 2009 to approximately $55 billion in 2010 to 2020approximately 70 percent of which was destined for southern and North Africa. Stakeholders could look to tap into these financing sources including governments, donors, climate-focused investors, and international energy playersthat are already active in the new energy sector and offer attractive access to capital pools.

To improve bankability of oil and gas projects, project sponsors could prioritize decarbonization in the design phase and consider incorporating carbon-offset opportunities. A recently announced $10 billion deal between TotalEnergies SE, the China National Offshore Oil Corporation, the Uganda National Oil Company, and the Tanzania Petroleum Development Corporation is a case in point. The project, which aims to develop crude oil production in East Africa, also intends to take steps to limit greenhouse-gas emissions to below 20 kilograms CO2e per barrel of oil, including by solarizing the East Africa Crude Oil Pipeline and extracting LPG for use in local markets to offset more carbon-intensive cooking fuels. The project also includes a commitment to develop one gigawatt of renewable energy.

Additionally, as global funding shifts away from oil and gas projects, African countries may need to increasingly seek domestic sources of financing to unlock lower-carbon energy projects. Governments, sovereign wealth, and export/import banks could play an important role as anchor investors. For example, in the past year, the African Export-Import Bank (Afreximbank) signed a $1 billion deal with the state-owned Nigerian National Petroleum Corporation (NNPC) to finance petroleum exploration.

Attract skills and develop the capabilities needed for the energy future

McKinsey analysis suggests that approximately 40 percent of oil production in African countries is controlled by international energy players that are increasing their focus on renewable energy, carbon-emissions reduction, and cost containment. There is a significant risk of a technical and skills gap if international players continue to divest from the region. To help address this, African countries could consider increasing and strengthening local oil and gas workforce capabilities while also attracting and investing in the talent, skills, and expertise needed to grow sustainable-energy businesses. In the short term, stakeholders could look to drive regional content policies to increase local participation across the oil and gas value chain and coordinate global recruitment campaigns to attract the required professionals.

In the longer term, there may be an opportunity to explore the development of regional centers of excellence to share best practices and develop oil and gas knowledge and to create knowledge-transfer mechanisms between international and national partners. Stakeholders could also invest in partnerships with local universities to develop relevant new curricula to nurture homegrown talent and skills to support the energy transition. It will also be vital to develop programs to reskill and transition oil and gas workersto adjacent opportunities. For example, in Nigeria, Actemium oil and gas training has, since 2020, been helping to transition oil and gas workers into the offshore-wind sector by offering a suite of safety and technical training standards and qualifications developed by global skills organization Opito to address the skills requirements of a net-zero economy.

McKinsey analysis suggests that more than one million jobs in Africa could be vulnerable as global economies transition away from oil and gas and global consumption patterns shift in favor of lower carbon intensity of production. The UN Paris Agreement, a legally binding international treaty on climate change adopted in December 2015 at the United National Climate Change Conference (COP 21) in Paris, explicitly calls for countries to pursue a just transition that ensures environmental sustainability as well as decent work, social inclusion, and poverty eradication. Given that African countries continue to have among the highest poverty rates in the world, the importance of foregrounding just transition principles cannot be overemphasized.

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.

See more here:

The future of African oil and gas: Positioning for the energy transition - McKinsey

The UK governments proposals have since been included in the Animals Abroad Bill (2022), which may be tabled, in the next sitting of Parliament. The purported aim of these measures is to protect endangered wildlife but the likely outcome in Africa will be the opposite.

If these measures are enacted, we expect to see, in Africa, an acceleration in the rate of loss of wildlife, accelerated loss of biodiversity and yet more loss of wildlife habitat to unsustainable agricultural practices on marginal land. These proposals are ill judged and not well considered. The UK government has ignored both its own experience and the detailed submissions and reasoned arguments of the better informed. No African nation has the resources to offer off its citizens an adequate health or education service so it is hard to justify spending on conservation. Few people in the UK can have any conception of how harsh life is for the great majority of rural Africans. Even in Botswana where I live, one of the better-off African nations, there are many people struggling to exist on an income of less than P350 (=25) a month. The cost of living is not that different from the UK. Rural Africa is impoverished by unfair trade practices by developed nations, poor domestic policy, inadequate infrastructure and poor health services and education.

