Africa is a considerable natural gas resource and LNG exporter, but local sales are subsidised and greater rewards for new developments may lie down the LNG route
Speaking at the Global LNG Developments session at the LNG Shipping & Terminals Conference 2023 in November 2023 in London, FTI Consulting senior managing director, Emmanuel Grand, explained the outlook for LNG in Africa, while UTM group managing director, Julius D. Rone, related the policies and tasks required to bring the first FSRU to Africa.
Mr Grand provided an in-depth analysis of the LNG landscape in Africa, focusing on various factors such as supply and demand dynamics, pricing complexities, infrastructure costs, and the impact of volatile markets.
The presentation also highlighted contrasting perspectives on LNG pricing and long-term trends. Africa boasts significant growth potential in terms of gas demand. However, certain challenges, such underpriced and subsidised gas, as well as cost recovery issues for electric utilities, pose obstacles in the region.
On the supply side, Africa possesses robust natural gas reserves and a range of forthcoming LNG projects. Mr Grand also drew attention to potential pricing disputes and the upward trajectory of long-term LNG prices, which have implications for infrastructure and overall market efficiency.
According to Mr Grand, Africa is expected to experience the highest gas demand growth rate globally, although there remains considerable uncertainty surrounding such forecasts. There is a basket of forecasts that range from the conservative to the optimistic, including one that sees Africa lifted out of poverty.
“What are the challenges for LNG to capture that demand? I think one of them is the question of prices,” said Mr Grand.
The key challenge for LNG demand in Africa is that there is a marked contrast in how gas prices are determined globally compared to the African context. A significant portion of Africa’s gas is regulated at prices below cost, resulting in subsidies that complicate the expansion of gas demand.
In Africa, the demand for gas is primarily driven by power generation. However, this presents challenges as electric utilities face difficulties in recovering costs, often leading to subsidies and limited capacity to pay for gas.
“We are aware we that 60% of gas [globally], is based on market index,” said Mr Grand, “This is only 13% in Africa.”
Despite the challenges, African gas supply is promising, with potential growth in both LNG export and import capacity. Mr Grand also shed light on commercial trends, acknowledging the volatility of the environment and its subsequent impact on infrastructure costs.
“[In Africa] about 80% of urban population is electrified,” he said, “but less than 30% of the rural population.” This will place a strain on infrastructure growth and the in-country reach of LNG.
Subsequent energy generation was also touched upon by Mr Rone in his presentation.
Mr Grand also discussed security, emphasising the high volatility and increased charter rates that reflect the value of flexible infrastructure and indicated the potential economic implications for African LNG projects due to the anticipated rise in the cost of these flexible assets.
In his summary, Mr Grand noted that there are various challenges regarding LNG demand in Africa, particularly the issue of gas pricing, with a substantial portion of gas being regulated at prices below cost.
Addressing these challenges and capitalising on growth opportunities will be instrumental in shaping Africa’s LNG landscape, noted Mr Grand, and these opportunities are being met by companies like UTM.
UTM is a Nigerian company developing the first floating liquefied natural gas (LNG) project in Nigeria, in partnership with the Nigeria National Oil Company and PCL Limited. The project has gained support from the Nigerian government and policy makers, which are promoting natural gas as an environmentally friendly energy source and a catalyst for industrialisation.
During his presentation, Mr Rone announced the company’s development of Nigeria’s inaugural floating LNG project in collaboration with the National Oil Company. This aligns with the Nigerian government’s focus on gas development to meet infrastructure needs and protect the environment.
The government is providing support to the project through favourable regulatory frameworks, policies, and incentives such as tax breaks, grants, subsidies, and market access. These measures aim to attract private investment and reduce overall project costs.
UTM is working on developing a capacity of 1.79M tonnes per annum (mtpa) for the project, in a water depth of 64 m, some 60 km from the shore. The proposed floating LNG is expected to produce 0.3M tonnes of LPG and 1.3M tonnes of condensate to meet domestic demand.
The project also envisions training Nigerians for plant management and operation. Last year, UTM secured the front-end engineering and design contract, in collaboration with Kellogg Brown and Root, Japan Gas Corp and Technip Energies.
Several challenges are associated with the development of the floating LNG, including technical expertise, infrastructure development, compliance with environmental regulations, securing long-term gas supply agreements, promoting local content and workforce development, and managing technology selection and risk.
Mr Rone said: “We have chosen a proven and reliable FLNG technology to minimise the technical risk and develop a contingency plan and risk mitigation strategy.”
Mr Rone said UTM is actively working with industry leaders and exploring financing options to overcome these challenges, while also implementing community-friendly development and engagement initiatives.
“We have identified Vitol, a global energy trader, for a market and offtake agreement,” he said. “It will not only participate in offtake, but has indicated interest to be part of the project development as well.”
Mr Rone said that security concerns have been thoroughly addressed, with security structures in place to protect the project.
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