GGP: LNG for Africa

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This is an excerpt from a paper by the King Abdullah Petroleum Studies and Research Center (KAPSARC) published in November 2016.

Summary

The idea that Africa could become an LNG destination is not new. It has been proposed for many years in countries as far apart as South Africa, Morocco and West Africa. Sellers’ attention, though, was previously directed toward the more lucrative and larger Asian markets and traditional creditworthy buyers able to commit to a 20-year oil-indexed long-term contract. But over the past two years the global LNG market situation has radically changed. Global gas markets are currently oversupplied, and this glut could last until the middle of the next decade. Consequently, sellers are actively seeking new markets and offering innovative new models that may suit riskier new LNG buyers. LNG imports into Africa became a reality in 2015 with Egypt and many African countries are considering following suit, given the product’s current affordability.

As the gas industry ponders how to bring an end to its new Dark Age (KAPSARC 2015), developing gas markets in Africa could be one solution. Gas is also an opportunity for Africa, so long as it remains affordable. Sub-Saharan Africa is starved of electricity. Despite many initiatives, power capacity is still lagging behind population growth and hampering gross domestic product (GDP) growth. Africa’s future economic development is directly linked to its ability to develop its power sector, for which there is a range of different options depending on the country in question, its natural resources and existing power infrastructure – with both centralized and decentralized solutions available. Developing coal-fired generation looks more compromised since the resolutions of the 2015 Paris Climate Conference (COP21), while the development of capital-intensive nuclear capacity looks even more challenging. This leaves gas and renewable energies as the main options for extending access to electricity.

A key question for Africa, as for many developing countries, is whether customers will be willing to pay an environmental premium for power. For remote applications, though, renewable options may in fact be the cheaper option. Both Shell and Total recently highlighted how LNG could help bring power to Africa by creating an integrated LNG-to-power project (Smedley 2016). Indeed, most projects that have recently emerged are LNG-to-power projects, using power plants as anchor customers (see Table 1). Many international financial institutions tend to favor renewables against gas, but gas could provide opportunities as a source of baseload power in urban areas, as a complement to intermittent renewable generation and as a fuel source for the industrial sector.

Intraregional gas trade in Africa has remained limited so far. This leaves LNG imports as the main solution to empower resource poor African countries. As of late 2016, the list of potential LNG importers includes Morocco, Senegal, Côte d’Ivoire, Benin, Ghana, Kenya, Namibia, Sudan and South Africa. Only Ghana so far has a floating storage regasification unit (FSRU) on site, albeit not yet operational. Africa could be a growing LNG importer: while individual countries represent small volumes – all markets begin small (0.5-2 million metric tons per year, mtpa) – the aggregate could be significant in the medium term. A further development of demand in other sectors is also envisaged. The short shipping distances to neighboring producers could make these markets more attractive. By 2020, five Africa countries will export LNG, with Mozambique and Tanzania potentially joining them later.

The road to developing LNG imports may be a long one, though. The key issue is how to attract investors and reduce the risks, given the initial small size of markets, the countries’ low credit ratings, low domestic energy prices and higher project risks. Most projects have opted for the more flexible FSRU, which can be put more rapidly into operation, has lower capital costs, and is often leased rather than bought by the investor. This solution also gives the operator the option to remove the facility and redeploy it elsewhere, should domestic production grow to levels sufficient to enable self-sufficiency, or should there be any issue such as payment default – for example through insufficient revenues, as electricity prices often do not reflect the cost of generation. Redeployment is, of course, only possible if there is a market for the FSRU elsewhere. Past experience in Puerto Rico and the Dominican Republic shows that bundled power and LNG projects which have a complementary LNG sale and purchase agreement (SPA) and power purchase agreement (PPA) have a key advantage (Haug and Cumberland 2013).

A lot remains to be done in Africa’s power sector to ensure LNG-to-power projects are viable and to create an environment that is conducive to investments. In particular, governments need to provide regulatory and political clarity to prospective sellers. This includes setting up a transparent legal and regulatory regime for the power and gas sectors with transparent rules governing electricity transactions and network access; tariffs reflecting the true costs of electricity; the development of a project structure adapted to the market environment, ensuring that a credible buyer exists, seeking support from external institutions to guarantee the risks; and, finally, supporting the projects themselves. Financial institutions need to facilitate the access to capital and LNG suppliers to accept the risk of delivering to these new markets and building the gas and power infrastructure. Investors must also carefully analyze the gas and power markets that their project will serve in order to understand the risks associated. Lenders must also scrutinize the domestic gas and electricity buyer’s offtake liabilities and ability to pay for the energy. 

Full Paper Here.

Anne-Sophie Corbeau is a Research Fellow at the King Abdullah Petroleum Studies and Research Center (KAPSARC).