As a generality, those areas, which are richest in wildlife resources, are the most economically marginalised. The UK has no legitimate interest in how African states choose to manage their wildlife resources. No one in the UK suffers hurt, harm or loss neither from the practice of trophy hunting in Africa nor from the importation of the resulting trophies. This proposal is, in fact, a blatant assault on the sovereign right of African nations and their citizens to manage their wildlife resources as they see fit. There is an element of hypocrisy here too because the British government is the largest provider of trophy hunting opportunities in the UK through the lease of deer stalking by the Forestry Commission and its devolved off-shoots. Trophy hunting for deer generates significant economic benefits in Highland Scotland. The IUCN supports trophy hunting as a viable conservation tool because it generates revenue, which can be spent on management and protection of natural resources, and because it puts legitimate feet on the ground, which is a powerful deterrent to poaching.

Off-take rates are low, rarely over two percent compared to a safe harvest rate of 10 15% for most species. The great majority of animals shot are post-mature males (i.e. in late middle age), which have passed their breeding prime. This level of off-take has no negative impact on the population as a whole.

Trophy hunting generates large revenues for relatively low initial investment and subsequent operating costs. The trophy hunting revenues, which accrue to African governments, contribute significantly to their expenditure on conservation. Without such revenue, resource starved governments would find it hard to justify diverting scarce revenues from other sources to conservation. Few national parks, in which the primary form of wildlife use is game-viewing/photographic tourism, generate sufficient revenue to cover their operating costs nor do most generate sufficient economic activity in other sectors to justify a level of subsidy to enable them to be managed properly. Consequently, most are starved of the funds, manpower and equipment they need to maintain their infrastructure and adequately protect their wildlife and plant resources. In many instances, the former inhabitants of what are now national parks were evicted in order to establish the national park in the first place. Understandably, they and/or their descendants are disgruntled by the loss of their land and hostile to the existence of the park.

Over the past 35 years or so, there has been a paradigm shift in the approach to wildlife conservation over much of southern and central Africa. The old top down paradigm where governments claim to own wildlife and to be able to protect and manage it successfully has been shown to be false. A new paradigm, where the occupiers and users of the land are seen to be best able to protect and manage the wildlife on the land has arisen. It shows great promise and has led to substantial reversals of past losses of wildlife, habitats and biodiversity. In the most successful instances, where more rights to wildlife have been ceded to occupiers and users, wildlife numbers have increased substantially, the amount of land devoted to wildlife has increased greatly and biodiversity has increased.

All this has happened at little or no cost to governments and has been funded mostly by revenues from trophy hunting. The development of Community Based Natural Resource Management (CBNRM) initiatives in Zimbabwe, Namibia, Botswana, Zambia, Tanzania and elsewhere has enabled rural communities, mostly in remote and economically marginalised areas, to manage their own resources for their own benefit.

Such rural communities bear the brunt of the social and economic costs of living with wildlife, which are large. Under the old paradigm they got almost none of the benefits accruing from wildlife but suffered, often heavily, from crop and livestock losses as well as human deaths due to the depredations of wildlife. Under the CBNRM dispensation, communities are able to transform wildlife from a liability into a valuable resource whose protection they will invest in. In some instances, communities have foregone agricultural developments to make more land available for wildlife and limited their agricultural and livestock development ambitions due to the high returns from wildlife.

Most of these returns derive from trophy hunting by foreign visitors, British amongst them. Revenues have been invested by communities in education (building classrooms and hiring extra teachers), health care (building clinics & health posts and hiring extra nurses), rural transport services (mini-buses) and other developments, which the communities want but governments are unable or unwilling to provide. The most successful CBNRM operations have been able to make relatively large cash payments to residents.

