The future of natural gas and liquid natural gas looks promising in Africa: Both 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, the liquefaction of natural gas 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 at the U.S. It aims to explore the feasibility and understanding 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.
Table of Contents
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
1959 dates the first-ever overseas gas market. The trade was between the U.S. and the UK. Since then, regions have been teaming up depending on their proximity to reduce LNG transportation costs. The three major global gas markets today are the European region, Asia-Pacific region (the most extensive currently), and North American (Atlantic Basin) region. Statistics show that Japan, South Korea, and Taiwan lead in liquid natural gas importation worldwide. India and China are 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 being discovered each day, a shortage in its supply is also possible. The year 2016 saw 258 million metric tonnes of LNG traded globally. 19 countries were exporting while 34 countries were importing LNG.
1.1.1 Factors posing a threat to the global liquid gas export market;
- Australian LNG export facilities which are projected to account for 85 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 seen a current oversupply of LPG in the global market. Consequently, prices have significantly dropped down. This might be a short to a medium-term crisis. Therefore, any new gas investor should forecast when gas markets’ rebalancing is likely to occur. And thereafter make new gas project projections. The key is to have sales above the marginal cost of production. There are pressures (commercial and financial) threatening to realign the LNG market for a short term. But if this does not happen, oversupply could cut through into the next decade.
1.2 The Domestic gas market
The domestic market has sufficient demand for compressed natural gas (CNG). In addition, there is a demand for the by-products (such as petroleum liquids) as well. Transportation is also cost-effective where pipeline transmission can be used. It is the role of the host’s national gas company to market the gas locally and develop the infrastructure.
In Africa, domestic and regional pipelines have opened up the local market. In addition, several manufacturing industries continue to create demand for compressed natural gas (CNG). They use its use as a feedstock. CNG is also a preferred source of fuel for power generation and fuel for gas-powered vehicles. However, the infrastructure and markets are still underdeveloped.
1.2.1 Other Examples of Domestic Gas Projects
- 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. As an investor, 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 centers (bearing in mind future expansions). And then decide on whether to build these power plants closer to the gas source or closer to the demand centers. A few factors to consider include;
- Expansion potential.
- Energy losses.
- And strategic considerations.
Here is a link for more information on how natural gas is being used to fuel power generation.
1.2.3 Factors Influencing Prices on the Domestic Market
- Global market prices.
- Regulatory policy choices.
- Mandated technology choices.
- 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 has to also outweigh their current options. And finally, outweigh the risk associated with change.
1.2.4 Understanding Natural Gas and LNG: What’s in for Africa?
Sub-Saharan Africa countries have the potential to become major natural gas producers. Gas reserves are being explored each day. Tanzania and Mozambique have 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.
One of the vision 2030 goals in sub-Saharan Africa is to increase power generation by over 30,000 megawatts (MW). This is according to the September 2016 report generated by the U.S. Power Africa Roadmap. Assuming natural gas is their preferred source of energy, this translates to over 42 MTPA of liquid natural gas. In addition, African Development Bank Group, via the Energy for Africa project, aims at making electricity available to all nations by 2025.
In Africa, natural gas prices vary. They are established by the seller with a little negotiation with the buyers. The prices range between $1.21/MMBtu to $8.4/MMBtu (a case study in Mozambique, Ghana, and Nigeria). The market demand is so good such that most African gas producers focus on the domestic market. A good example is Nigeria.
1.2.5 Causes and effects of LNG Market Uncertainties
Pipelines have their challenges when it comes to flexibility. Mountainous regions and insecure borders will not benefit from a piped gas supply. 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.
Due to the above, shippers commonly sell cargos reserved for gas term contracts. This helps to cover initial infrastructure and LNG ships costs. Obviously, convenient transportation and marketing of LNG is negatively affected.
2 Understanding Natural Gas and LNG: The Project
A typical natural gas project can last between 20-40 years. And it is capital intensive. Investors must allocate risk and define the functions of each participant. This will ascertain sufficient returns on investment and also 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:
- And their hybrid versions.
