The future of natural gas and liquid natural gas (LNG) looks promising in Africa as a natural gas resource and a potential import market. African governments are eyeing clean energy as a bridge to rapid economic growth. However, the key stumbling block has been its transportation options. Nevertheless, natural gas liquefaction now opens the possibility of better transportation logistics. This article is a summarized report of the research documented by the Department of Energy in the Office of International Affairs in the U.S. It aims to explore the feasibility and understanding of Natural Gas and LNG projects in Africa.

EPCM has categorized this summary into five main sections:

Natural Gas and LNG Marketing
The Project
Financing Options
Modern Technology
Project Management

1. Understanding Natural Gas and LNG: Marketing

Natural gas marketing can be viewed from two perspectives: the local market and the global market.

1.1 The Global gas market

The first overseas gas trade occurred in 1959 between the United States and the United Kingdom. Since then, regions have been teaming up depending on their proximity to reduce LNG transportation costs. Today, the global gas market comprises three primary regions: Europe, the Asia-Pacific (currently the largest market), and North America (Atlantic Basin). Japan, South Korea, and Taiwan are the world’s leading importers of LNG, with India and China slowly catching up.

While there is more than enough demand for natural gas, oversupply has been a threat in the past. However, as more uses of natural gas are discovered each day, a shortage in its supply is also possible. In 2016, 258 million metric tonnes of LNG were traded globally. Nineteen countries exported LNG, while 34 countries imported it.

1.1.1 Factors posing a threat to the global liquid gas export market

Australian LNG export facilities, projected to account for 85 million tonnes per annum (MTPA)
The U.S. which is currently accounting for 60 MTPA of LNG globally
New extensive gas discoveries in several frontier regions
A stagnating demand from Asian markets

The above factors have led to an oversupply of LNG in the global market, resulting in a significant price drop. This situation could persist as a short- to medium-term crisis. Before planning new projects, new gas investors should carefully forecast when market rebalancing may occur. The key is to have sales above the marginal cost of production. Commercial and financial pressures may drive a short-term realignment of the LNG market; however, if this correction does not occur, oversupply could extend well into the next decade.

1.2 The Domestic Gas Market

The domestic market has a solid demand for compressed natural gas (CNG) and its by-products, such as petroleum liquids. Transportation is also cost-effective where pipeline transmission can be used. The host’s national gas company markets the gas locally and develops the necessary infrastructure.

In Africa, domestic and regional pipelines have expanded the local market, and manufacturing industries continue to drive demand for CNG as a feedstock. Additionally, CNG is a favoured fuel source for power generation and gas-powered vehicles. However, infrastructure and market development remain limited.

1.2.1 Other Examples of Domestic Gas Projects

Petrochemicals
Power projects
Methanol projects
Feedstock for manufacturing industries (e.g., cement, iron, and steel projects)
Gas-to-liquids projects
Building transmission and distribution pipelines for gas
Fertilizer plans

1.2.2 Gas to Power Project

Domestic markets have more demand for natural gas as a fuel for power production. For investors, proper planning is critical to ascertain reliability. Cost-effectiveness and safety of the end product (both to the users and the environment) should also be considered. Identify demand centres (bearing in mind future expansions). Then, decide whether to build these power plants closer to the gas source or the demand centres. A few factors to consider include;

Cost
Expansion potential
Energy losses
And strategic considerations

Here is a link for more information on how natural gas fuels power generation.

1.2.3 Factors Influencing Prices on the Domestic Market

Global market prices
Regulatory policy choices
Mandated technology choices
Taxes
Regulations for licensing. Etc.

A potential natural gas customer (vehicle, power plant, or ship) has to be convinced that this gas will always be available. The gas must also outweigh their current options and the risk associated with change.

1.2.4 Understanding Natural Gas and LNG: What’s in for Africa?

Sub-Saharan African countries have the potential to become major natural gas producers. Gas reserves are being explored daily. Tanzania and Mozambique recently discovered gas reserves of over 250 trillion cubic feet (TCF).

