Whither Africa’s LNG projects amid looming glut?

As African countries are stepping up drive to bring their liquefied natural gas (LNG) projects on stream, growing supply in the global LNG market looks set to depress prices and force the cancellation of a slew of projects on the drawing board.

 From Nigeria to Mozambique to Tanzania, the governments have signaled strong willingness to bring about new capacity with projects now awaiting final investment decision (FID).

 In Nigeria, the Brass, Olokola LNG (OKLNG) and Train 7 projects have over the past few years continued to await FID by the stakeholders on the projects, even as some have pulled out of the projects.

 The government has said it was committed to ensuring that the projects go ahead as it seeks to keep the country’s market share at about 10 percent, which recently slipped to about 7.5 percent.

 Recent large discoveries of gas in Mozambique and Tanzania have seen the  two East African countries unfold plans for LNG exports. Mozambique and Tanzania projects are in the early design stages, and neither has come to a final investment decision. 

In March this year, Anadarko Petroleum, the primary operator of Mozambique’s Rovuma Offshore Area 1, which is estimated to hold more than 65 trillion cubic feet of natural gas, said it had sold two-thirds of the capacity of its planned Mozambique LNG project to Asian customers.

 Anadarko expects to make the FID later in 2014. The official timeline pegs 2018 as the year of the first LNG delivery. 

In Tanzania, Statoil, BG Group, Ophir Energy and ExxonMobil are teaming up to look at building the country’s first LNG export terminal. But political turmoil is slowing the project.

 Tanzania project sponsors are considering the possibility of three 5-mtpa trains and aim to make an FID by the end of 2016. Production could start in 2021 or 2022. 

 Increasing risk of 

destructive competition

With the wave of new capacity set to come online between 2015 and 2018, global liquefaction capacity is projected to expand by 100 million tonnes per annum (mtpa) by 2018, or a 35 percent increase. 

 The huge amount of new global liquefaction capacity that has been proposed or is under construction in many markets including North America, Africa, Australia and Russia — all lead to the increasing risk of destructive competition, says Ernst & Young in a recent report.

 Fifteen Canadian LNG export projects have been proposed and another two dozen have been proposed in the Unites States (US). Seven US projects, with a total of about 9 bcfd of export capacity (equivalent to more than 12.5 percent of current US natural gas production) have received full export approvals. Approved export project capacity could top 10 bcfd by the end of 2014. 

 In the US, one of the approved projects is already under construction, with first exports expected in late 2015. Seven Canadian projects have already received export permits with the expectation that many more will be approved.

 All eyes on energy-hungry Asia

 Competition between exporters of LNG for the high-demand Asian markets is on the rise, even as industry analysts have said that going forward, gas trade flows will become more Asia-focused.

 Asia’s fast growing economies will be the main drivers of growth in global gas demand in the next decade, according to global management firm McKinsey. Forecasts from the US Energy Information Administration (EIA) suggest that demand in Asian countries that are not part of the OECD will grow 4.5 percent between 2010 and 2035. The countries, which includes China, India and Indonesia, would see demand rise from 350 billion cubic metres per year in 2012 to 870 billion cubic metres per year in 2030, accounting for more than a third of gas demand in that period.

 LNG projects in Africa, which are largely targeted at the Asian markets, face severe competition from other parts of the world, especially the US.

 While Australia and Papua New Guinea hold the distance advantage for shipping gas to Japan and South Korea, East Africa is closer to the growing LNG market of India.

 Proposed Canadian projects also have a distinct advantage when it comes to transportation proximity to Asian demand markets. 

In Australia, major gas suppliers have made huge investment in LNG in order to make it the LNG exporter of choice for the Asia-Pacific region as several of the world’s largest LNG consumers – Japan and South Korea – are nearby. 

But the shale revolution in the United States looks set to bursting their bubble as it brought a tidal wave of natural gas online and caused prices to plummet.

According to analysts, the entry of the US into the LNG market will have two effects, both of which are negatives for Australian LNG developers. 

 The first effect is that buyers will have more choice. Already, major Asian energy consumers have signed deals with yet-to-be-built export terminals in the US.  Second, with greater US LNG, buyers in Japan and Korea are increasingly shying away from locking themselves in to long-term contracts. 

Already, Chevron is having difficulty locking in buyers for some of its LNG capacity at its massive Gorgon project in Australia. The facility, one of the world’s largest LNG terminals as well as the world’s most expensive, will have an annual export capacity of 15.6 million tonnes. Construction of the terminal is 83 percent completed and expected to start operations in 2015. 

Chevron had hoped to get 85 percent of the facility’s export capacity under long-term contract, and sell the remaining volume into the spot market. But so far the oil major has only 65 percent of the volume under contract.

However, the leading export facilities in the US have succeeded in getting customers to agree to 20-year contracts to take their LNG cargo. Cheniere Energy has sold virtually all of its export capacity under long-term contracts, securing customers for the long haul. 

Time ticking for Africa

 “Mozambique and Tanzania need to move fast to become major exporters,” shipping research group Lloyd’s List Intelligence said in a 2013 report. “The clock is ticking for both nations.” 

If the delay in reaching the FID for the triad of OKLNG, Brass LNG and Train 7 projects continues, Nigeria risks losing a big chunk of the Asian markets, analysts have said.

 The inability to secure long-term market commitment and delay in the passage of the Petroleum Industry Bill (PIB) continue to constitute a major setback to the projects, BusinessDay has learnt. 

Dolapo Oni, energy analyst at Ecobank, says there is a huge demand around the world for LNG, particularly in Asia and Europe, noting that Nigeria is not expanding capacity as much as it should because of domestic gas requirements.

 “We risk losing our share if by 2020 our LNG projects do not come on stream. Nigeria needs to get those plants on ground. If we dilly-dally too long on these projects, we risk losing market in Asia. Everybody is focusing on Asia,” Oni told BusinessDay West Africa Energy.

 Brass LNG project was designed to produce 10 million metric tonnes of LNG per year, with the FID initially planned for 2006. The existing stakeholders on the project include the Nigerian National Petroleum Corporation (NNPC), Total and Eni Group. ConocoPhillips withdrew from the project in 2012.  

 The OKLNG project was initiated in 2005, with NNPC as the major shareholder. But other shareholders including BG Group, Shell and Chevron have withdrawn 

 

 

FEMI ASU