Gas prices have tracked the decline in oil prices since 2014. Supply has risen considerably in that period with the US shale gas boom and Australia emerging as a major liquefied natural gas (LNG) producer. This is good news for African countries – such as South Africa – that hope to import LNG to build domestic gas economies. The current low price – under US$3 per million British thermal units – is expected to prevail until 2020/23, says Niall Kramer, CEO of the South African Oil and Gas Alliance.
However, it has more ambiguous implications elsewhere on the continent. Established oil and gas producers – especially Nigeria but also Angola and Ghana – have an opportunity to sort out the gas element in their domestic electricity generation sectors. But new entrants such as Mozambique and Tanzania, which intend exporting LNG, now face a different and less favourable set of project economics.
The International Energy Agency’s 2011 prediction, that a ‘golden age of gas’ was imminent is slowly coming true. In 2017, the US exported more LNG than it imported. The shale gas industry in that country is displacing coal despite the best efforts of the Trump administration to reverse the process.
Speaking in Cape Town last year, US Energy Secretary Rick Perry spoke enthusiastically about approving US applications to export LNG to Africa. This idea is not as bizarre as it may have seemed only two years ago. The US exports (via pipeline) gas to Mexico where it is now used to generate more than a quarter of the neighbouring country’s electricity.
Bloomberg reported that LNG demand grew 10% last year. One of the main drivers is the world’s second-largest economy, China, which has embarked on an ambitious coal-to-gas switching policy where coal-burning power stations are replaced by gas. China is on track to replace Japan as the world’s largest LNG importer by 2030.
Africa’s gas reserves are a typical example of a ‘stranded’ resource. They are simply too distant from the world’s major markets to be piped to the point of sale. This leaves two alternatives: Africa’s gas reserves can be processed and exported to those markets in the form of LNG; or they can be used near or on-site to generate electricity, thus contributing to closing the continent’s energy gap.
Gas-to-power has a number of advantages. The technology is established, and relatively small plants can be brought on-stream rapidly under optimal conditions in not much more than a year.
In 2013, South African energy and chemicals multinational Sasol brought its 140 MW Sasolburg plant online after a construction period of just 15 months. The technology also lends itself to public-private partnerships because costs and cash flows are fairly easy to define.
A 100 MW gas-to-power facility in Maputo, due to come on-stream later this year, is being built by a consortium comprising energy parastatal Electricidade de Mocambique and two Japanese partners, Sumitomo Corporation and IHI Corporation. In 2017, Sumitomo signed a contract to build another, similar-sized power plant at Temane in the Inhambane province.
Opportunities in developing, financing, building and operating plants of this sort of size, throughout Africa, is a favourite topic at the continent’s numerous oil, gas and energy conferences. However, the problem with gas-to-power plants in many African countries has been the reliability of local and regional gas supply.
Ghana, which currently has 860 MW of gas-generated power, has massive ambitions. The Tema and Takoradi programmes are planned to have an eventual capacity of at least 3 750 MW. Feedstock, however, is problematic. The West African Gas Pipeline has proven unreliable, while gas supply from the Jubilee oil fields has fluctuated. In 2016, it was reportedly 12% lower than it was in 2015.
One obvious answer to the problem of unreliable supply is the use of floating storage and re-gasification units (FSRUs). These are essentially barges, towed in and used for limited periods (contracts are typically for five years) until fixed land-based infrastructure is sufficiently reliable. Ghana has installed one such FSRU at Tema. Another FSRU is planned to start operating at Abidjan in Côte d’Ivoire in mid2018. The FSRU solution has also been mooted for Morocco, South Africa, Kenya and Namibia.
South Africa gave the go-ahead to two gas-to-power developments in October 2016. The Department of Energy determined that the developments were to happen at Richards Bay, near the Mozambique border (2 000 MW), and Coega, in the Nelson Mandela Bay metro in the Eastern Cape (1 000 MW). The country’s highly rated Independent Power Producer Procurement Programme office suggested that it would make sense for the proposal to incorporate FSRUs. It was later forced to clarify its statement, saying that this was in no way a binding requirement.
However, matters have moved very slowly since the initial announcement. Despite considerable interest from a range of players, including Shell, Sasol and Siemens, the initial milestone (March 2017) for announcing preferred bidders passed without any notice.
South Africa would appear to be struggling to overcome another of the frequently encountered hurdles to gas development in Africa – regulatory uncertainty. In its 2017 Africa Oil and Gas Review, PwC argued that ‘regulation in South Africa remains uncertain with the separation of oil and gas still not achieved’. The global consultancy commented that other policy elements have also been in limbo for several years.
The country’s integrated resource plan (IRP) is the underlying guide to policy, determining among other things the proportions of South Africa’s energy mix. But it has not been updated since 2010, although at least two new drafts have been sunk by political rent-seeking. Until the IRP is in place, the country’s gas utilisation master plan cannot be updated.
Kramer lists some of the other issues. ‘We need policy certainty and harmonisation around a plethora of related regulations, from pricing; the powers of the National Electricity Regulator; the Gas Act; gas-to-power; the legislation under which the Transnet National Ports Authority operates; and so on.’
He warns that South Africa is in danger of missing an opportunity. ‘While prices remain low, LNG provides the huge opportunity for us to leapfrog in terms of industrial development,’ he says. ‘This risk is that we find resource opportunities but do not secure access to the benefits they can bring.’
For some African economies the stakes are huge. Mozambique and Tanzania are less developed countries with enormous reserves of natural gas. Here too, regulation is proving critical. Mozambique has regulated cleverly, borrowing extensively from international best practice. PwC says the country’s 2014 New Gas and Petroleum Law has reduced uncertainty although the consultancy still has misgivings about Mozambique’s local participation ambitions.
In contrast, Tanzania has not only lagged in basic regulation but in July 2017, it enacted two mining laws that allow the government to ‘forcibly renegotiate contracts with mining and energy companies’.
It is unclear whether existing gas contacts will be renegotiated but the implications could be ominous. Norwegian company Statoil, which is looking into developing a LNG train in Tanzania, has said a final investment decision is many years off.
By contrast, investment is going ahead in Mozambique. Despite processes slowing in recent years as gas prices came down, Mozambique has reached the point where probably only an unprecedented catastrophe can prevent the Coral South project reaching production. This project, managed by Italy’s ENI, is a floating facility intended to produce 3.4 million tons of gas per year.
Located off the northern coast of the country, infrastructure commissioned in 2017 has taken the project past the point where reversal may simply be too costly. Three steel tube umbilicals, measuring 19 km, were commissioned from a Norwegian firm. Umbilicals connect the LNG processing superstructure to the gas deposit below the sea bed. Coral South is set to begin production in 2022.
The second big Mozambique LNG project, two onshore LNG trains to be built by Anadarko, appears to be proceeding more cautiously even though the US-based company intended spending US$150 million on it in 2018 (a relatively small proportion of the projected US$4.2 billion to US$4.6 billion capital spend projected). Anadarko is still in the process of ‘securing take-off agreements in Asia’ – in other words, securing the market for LNG product.
Africa’s natural gas strikes are the big story of the last decade. In power generation – LNG and the development of gas economies more generally – the events undoubtedly offer an enormous opportunity.
However, African countries have to play it smart in a global context. That means positioning themselves to import LNG for power generation when prices are low – as they currently are – and looking to export (where feasible) when they go up again.