- Natural Capital
- Sovereign Debt
Natural Resources versus Technology in National Strategic Interests: Crossing Views on France and South Africa
In the context of an innovative analysis of sovereign risk integrating the energy factor at the same level as macro-financial variables, we have already dedicated several Insights to cases of countries facing large-scale changes in their energy position, not only affecting their risk profile but also their strategic interests. We dealt with Egypt and its potential for offshore gas resources ("The need to go beyond the 2° rationale", October 6th, 2015), with the example of border resource management provided by Senegal and Mauritania (“Intense news on energy resources in international relations calls for advanced risk methodologies”, February 22nd, 2018), with Mexico as an illustration of long-term historical determinism in the exploitation of national natural resources (“The weight of energy in the political transition in Mexico: moving backward to the future“, July 5th, 2018) and with the extraordinary case of Saudi Arabia as a potential destabilizing factor for international oil relations (“Factoring ESG in sovereign credit analysis: recent oil-related issues in Saudi Arabia and Mexico illustrate the challenge of capturing SG”, September 6th, 2018). These analyses, although simplified as part of the short format of an Insight, illustrate the multifactorial nature of the energy problem: energy as a factor of production, source of income, pillar of an economic development model, first order driver of regional and global geopolitics, but also a joint and growing issue of diplomacy deployed in the context of international climate negotiations.
Recent news from South Africa is another example of the weight of the energy factor in national strategic interests. An offshore discovery of hydrocarbons of significant size has been announced by the oil company TOTAL. The unanimously positive welcome on the South African national scene that has been reserved to this announcement must be understood in the light of the economic and energy situation of the country, but also of the historical legacy. Under the apartheid regime, the coal liquefaction sector was the main alternative to oil imports which were heavily constrained by international sanctions. Although the country renounced the apartheid regime 25 years ago, nearly 25% of domestic oil consumption remains satisfied by the liquefaction of coal, the balance being massively imported. Moreover, the capping of domestic coal production over the last 10 years is not unrelated to the chronic constraints on electricity generation and the national company Eskom, which is a major brake on economic activity, despite the development of alternative generation capacities. In this context, the possibility of new domestic sources of hydrocarbons appears as a positive factor, synonymous with increased economic and social resilience. Whatever the share of gas and oil in these resources, which remains to be confirmed, these discoveries point to the prospect of less dependence on coal, especially for the transportation fuels, reduced constraints on the electricity sector and reinforced control of the decarbonation national trajectory.
The fact that the energy situation in South Africa can benefit from the success recorded by the French company TOTAL, the 4th largest international oil company, is not without irony. For if the French energy situation currently presents performance indicators much higher than those of South Africa (diversity and quality of infrastructure, performance of networks, quality of governance), the strategic interests of France have been singularly attacked and its energy position weakened due to the loss of control of both companies Alstom and Technip. Analyzing the factors and responsibilities that led to the takeover of both companies, by General Electric for one and FMCTechnologies for the other, is beyond the scope of this Insight. But both stories are linked by a common point and by their consequences. The commonality of Alstom and Technip lies in the attack by the United States Department of Justice which, by virtue of the extraterritorial nature of US legislation, was able to conduct an exclusive prosecution procedure and inflict on the French groups two of the largest fines to have ever hit European companies. The consequences are dramatic in the sense that France has lost control of almost all technologies, critical R&D and engineering capabilities for the energy panorama that has prevailed over the past 50 years and, as an aggravating factor, for the emerging panorama of low carbon energy which will prevail in the future and will require a deployment over several decades. The French national energy independence, with the loss of Alstom and the control of the technology of the 58 nuclear reactors, is now no more than an illusion, whatever the degree of risk on the international uranium market and the share of MOX (partly recycled fuel) in nuclear fuel supply. The loss of Technip deprives the French industry of crucial skills in the LNG industries, all offshore technologies and industrial scale renewable energy sectors (offshore wind for example). Given the amount of public and private investment that were needed over decades to bring these two world-leading companies to fruition, one can only fear that these losses will be irreversible.
The statement briefly developed within the framework of this Insight questions the generalization of ESG analysis by the financial sphere on three levels. Firstly, the two main lines of ESG risk characterization, for corporates and sovereigns, are not independent from one another. Micro and macroeconomic interests are necessarily convergent to a term that is significantly shorter than that of Keynes, in which “we are all dead”. This argues at least for harmonized and coherent methodological developments between the different asset classes. Secondly, the Alstom and Technip cases illustrate the weakness of ESG methodologies in corporate governance. The repeated assurances from the management of these two groups, to all stakeholders, employees, shareholders, public authorities, remained a dead letter, causing damage now proven to be considerable. Thirdly, the cases of France and South Africa can be considered through an historian’s view. We can summarize the importance of the energy factor in the economic development trajectories of the last two centuries to the sole access to resources. The long-term trend of hydrocarbon depletion and international commitments to reduce GHG emissions shift the criticality of the energy factor from the historical criterion of access to resources to that of control of technology. France has lost in a few years the fruits of more than half a century of strategic investment. No domestic resource is able to compensate, even temporarily, this weakening. At the dawn of the new energy era, France is dramatically weakened and back in the international hierarchy. A country like South Africa, combining access to resources, key assets in the past, and assets of the future that are technological culture and ambition, is in the process of building a strategic energy position superior to that of France. This is not the least of the challenges for ESG analysis to capture these fundamental long-term determinants.