Most African nations also have a potential LNG import market due to:

Insufficient power supply
The high cost of electricity

According to the September 2016 report generated by the U.S. Power Africa Roadmap, one of the Vision 2030 goals in sub-Saharan Africa is to increase power generation by over 30,000 megawatts (MW). Assuming natural gas is their preferred energy source, this translates to over 42 MTPA of liquid natural gas. In addition, the African Development Bank Group, via the Energy for Africa project, aims to make electricity available to all nations by 2025.

In Africa, natural gas prices vary. They are established by the seller after some negotiation with the buyers. The prices range between $1.21/MMBtu and $8.4/MMBtu (a case study in Mozambique, Ghana, and Nigeria). The market demand is so good that most African gas producers focus on the domestic market. Nigeria is a good example.

1.2.5 Causes and Effects of LNG Market Uncertainties

Pipelines face significant challenges in offering flexibility, especially in mountainous regions or areas with insecure borders, where piped gas supply may not be feasible. In such cases, compressed natural gas becomes their plan B. However, pipeline supplies still pose a threat to LNG markets. Primary causes of market uncertainties include:

Increasing LNG supply competition
Limited demand growth
Competition from pipeline supplies

These factors often lead shippers to sell cargoes initially reserved for long-term gas contracts. This approach assists in offsetting the initial costs of infrastructure and LNG carriers. However, these conditions negatively impact the efficient transportation and marketing of LNG.

2. Understanding Natural Gas and LNG: The Project

A typical natural gas project is capital-intensive and can last between 20 and 40 years. Investors must allocate risk and define the functions of each participant. This will ascertain sufficient returns on investment and the ability to pay off debts. Consider the possibility of future expansion as well. Poorly structured projects scare off potential buyers due to the high risk involved.

2.1 Project Structures

2.1.1 The Export Structure

The most expensive area in an export structure is the liquefaction project. To cut down these costs, investors have a choice of four major commercial structures:

Integrated
Tolling
Merchant
And their hybrid versions

2.1.1.1 Integrated Commercial Structures

Here, the natural gas producer owns LNG export facilities, the liquefaction units, and the upstream section (exploration and production). He is also responsible for all LNG agreements (both purchase and sale). Revenues come from direct LNG sales. Examples include Qatargas, Sakhalin Island, Tanggu, and Snohvit projects.

2.1.2.2 Tolling Commercial Structures

This structure separates the owner (producer, buyer, or aggregator) of natural gas from the owner of the export facilities. As a result, the overall project cost is significantly reduced because an independent company provides liquefaction services. However, the gas owner bears all the risks (cost, supply, and demand). Revenues come from tariff payments made by the terminal’s customers. Examples include Damietta, train 4, Freeport LNG and Cove Point facilities.

2.1.2.3 Merchant Commercial Structures

The liquid natural gas export facility’s owner differs from that of the natural gas producer. The liquefaction project company enters a purchase agreement with the producer. And this is how revenue is generated. This structure allows for more than one natural gas supplier (or producer). Examples include Equatorial Guinea, Angola, Malaysia, and Nigeria.

2.1.2.4 Hybrid Commercial Structures

Here, the investors make their commercial structure by combining some principles from the above three structures. It is common for the host government or independent contractors to demand full participation. They drill the gas, market it, and retain full ownership while the other party benefits from charging a fixed monthly reservation. Examples include Corpus Christi and Cheniere’s Sabine Pass projects.

2.1.2.5 Factors to Consider Before Choosing Any of the Above Structures

Type of governance
Adequate use of project facilities
Taxes and legal regime
Expansion flexibility
Type of financing desired
Ownership flexibility
Marketing arrangements
Gas transfer price
Efficiencies in operations
Regulations

The commercial structure chosen will impact the project’s overall success. Structures that don’t favour local investors tend to have limited expansion. Remember that the government has the final say on licenses and project approvals. Therefore, factoring them in when choosing a project structure and making critical project decisions is imperative.