All CBNRM operations have also generated substantial quantities of meat to be distributed to residents a benefit which is greatly valued. The widely quoted claim that communities only get two percent of the revenues is simply not true. Successful CBNRM initiatives also strongly discourage poaching or poisoning of wildlife as they demonstrate tangibly the economic and nutritional value of sound wildlife management and ensure that rural communities enjoy direct benefits from their wildlife resources. Poaching is rife throughout rural Africa due to poverty, hunger (especially for protein) and lack of alternative options. Kwashiorkor (protein deficiency in childhood leading to stunted intellectual and physical development) is widespread and common over much of the continent.

The UK government, through DfID supported a number of successful CBNRM initiatives in the 1980s whose main source of revenue was from trophy hunting. In Botswana, DfID supplied an officer to revamp the controlled hunting area system and the lease of hunting concession areas, which was an essential pre-condition for the introduction of CBNRM.

This same officer also played a key role in establishing early CBNRM schemes. Consequently, the UK government is well aware of the benefits brought by trophy hunting in terms of poverty alleviation and community empowerment. If that were not enough, a number of people with serious knowledge of the issues involved made direct submissions on the issue to DEFRA, most notably Dr Brian Child who coordinated the introduction of CBNRM in Zimbabwe, which were either not read or were ignored.

For example, in Sankuyo a community of around 370 people on the eastern margin of the Okavango delta in Botswana, the community was able to transform itself over a 15-year period. What had been a typical poverty ridden semi subsistence economy dependent on remittances from outside became a self-sufficient community with a vibrant land-based economy funded by trophy hunting.

The community formed a community trust to obtain a head lease on an 87,000 ha hunting area and a 6,000 ha photographic area. The trust leased out its hunting area to a safari operator for US$321,400 a year by 2011 and two camp sites in the photographic area to private operators for $112,280. The safari operator also provided a $15,000 fund for medical assistance to community members and delivered 70% of the meat from shot animals to the community. Community members gave the community a trophy hunting quota of 22 elephants and 98 other animals as well as a subsistence hunting quota of 28 animals for use. The total quota represented 0.4 percent of the assessed wildlife population. Poaching, which had been a significant element of the communitys livelihood strategy prior to the institution of the CBNRM project had virtually ceased by 2011.

By 2011, 67% of the communitys income came from trophy hunting, 24% from tourism in its own lease areas, three percent from other tourism and 10% from other sources. (The latter two being mostly remittances by relatives to residents.)

The safari operator and private tourism camp operators created 56 jobs for community members while the community trust itself created a further 63 jobs primarily using hunting income. The community trust spent 56% of its income on direct benefits to community members while 33% was spent on managing an office in Maun, which it was required to do. Among direct benefits paid to community members, the trust gave: US$75 to every household each year until 2010, A funeral grant of $825 to every bereaved family, An annual pension of $33,000 to every resident over 55 years of age, Sponsorship to the local football club, Scholarships for worthy students from the community Free transport to Maun (83km) three times a week. In addition, the trust implemented a number of community development projects including: Water reticulation with a connection to every household, Developing a community owned tourism campsite, which employed 15 people and was self financing, earning revenues of $85,000 a year, Housing for destitute residents, Installing a toilet in every household, and An upmarket tourism lodge. The latter two were not completed at the time the hunting ban was implemented in 2013. In the aftermath of the implementation of the hunting ban in 2013, the community trust was bankrupted and virtually all the community benefits ceased. Average household income fell by 35%, development projects came to a standstill, the trust retrenched 30 employees and overall employment within the community fell by over 50%. In addition, there was widespread hunger due to loss of game meat from the safari operator and elephant damage to crops. The situation has not changed radically since then and game viewing and photographic tourism has failed to replace these losses. Similar scenarios were repeated all over Botswana in all CBNRM trusts and, in total, some 6,000 jobs were lost as a result of the hunting ban. These losses have not been made good to date and the damage to confidence and trust has been immeasurable.

