Positioning Sub-Saharan Africa as LNG next investment frontier
Sub-Saharan Africa holds the highest potential to become a “niche” market for liquefied natural gas to feed power plants as the world faces a growing surplus of the fuel, states a recently published BMI research.
Countries like Cote d’Ivoire, Ghana and South Africa, the research says have the best import potential for liquefied natural gas and could become a major niche market amid a growing LNG supply glut.
Sub-Sahran Africa’s drive for LNG-to-power projects will generate great potential for demand, according to the BMI Research. While traditional buyers have tapered off in some areas, sub-Saharan Africa holds the keys to driving a new market, but would need government support in the form of “pricing and offtake agreements” to drive import growth.
In February, Ghana’s state hydrocarbon company signed an agreement for a 500MMscf/d LNG regasification facility to be built at Tema. The project is to be delivered by Quantum Power, a pan-African energy infrastructure investment platform.
The facility will have the scalable ultimate capacity to receive, store, re-gasify and deliver, at steady state, about 3.40 million tons of LNG per year, equivalent to 500 million standard cubic feet of gas per day, utilizing a state-of-the-art dedicated floating storage and regasification unit (FSRU) moored off-shore Tema according to information by Ghana National Petroleum Corporation (GNPC).
“GNPC will be buying the LNG from traders, mostly on a short-term basis because there is an abundance of LNG. We are talking to Qatargas, BP, Shell, Woodside, the usual suspects, to enter into some sort of agreement with them,” Alex Mould, chief executive of GNPC said at an oil and gas conference in Cape Town recently.
Norwegian shipping company Golar LNG has already supplied a floating terminal to the port of Tema. Golar LNG and West African Gas Limited (WAGL) have signed a contract for the provision of the 170,000cbm new build FSRU Golar Tundra for an initial period of five years with the option for WAGL to extend for a further five years.
Also the Ghanaian subsidiary of Quantum Pacific, the industrial investment group owned by Israeli billionaire Idan Ofer, has plans to install a second terminal at Tema.
Fixing pricing and off-take agreements
To be competitive in an already glutted with LNG, sub-Saharan African governments must allow competitive pricing and prepare ironclad off-take agreements to drive new investments either for LNG infrastructure or shipments. Ghana and a few other countries are already on the right track.
“The Ghanaian government has expressed the intention to plug the gaps necessary to allow projects to proceed and has published details of its “Viability Gap Scheme”, with the aim of supporting PPP projects that fall within the government’s national development agenda that are economically and socially justified but not financially viable,” stated Andre Buisson, Partner at Norton Rose Fulbright, a global law firm.
He added, “The intention is to provide Viability Gap Funding (VGF) which will decreases the upfront capital costs of pro-poor private infrastructure investments by providing grant funding at the time of financial close, which in turn will reduce the revenues that need to be generated by user fees, paid mostly by poor customers. The proposal is that VGF grants will only be disbursed after investors have committed equity to the project, and will also track debt drawdowns, so as to benefit from lender due diligence and performance monitoring.
Nigeria needs to literally take a page off Ghana’s playbook as three LNG projects with over $37billion worth of investments are awaiting Final Investment Decision (FDI). They are Olokola LNG ($10billion), Brass LNG ($15billion), and the Nigerian LNG Train 7($12billion).
Olokola LNG project with a 12.6 metric tonnes capacity was stalled because the international oil companies (BG, Shell and Chevron) withdrew from the project. The10 million metric tonnes annual Brass LNG project ran into troubled waters when ConoccoPhillips withdrew from the project in 2013. NLNG train 7 has been in the works for years.
However if current moves by Nigeria’s Ministry of Petroleum Resources is anything to go by, the Federal government has stated its intention to cease fixing the price of natural gas allowing market forces to determine what a willing seller and buyer pay when the new draft national gas policy is approved.
According to the document, the purpose of the fiscal framework is to make gas standalone, separate from oil. Hence, gas projects will be developed based on their economics and not dependent on or consolidated against oil taxation,” states the draft policy document now presented for input of stakeholders.
Already Japanese investors are indicating a willingness to invest in gas development infrastructure and liquefied natural gas (LNG) type facilities in Nigeria.
“As you know, over the last one year or so, the markets in the US began to thin out for gas, we have managed to move quite a lot of our gas to delivery markets in Asia,” Ibe Kachikwu Nigeria’s minister of state for petroleum resources told Bloomberg TV.
He further said, “Japan being one of the beneficiaries, has been very helpful. The conversations I have had so far has been along the lines of willingness to invest in gas development infrastructure and LNG type facility to provide a market base for the sale of gas
Last year, Taku Miyazuki, Japan’s trade commissioner to Nigeria and Managing Director of the Lagos office of Japan’s External Trade Organisation said bilateral trade between Nigeria and Japan has reached $4.5 billion
While Japan’s exports to Nigeria comprised mainly machinery, steel products and vehicles, Nigeria’s exports to Japan comprised mainly natural gas and sesame seeds. Japan is keen on deepening this trade with investment in gas development infrastructure in Nigeria.
Some industry operators say the move will help to drive more investments as they see absence of standalone fiscal framework for gas in Nigeria militating against investments.
“We strongly support a move towards deregulated pricing on a willing buyer willing seller basis, while retaining the existing regulatory approvals by NERC of prices for gas to power transactions”, said Dada Thomas, Nigerian Gas Association President.
However an industry source expresses worry that the policy could prove counter-productive.
“I think this idea could be a serious drawback for the spurt of growth recently witnessed in the gas industry especially if the replacement framework does not provide commensurate incentives as AGFA.
“The incentives offered with AGFA may only be reviewed if the domestic gas industry has matured, supply is robust, infrastructure is adequate and flexible and payment discipline is established.”
What is not in dispute is the need for deep reforms in the gas sector which will achieve a market driven framework to create stability in pricing and spur investments.
ISAAC ANYAOGU