2.1.2 The Import Structure

Import facilities cost relatively less when compared to the export structures. However, they share the same operating principles (integrated, tolling, and merchant structures). The only difference is that in the absence of an export facility, we constructed a regas terminal. In a nutshell:

Integrated structures – gas owners (who are also the producers) add a regas terminal. Consequently, they can sell this gas to local and distant markets.

Tolling structures – The import terminal charges a fee for everything (regasification, offloading, and storage).

Merchant structures – Import project owner buys LNG, regasifies, and sells to consumers.

2.2 Understanding Natural Gas and LNG: Government’s Role in a Project

The government can participate directly or directly in the national oil company. Its support is vital for investors to get proper approvals. Investors also need support to gain access to the country’s natural gas resources. Other roles include:

To set the gas sector policies
Monitoring governmental entities
To establish relevant institutions for capacity building
Developing fiscal and legal gas and LNG frameworks
To uphold the rule of law among all involved stakeholders (using an independent regulator)
Development of infrastructure primarily for the domestic market
To provide a business-friendly environment

3. Financing Options

Most projects practice a staged project finance structure, while donors finance others directly. LNG projects have more than one financer. Three principal factors influence LNG projects’ financing:

Firm agreements.
Reliable LNG value chain.
Creditworthy partners.

Investors need to be careful with the liabilities of a partnership when sourcing for funding. A “Limited recourse” finance plan takes care of such liabilities. For higher-risk countries, Public-Private Partnerships are the best approach. Other financing considerations include:

Debt to equity ratio
Loan tenor
Offshore ventures
Special Purpose Vehicle (SPV)
Risk mitigation
ECAs and MDBs inputs
Long-term agreements for sales-and-purchase
Debt recovery

The time it takes for an investor’s loan to be approved depends on several factors, but the most important are the size of the project and the amount of risk involved. However, the current unstable gas market is posing a threat to project funding. The potential sources of financing for LNG projects include bank debts, ECAs (Export credit agencies), sponsors, multilateral, equity, and bonds.

3.1 Setting Gas Prices

LNG prices vary from segment to segment, and setting the right prices is crucial for an investor. Several formulas already exist for setting LNG prices, but most follow oil-based pricing. Europe, however, has recently adopted pricing based on the gas-on-gas method.

In Africa, the goal is to move to LNG imports and establish small-scale LNG projects. As a result, no pricing mechanism has been set yet.

4. Understanding Natural Gas and LNG: Modern Technology

4.1 Liquefaction options

Most African nations are adopting floating liquefaction solutions instead of the usual expensive trains. This is because of the resources’ remote location and environmental issues. Instead of trains, the liquefaction process occurs at sea on the vessel: the same process but with different technology.

4.2 Shipping options

In the past, most LNG carriers had an average capacity of 125,000 cubic meters. Today, however, LNG carriers (particularly Qatari ships) have a capacity of up to 266,000 cubic meters, with the largest accommodating 6 billion cubic feet of gas. Modern ships not only provide a more substantial carrying capacity, but they are also more fuel-efficient and have reduced operating costs. The cost of these vessels is equally high. Most cost over $200 million, with a daily charter rate of over $80,000. Ships without secure long-term charters often face economic challenges due to the less lucrative short-term charters available.

In addition, LNG sellers pass on their cost pressures (resulting from gas oversupply) to shippers. This has led to a shift in charter agreements, where shippers are compensated for the loaded leg of the journey but only receive a modest bonus for the return leg. To combat the current downturn in the shipping market, many shippers are converting their LNG carriers into multipurpose floating facilities, with floating liquefaction (FLNG) facilities being the most common. These converted carriers are ideal for African markets to initiate a reliable gas stream for use in power projects. Later, indigenously produced gas can supplement LNG imports. This is after the projects have been undertaken and the domestic market has grown.