22.214.171.124 Integrated Commercial Structures
Here, the owner of LNG export facilities, the liquefaction units, and the upstream section (exploration and production) is the natural gas producer. 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.
126.96.36.199 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 liquefaction services are provided by an independent company. 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.
188.8.131.52 Merchant Commercial Structures
The liquid natural gas export facilities owner is different from the producer of natural gas. The liquefaction project company enters a purchase agreement with the producer. And this is how revenue is generated. This structure gives room for more than one natural gas supplier (or producer). Examples include; Equatorial Guinea, Angola, Malaysia, and Nigeria.
184.108.40.206 Hybrid Commercial Structures
Here, the investors make their commercial structure by combining some principles from the above three structures. It is a common practice where the host government or the independent contractors demands 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.
220.127.116.11 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.
The commercial structure chosen will impact the overall project 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, it is imperative to factor them when choosing a project structure and also when making critical project decisions.
2.1.2 The Import Structure
Import facilities cost relatively less when compared to the export structures. But 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 are able to 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 in the national oil company or directly. 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 others get financed directly by donors. 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 partnership when sourcing for funding. “Limited recourse” finance plan takes care of such liabilities. For higher-risk countries, Public-Private Partnerships is 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 length of time taken for an investor’s loan to be approved depends on several factors. But the most important is 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, multi-lateral, equity, and bonds.
3.1 Setting gas Prices
Prices of LNG vary from segment to segment. As an investor, setting up the right prices is crucial. There are several formulas already in use for setting up 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
Other than the usual expensive liquefaction trains, floating liquefaction solutions are being adopted by most African nations. This is because of the resources’ remote location and environmental issues. So 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, LNG carriers (Qatari ships) have a capacity of up to 266,000 cubic meters. The most enormous accommodates 6 billion cubic feet. Modern ships not only provide a more substantial carrying capacity, but they are also 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 a reliable long-term charter struggle with the short-term charters that are less economically viable.
In addition, LNG sellers pass on their cost pressures (resulting from gas oversupply) to shippers. This has influenced charters to pay for the loaded leg only with a little bonus for the empty return leg. To counter this depressed shipping market, shippers are converting their carriers to multipurpose floating facilities. The most common currently is FLNG (floating liquefaction) facility. 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. Well, this is after the projects have been undertaken and the domestic market has grown.
Currently, shippers are using smaller marine carriers. This approach is known as the break-bulk approach. They use even smaller vessels to reload regasified LNG from their regasification terminals. Storage is also an important consideration. Investors need to avail more gas during the peak demand season. 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 3 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. The major reasons for this are due to their lack of experience as well as the high amount of capital required. Smaller international companies also get involved. But these fail to take up the projects to the end. Strategic planning determines the overall success of this stage. And if this stage succeeds, then the rest are more likely to succeed too.
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 is 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.
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 (either the gas buyers or sellers) than charter these ships for a period of time (usually the entire project period). However, major projects consortium (like the Qatar projects) build and own their ships. The success of this stage depends on the availability of these carriers when needed – usually when the terminal commences operations. The infrastructure should also be ready as well as other trucking and local maritime shipping.
5.1.4 Regasification and Storage
An increase in temperature returns LNG to its gaseous form during this stage. A docking facility (for LNG carriers), additional cryogenic tanks (to hold the gas awaiting regasification), and the regasification plant are the major requirements. For this stage to succeed, it will require sufficient regasification capacity.
5.1.5 Distribution and Marketing
This is where the host country 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.
Both the national government and the contracted international oil companies need to coordinate the operations of the entire value chain for a successful project. Since natural gas is not a commodity business, each party needs to see value addition for the entire period of the project. 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. And the currently projected market over-supply combined with low prices make 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 different project 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.
- 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 tap these resources. It’s important to mention that unemployment is a major crisis in most African nations. Therefore, investors need to manage high expectations that could lead to social conflicts. Nevertheless, proper planning and forecasting are the most crucial step for any LNG project to be successful. Here is a link to the original report for further reading.