African LNG: born again?

Gas production in Africa is currently estimated at 216 billion m³/y, 6% of total global supply. However, with a current gas per capital demand of 119 m³/y, Africa also has the lowest consumption rate of all continents; seven times less than the Middle East, and fourteen times less than North America. Total domestic consumption is estimated at just 56% of supply, and with projections from BP expecting these ratios to be sustained over the next 20 years, exports will play a vital role in the future of the African gas industry. This is even more acute for West African producers where production to consumption ratios average 30 - 40%.

Strong growth is expected in demand; a combination of a rapidly modernising Asia and carbon-cutting West are projected to increase global gas consumption by 46% over the next 20 years. Some 100 billion m³ of gas was exported by Africa in 2012, of which 45% was by pipeline (typically in the north from Algeria and Libya) and 55% via LNG facilities. Piped gas predominantly supplies Europe where forecast gas demand growth is relatively stunted at a projected 18% over the next 20 years. More recently, European gas demand has been impacted by imports of coal from the US as American power generators switch to using low cost shale gas, releasing large amounts of unwanted coal into world markets.

However, 41% of current LNG exports went to Asia in 2012, where gas demand is expected to grow by a far greater 107% over the same period. It is clear from this that the flexibility of destination offered by LNG technology could well be a critical factor in the future of gas developments throughout Africa.

A brief overview

Africa is known as the birthplace of commercial LNG: the world’s first export facility opened at Arzew, Algeria in 1964. During the following decades numerous other facilities were brought onstream throughout the continent. Today, African capacity equals 73 million tpa, with additional facilities in Egypt (Damietta) and Bioko Island off Equatorial Guinea. However, with African LNG exports estimated at 54 million tpa in 2012, it appears that liquefaction terminals are being under-utilised, especially in relation to Algeria and Egypt’s export capabilities. Algeria has an export capacity of almost 30 million tpa, but its exports fall short by almost 15 million tpa, while Egypt’s export levels fall short by more than 7 million tpa. This represents one of a number of challenges facing the African LNG industry.

However, substantial new investment is expected. Over the next five years Douglas-Westwood expects US$ 15.6 billion of expenditure on LNG facilities in Africa, an increase of 30% over the previous five years and 10% of the global total.

Shifting focus

Beyond 2017, LNG expenditure in Africa is expected to undergo a geographical refocus. Traditionally, North and West Africa have been at the frontiers of gas production in the region, contributing to more than 90% of regional output. However, recent discoveries in East Africa, specifically in Mozambique and Tanzania, are shifting the focus of the global exploration and production (E&P) industry. Discoveries in these two countries have been estimated to total more than 3 trillion m³ of natural gas reserves, 20% of Africa’s total current reserve base, potentially transforming these countries into major global gas hubs. Despite the relatively recent nature of these discoveries and the lack of local E&P infrastructure, a number of LNG developments are already being discussed. In Mozambique, Anadarko’s two-train Alfungi development, with an export capacity of 10 million tpa, coupled with ENI’s Mamba 10 million tpa facility, are currently under evaluation and are expected onstream between 2018 – 2020. However, more than US$ 40 billion of investment is required to develop Mozambique’s natural gas infrastructure and, to date, it remains unclear as to which companies or countries will assist in building these terminals. In Tanzania, together with upstream operators Statoil and ExxonMobil, BG Group has proposed the country’s first 6.6 million tpa train development, with plans to see first exports post-2020.

Obstacles

There are, however, a number of major obstacles that must first be overcome in order for these ambitious multi-million dollar plans to come to fruition. Firstly, local content and taxation policies, whilst aiming to distribute oil and gas wealth amongst the host nation’s citizens, in many instances, are threatening the commercial viability of some of these Capex-intensive developments. In Mozambique, sales by foreign companies of domestic assets will be taxed at a fixed rate of 32% starting in 2014, whilst in Nigeria the introduction of the proposed Petroleum Industry Bill (PIB) in late 2013 or 2014 will boost the government’s share of oil and gas revenue to 73% (up on the current 61%). In particular, this latter proposal has drawn criticism from E&P companies who claim the new terms could see Nigerian output fall by 25% over the next five years.

In addition, geopolitical instability has also shaken confidence in the world’s oldest LNG export market. Political upheaval and revolution in Egypt and Algeria have seen their LNG exports fall dramatically since 2010 when they accounted for a combined 25% of African exports, compared to just 12% today. External commercial conditions are also threatening to impact this market. Rapidly increasing supply from the US and Australia will compete with African gas, particularly in the attractive consumer markets of North Asia. Combined export expenditure for North America and Australia will dwarf Africa with US$ 108 billion of anticipated investment – 75% of the global total over the next five years. The emergence of technology to extract once commercially unrecoverable shale reserves in North America has been a major concern for other regional exporters.

Today, new technology to crack deep sea methane hydrate reserves off Japan could, in the long-term, threaten the US gas export party, as Japan currently accounts for more than a third of total global imports.

Conclusion

Many questions loom over the future of the African LNG industry, making cooperation and communications between sovereign governments, their customers, and the international oil and gas companies, more important now than ever.

  Written by Michelle Gomez, adapted to house style by Ted Monroe

Read the article online at: https://www.lngindustry.com/lng-shipping/06122013/michelle_gomez_examines_the_opportunities_and_pitfalls_that_african_lng_presents/