Currently, shippers are using smaller marine carriers, known as the “break-bulk” approach. They use even smaller vessels to reload regasified LNG from their regasification terminals. Storage considerations are essential to ensure adequate gas supply during peak demand periods. Finally, for small-scale LNG projects, trucks and small ships are the preferred modes of transportation.

5. Understanding Natural Gas and LNG: Project Management

5.1 LNG Value Chain Management

Natural gas production can be categorized into three major stages:

The upstream (exploration and production)
Midstream (processing and transportation)
And the downstream (liquefaction, shipping, and market distribution)

5.1.1 Exploring and Drilling

In developing countries, national oil companies dominate the exploration phase with some help from international oil companies. This is due to their lack of experience and the high capital required. Smaller international companies also get involved but fail to complete the projects. Strategic planning determines the overall success of this stage. If this stage succeeds, the rest are more likely to succeed.

5.1.2 Processing and Liquefaction

The feed gas is sent to a processing plant for further refining. Liquefaction then occurs, which makes LNG more space-efficient for enhanced transportation. However, processing and liquefaction are the most expensive part of the value chain. As such, this stage will benefit more from careful project management and support from local authorities. Proper shipping and domestic market supply arrangements will also hasten capital and cost recovery. They also enhance revenue generation. That will make the investor look “good” to the host country’s citizens.

5.1.3 Shipping

Specialized LNG carriers transport the liquefied product to a regasification facility. Asians have dominated the shipbuilding industry due to their in-depth design experience. Investors (gas buyers or sellers) then charter these ships for some time (usually the entire project period). However, major project consortiums (like the Qatar projects) build their own ships. The success of this stage depends on the availability of these carriers when needed – usually when the terminal commences operations. The infrastructure, other trucking, and local maritime shipping should also be ready.

5.1.4 Regasification and Storage

An increase in temperature returns LNG to its gaseous form during this stage. The major requirements include a docking facility (for LNG carriers), additional cryogenic tanks (to hold the gas awaiting regasification), and the regasification plant. For this stage to succeed, it will require sufficient regasification capacity.

5.1.5 Distribution and Marketing

This is where the host country’s citizens benefit the most. This is due to the establishment of gas infrastructure to facilitate domestic supply. Overall, buyers’ and sellers’ price negotiations and the ability to adapt to any future gas market changes contribute to the success of this stage.

Note

For a successful project, the national government and the contracted international oil companies must coordinate the operations of the entire value chain. Since natural gas is not a commodity business, each party needs to see value addition for the entire project period. For example, the host country will be happy to see cheap local gas supply over the project period, while the drilling oil company will appreciate developed domestic supply infrastructure and enhanced security. It’s a win-win situation.

5.2 Advantages of Successful Value Chain Management

Completion within budget
Timeliness of start-up
Safe and reliable operations
Flexibility in case of market changes
Better operating conditions

Short-term contracts are becoming popular due to challenges in long-term project forecasts. LNG projects are generally capital-intensive. The currently projected market oversupply combined with low prices makes it impossible for the entire value chain to appear profitable. However, a dedicated shipping plan might ease the load for long-term projects.

5.3 Risk Management

Operational, strategic, and market risks should be shared among the stakeholders (the project developer, host government, upstream developer, EPC contractor, financiers, and LNG buyer). Other risks include:

Political risks
Risks resulting from government regulations
Development risks
Financial
And environmental risks

In African countries, price risk plays the biggest role in LNG investment decisions. The Equator Principles (a risk management framework) used by financing institutions can be applied by gas investors.

6. Understanding Natural Gas and LNG: The Bottom Line

Africa is booming with unexplored potential in natural gas and LNG. As the local governments continue to equip their citizens with the relevant skills, investors can now confidently access these resources. It is important to mention that unemployment is a major crisis in most African nations. Therefore, investors must manage high expectations that could lead to social conflicts. Nevertheless, proper planning and forecasting are the most crucial steps for the success of any LNG project. Here is a link to the original report for further reading.

To all knowledge

Understanding Natural Gas and LNG Options Handbook – Summary