Very large tracts of privately held land in South Africa, Namibia and Zimbabwe and smaller areas in Botswana and Zambia have been re-wilded and transformed from marginal or loss-making cattle ranches (many of which were arguably ecologically unsustainable) into viable, ecologically sustainable operations with improving biodiversity. A parallel process occurred in the Scottish Highlands in the 19th century. Uneconomic and ecologically unsustainable sheep walks were converted to deer forests, driven by high stalking rentals and low returns to sheep farming due to competition from Australia, New Zealand and elsewhere. This process could usefully restart today. Harvesting wildlife for meat is marginally profitable but the initial capital and subsequent running costs are both higher than for trophy hunting, while the revenues are much lower. Capital and running costs are also higher than for cattle ranching so neither conversion of cattle ranches to game-meat ranches nor initial development of the land as a game-meat ranch are attractive. The return to invested capital is too low.

The total area converted to wildlife use in South Africa, Namibia and Zimbabwe greatly exceeds the total area of National Parks, Game Reserves and other official conservation areas in these countries. This process is driven by the high revenues derived from trophy hunting and represents an enormous conservation gain. These areas are not only protecting the more common and huntable species but also rare and endangered species such as Black and White Rhinoceros. In some cases, these species have been removed from state land, where they are vulnerable to poaching, to private game areas where they are safer due to better security. Limitations on trophy hunting e.g. by banning the importation of trophies, is likely to put these desirable changes into reverse. This happened in Botswana between 2013 and 2019 when former President Ian Khama banned all hunting. Virtually all the CBNRM trusts went bankrupt, several thousand rural jobs were lost by people who lack skills in the 'modern' sector and are almost unemployable in the rest of the economy and all the improvements in the lives of residents of the community areas went into reverse.

Furthermore, there was a marked and immediate upsurge in poaching allied to a notable increase in harmful practices, e.g. the poisoning of elephant carcasses so vultures don't give poachers away and an apparent increase in overall off take from a number of populations. In addition, several private landowners who had started converting their cattle ranches into game ranches put the process into reverse until the ban on hunting in private land (but not tribal or state land) was rescinded. Overall, there was a general and widespread decline in support for conservation. The damage done and losses incurred in that period have not been made good yet. Kenya banned all legal hunting in 1977, primarily to shield the widespread ivory and rhino horn poaching operations of its political elite from public gaze. The consequences have been disastrous. Between 1970 and 2015, 17 of the larger wildlife species in Kenya experienced a combined decline in numbers of 72%, ranging from a 30% decline for Zebra to 94% for waterbuck. Over the same period the sheep and goat population increased by 79%, the donkey population increased by 70% and the camel population by11%.

However the cattle population declined by 25% over this period. These figures indicate two things, firstly that domestic livestock has largely displaced wildlife over most of Kenya while, secondly, and the decline in the cattle population indicates an overall decline in ecological conditions.

The country has witnessed a continuing decline in bio diversity and all wildlife populations since the mid 1970s and also the widespread poisoning of carnivores as well as elephants and other large herbivores, which damage crops. The reason is simple, wild animals have no value for rural Kenyans and are seen by them as nothing but a nuisance and a danger to life. To my mind, these proposals to ban the importation of hunting trophies are cynical, hypocritical, wrong-headed and the worst kind of gutter politics pandering to a noisy and ill-informed minority who have no knowledge of the hard realities of conservation in Africa nor of the harshness of the daily lives of most rural Africans - and appear to care less. Put bluntly, the proponents of this measure appear to care more about African animals than they do about African people.

