In the course of the last two decades, Africa has generated a stream of massive liquefied natural gas (LNG) export projects, notably in West Africa and on the Mediterranean, so providing the host countries and their producers with a means to bring to market many trillions of cubic feet of natural gas. Meanwhile, in more recent years, huge reserves of natural gas have been discovered offshore Mozambique and Tanzania, as well as off the coasts of West Africa. Naturally, the host governments and producers aspired to replicate the successful model of commercialising that gas through large LNG export projects.
To attract the levels of debt funding required for these highly capital-intensive projects, a stable revenue stream is required which is generated by long-term gas sales agreements. Over the last couple of decades, Asian buyers have been key to driving the growth in LNG markets. However, with economic slowdown in Asia, the steady upward trajectory of LNG demand has tailed off. At the same time, the flood of new LNG supplies from new export facilities in the US and Australia carries with it the real prospect of oversupply in the world markets.
In addition, the prospect of large volumes of US-sourced LNG becoming available to Asian buyers also offers the possibility for them of securing their LNG requirements based on Henry hub pricing, rather than the oil-indexed pricing that has prevailed in long-term contracts with the traditional LNG producers. As a result, the prospect of LNG volumes becoming available from the US on this competing pricing model is suppressing the appetite of buyers to enter into long-term purchase commitments on traditional pricing terms.
Prevailing market conditions, and the resulting squeeze on available debt capital, have been cited as the reason for a number of international energy companies shelving plans to proceed with large gas liquefaction projects in Nigeria and Cameroon.
Increased security concerns have also in some instances compounded the challenges facing planned, as well as on-stream, projects. Witness the recent attack on the NLNG feed gas pipeline at Eleme in River State.
The greatest hurdles arise from the need to align the expectations of the host government and local communities with those of the international developers. First among these challenges is the immense disparity of knowhow and expert resources between these critical stakeholder groups. In the case of pathfinder projects, the host government is disadvantaged by having little conception of the complex arrangements required to structure, finance and develop an LNG project, nor of the vital contributions that are required of governments in order for an LNG project to proceed to successful implementation. This imbalance needs to be acknowledged and addressed at an early stage, and the international developers will likely have a key role to play in this. Developing a strategy for bridging the knowledge gap is critical to building trust and establishing a constructive process whereby the goals and requirements of all stakeholders can be explored, defined and reconciled in parallel. Such a strategy may, as a minimum, involve the deployment of substantial resources to the training of public officials and community leaders.
From the perspective of host governments, the development of midstream gas infrastructure including LNG liquefaction and export facilities, offers perhaps a unique opportunity to transform the local economy and public finances. As such, the levels of expectation can be high, and scrutiny can be intense to ensure that the opportunity is not squandered. Unless a healthy measure of trust can be established between the domestic and international stakeholders, the project risks becoming gridlocked.
The strength of the headwinds facing large LNG export projects in Africa has encouraged host governments and producers to explore other means of commercializing natural gas resources. A number of oil majors have been developing strategies based on gas-fired power generation with a view to satisfying the rapidly growing demand for electric power in Africa. In South Africa and Morocco, for example, LNG imports are seen as the fuel of choice for the back-up generation required to supplement the intermittent power capacity of solar projects. In some cases, floating LNG import and regas facilities (FSRUs) may have a role in making natural gas available for power generation in the growing economies of Africa, provided the cost of any associated marine works are not prohibitive. In current market conditions, success in developing LNG demand and commercialising African natural gas requires the careful scaling of projects to develop the necessary gas infrastructure.
Despite the immediate challenges of a depressed market for LNG exports, the medium-term forecasts for the LNG market are encouraging. Demand is forecast to grow at 4-6 percent year on year until at least 2030, and analysis from a number of leading market consultants suggests that, by 2023, we will be entering a very tight global LNG market.