If the UK government is genuinely concerned about the management of trophy hunting in Africa, there is a better way to tackle any issues that arise. The UK government could offer assistance to improve current practices where there may be a problem and encourage and assist practitioners to learn from best practice elsewhere. Indeed, many Scottish deer forests are very poorly managed and their owners and managers could learn a lot from best practice in southern Africa. Here in Botswana, our government needs to team up with the governments of other like-minded countries (Namibia, Zambia, Zimbabwe and South Africa) to put diplomatic pressure on the UK government to can this proposal. For a start our own President Masisi should pick up the phone to Boris Johnson to tell him about the realities of proper conservation. He did it at that meeting in the USA about elephants so he can do so again.

* Richard Whyte is a consultant and practitioner in wildlife management and rural development)

Originally posted here:

Impacts of the United Kingdoms proposed ban on importing hunting trophies - Mmegi Online

THE recently concluded first quarter (1Q22) reporting season did not entirely disappoint the market despite more misses than hits as the number of companies that fell short of expectations was higher than those that were above market consensus.

As expected, the 1Q22 period was boosted again by the buoyant commodity sector, allowing most companies in the chemical sector, plantation sector, and selected metal producers to report stellar results.

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The biggest drag to corporate Malaysias 1Q22 report card was the glovemakers as earnings plunged on the back of normalised average selling price and the higher cost structure post-pandemic.

Banking stocks were decent while the consumer sector was a mixed bag.

Despite the impact of a fully opened economy, the aviation and the gaming sector, led by Genting Bhd, remained under pressure and continued to post losses. AirAsia X was an outliner, reporting a huge net profit on the back of a write-back for previously made provision for its debt restructuring exercise.1Q nominal GDP expands

Economically, the Malaysian economy for the 1Q22 period was surprisingly strong as the economy expanded by 3.9% quarter-on-quarter (q-o-q) and 5.0% year-on-year (y-o-y), flatly beating market expectations of a 4% y-o-y growth.

Not surprisingly, Bank Negara maintained its gross domestic product (GDP) growth outlook for the year with growth projected at between 5.3% to 6.3% for 2022 despite taking a pre-emptive strike by raising the benchmark overnight policy rate (OPR) by 25 basis points (bps) to 2% from 1.75%.

In nominal terms, the Malaysian economy expanded by 13.9% y-o-y to reach RM422.5bil, although compared with the preceding quarter, the economy contracted by 0.6% q-o-q when measured in nominal terms.

On a y-o-y basis, strong nominal growth was seen in accommodation services, up 87% y-o-y; mining and quarrying, rising by 43.5% y-o-y; the agriculture sector grew by 28.3% y-o-y; while the transport sector experienced a 27.3% y-o-y growth.

With 1Q22 GDP data coming in above market forecast, 1Q22 net earnings momentum, excluding the volatile earnings of glovemakers, rose by 5.5% y-o-y, translating to about 1.1 times GDP growth.

Nevertheless, despite the relatively stronger earnings momentum, the ratio of companies earnings that surprised the market against those that were below expectations dropped as only 22% of companies reported earnings that were above expectations against 30% that were below consensus estimates.

This was weaker than the preceding quarters 4Q21 reporting season when 34% of companies reported results that were above expectations and 25% that were below expectations.

Hence, the earnings disappointment ratio jumped to 1.32 times, against the preceding quarters 0.76 times. The q-o-q trend is not unexpected as the 1Q22 period typically tends to have higher misses than hits. An analysis of the trend of hits and misses over the past three years shows that the 1Q22 performance was only weaker than last years 1Q21 performance as seen in Chart 1 and much stronger than the previous two 1Q periods in 2019 and 2020.

A better 2022?

As expected, post 1Q22 earnings season, there have been minor adjustments to earnings estimates for the year and in particular for resource-based companies mainly due to an upgrade in the forecast for the average crude palm oil price. The banking sector too may see better growth in 2022, mainly driven by economic momentum as well as expansion in net interest margin on the back of higher OPR by another 25bps later this year.

However, pricing pressure is also evident due to the rise in commodity prices which is eating into the profitability of listed companies.

While some can pass on the additional cost to consumers in the form of higher prices, others are seeing a contraction in earnings.

For 2022, from the earlier forecasted earnings contraction of 2.9% at the end of the 4Q21 quarterly reporting period, the revised estimate now shows earnings growth of 0.6%, a 3.7 percentage points improvement.

This is despite the one-off Cukai Makmur, which otherwise would lift earnings estimates by 10.9 percentage points to 11.5% for 2022.

Not many changes were made to earnings for 2023 as earnings are now estimated to grow by 12.6% from the 12.7% that was estimated in the preceding quarter.

Index wise, except for a 25 points upgrade to the FBM KLCIs fair value by one brokerage firm to 1,647 points, most broking firms have maintained their respective FBM KLCI target for this year, which range between 1,635 and 1,745 points, or an average of 1,680 points. This is some 11.3% higher than the 1,509.71 points on the FBM KLCI as at Thursdays close.

Interestingly, while most brokers have maintained their respective target values, it was derived at a lower price earnings ratio multiple of 14.5 times instead of 15.4 times previously, basically incorporating the risk that the market is up against in the second half of the year, which among others may include persistent inflation pressure, slowing growth, tighter liquidity, rising interest rates and the likelihood that the 15th General Election may be called as soon as August or September.

The fear of the three I

Invasion, inflation, and interest rates the three I sums up what to expect for the rest of 2022 as the Federal Reserve (Fed) has not only begun interest rate hikes but its quantitative tightening (QT) plan that will take away US$95bil (RM417bil) per month from the market over the next 12 months.

As for rate hikes, the market now expects the Fed fund rate to reach 2.75% to 3% this year from the current level of 0.75% to 1%, a full 200bsp hike to go, before rising by another 50bps in the first half of 2023 to 3.25% to 3.5%.

As it is, the Fed has already raised rates by 75bps this year as it remains behind the curve against elevated inflation prints but also against inflation expectations.

The Russian invasion of Ukraine recently reached 100 days since Vladimir Putin invaded various regions and is said to have now controlled about 20% of Ukrainian land. While the west has tried many ways to curtail the Russian move against Ukraine via sanctions, Moscow has so far not been perturbed by the moves but instead stepped up its efforts.

It has come with a price, although the ruble has rebounded to levels before the invasion, the Russian economy is suffering from the economic fallout that comes with its aggression.

The war has had an impact not only on Russia but the world over as the World Bank lowered its forecast to 2.9% early this week from 3.2% that it estimated in April.

The International Monetary Fund too will likely follow suit as it last lowered the global growth rate to 3.6% in April, taking into account the slowing economic momentum out of China as a result of recent Covid-19 lockdowns in major cities.

Timing the market re-entry

While the FBM KLCI is down 3.7% year-to-date, its performance when measured in dollar terms shows the market is now down 9.1% and remains an underperformer when measured against its Asean counterparts as seen in Chart 2.

All Asean markets are weaker year-to-date due to the dollar strength as the dollar itself is up 1.9% against the Singapore dollar; 2.1% against Indonesias rupiah; 3.8% against the Thai baht; and 3.9% against the Philippines peso. The ringgit has been the weakest among the regional currencies, falling 5.4% year-to-date.

As mentioned earlier, equity markets are now up against a relentless Fed that is persistent in its view that it needs to bring inflation down, with the hope of manoeuvring a soft-landing for the US economy.

But just like any policy measures, the Feds move will likely be driven by data and how core personal consumption expenditure and the labour market play out over the rest of the year, and if data shows that the economy is headed towards recession or a hard-landing, the Fed will, in all likelihood, engage the handbrakes and either pause or reverse the Fed fund rate hike path.

The Fed may even stop its QT move to support an ailing economy and hence that would be a signal of the market bottom as any measures that are seen to support the financial market, will be welcome.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writers own.

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Watch the Federal Reserve - The Star Online