Highlights
  • LNG prices continue to remain soft with 2017 expected to see YoY declines of 14%
  • From 2016 to 2020 nearly 16 bn cfd of new LNG capacity is expected to come on-stream
  • High-cost LNG production, for example, in the Arctic, Australia, and parts of Africa, is particularly vulnerable
  • A number of these schemes are likely to be postponed or cancelled and one solution maybe to turn towards the continent’s domestic markets

Introduction

Gas producers in Africa continue to propose new schemes for liquefied natural gas (LNG) exports in an already crowded business when they could be missing marketing opportunities much nearer home. The rise in domestic consumption across the continent is a largely unreported story: and there is more growth to come, particularly from the substitution of other fuels in power generation.

Gas markets are witnessing the curious phenomenon of large numbers of proposals for new LNG export schemes at a time of depressed gas prices and strong competition from cheap coal and oil. At present, there appears to be no way of making these new schemes economic. The result looks like being a battle for market share among the main gas producers, thereby prolonging the current period of low prices. Some producers see restricting supply as the only solution, perhaps by the establishment of an OPEC-style producers’ cartel; but several of the largest gas exporters prefer to compete for market share rather than cutting their output. Reductions in supply are more likely to come about as a result of the postponement or cancellation of future projects.

Falling prices

Gas prices have been falling steadily since 2013. LNG prices paid by the world’s largest buyer, Japan, went down by 38% between 2012 and 2015 and are set to fall further. Based on figures for the first ten months, 2016’s decline looks to be in the region of 35% versus 2015. Import contract prices at the start of the fourth quarter of 2016 are about $6.60/mn BTU. Spot prices are even lower, at about $5 mn BTU with a further year-on-year decline of 13.8% predicted for 2017-2018.

LNG Spot prices (2010-2015)

Prices are likely to remain under downward pressure in Japan and elsewhere in Asia as buyers try to switch some of their purchases away from long-term supply contracts to lower priced spot deals. There is also a growing desire among gas importers worldwide to reduce the role of oil prices in the formulae that set the base-prices they pay and move toward gas prices that are related to gas rather than oil markets. Buyers look to be in a good position to do this thanks to the large number of new suppliers now entering the market.

The Japanese hope to encourage the move to gas-on-gas pricing by establishing an LNG trading hub based in Japan that would provide an open and transparent market, which would, in turn, provide a spot-related price suitable for use in future long-term supply agreements for buyers in Asia. It is hoped to have the trading hub in operation within five years. As the world’s largest importer of LNG, Japan pays some of the world’s highest prices for its gas.

Producers on the hook

Gas producers are limited in their responses to falling prices by the fact that large increases to supply are planed over the next four to five years: far larger than global markets are likely to be able to absorb. From 2016 to 2020, nearly 16 bn cfd of new LNG capacity is expected to come on-stream, representing an increase of about 45% over the volume of global LNG trade in 2015. One response is bound to be the postponement, cancellation or reduction in size of several projects. Some companies have indeed already announced plans to modify their plans including projects in the US, Canada, and Russia. High-cost LNG production, for example, in the Arctic, Australia, and parts of Africa, is particularly vulnerable, especially if low-cost producers, such as Russia and Qatar, decide to defend or increase their market shares by competing on price. Another approach would be to try and form a cartel of gas producers to raise prices by restricting production, an idea that has been floated over a number of years, but a battle for market share looks to be a more likely option at present.

Too much LNG?

Africa already has five LNG-exporting countries, while three more plan to do so. The existing LNG exporters are Algeria, Angola, Egypt, Equatorial Guinea, and Nigeria, with total exports of about 4.8 bn cfd. One of them, Equatorial Guinea, plans to increase its existing exports of 0.5 bn cfd by nearly 0.3 bn cfd. Egypt has suspended its LNG exports owing to gas shortages at home, but has longer term plans for a large scale LNG export scheme from a number of new field developments offshore, combining output from gasfields off Egypt, Israel, and Cyprus.

These last two developments, along with proposed new LNG schemes in Cameroon, Mozambique, and Tanzania, are being proposed for what is already a crowded global LNG market. The period from 2015 to 2020 could see the addition of nearly 20 bn cfd of LNG to a world market that is growing at a much slower pace, with new export schemes already announced for Australia, the US, Russia, Malaysia, Papua New Guinea, and Indonesia, along with several more schemes that have been proposed for Iran, Brazil, Canada, Colombia, and various other countries as well.

Africa LNG Terminals
Africa LNG Terminals

A number of these schemes are likely to be postponed or cancelled altogether, but even so there looks to be a glut of LNG for the rest of the present decade and even beyond. Meanwhile, the rate of demand growth is slowing down across much of the world, including in the key Asian market, which accounts for 20% of global gas demand and 70% of world LNG demand. The next five to ten years should see growing competition for gas from coal, nuclear power and renewables: all of which is bad news for Africa’s new LNG exporters.

Their initial response has been to make themselves more competitive in future by looking for cost savings in their proposed new schemes. These include reducing the size of the proposed developments and using floating LNG terminals (FLNG) rather than the large, expensive export facilities on land. Cameroon is to use a converted LNG tanker, and FLNG schemes are proposed for Equatorial Guinea and Mozambique. However, competitors elsewhere in the world are planning cost reductions of their own, particularly in the US and Australia. Buyers meanwhile are demanding lower prices from their LNG suppliers, which is a further problem for Africa’s new exporters.

Monetising LNG in Africa

Cameroon is in a slightly better position than Africa’s other new suppliers. Not only has it found a cut-price solution in the form of its converted LNG carrier, it has also secured a buyer for all of its 160 mn cfd exports in the shape of Russia’s Gazprom. Mozambique is making some progress with its LNG plans, with a final investment decision on its Coral FLNG project due by the end of 2016. The scheme’s operator, ENI, has even increased the planned capacity by a third to 440 mn cfd, and has also signed-up a single prospective buyer, BP, for the gas.

ENI’s project, however, is not the only one that has been proposed for Mozambique’s gas. With estimated proven reserves of 100 tcf, the third-largest in Africa, Mozambique has the potential for a number of other LNG export schemes. ENI has proposed two further LNG trains on top of its FLNG project, capable of exporting an additional 1.6 bn cfd. US independent Anadarko has announced plans for a separate 1.3 bn cfd LNG scheme. With more gas likely to be found in the prolific Rovuma Basin off Mozambique, other LNG proposals could follow, although probably not for a number of years. An important consideration will be the high costs involved in producing gas from Rovuma. The situation is not exactly being helped by problems with a government scheme to provide infrastructure such as onshore facilities to service exploration and production offshore. There have been difficulties over the financing of these projects caused by the high levels of indebtedness of the government.

Africa’s other new LNG schemes are faring rather less well than the Cameroon and Mozambique FLNG projects. In May 2016, Schlumberger was reported to have broken off talks with British independent Ophir Energy concerning the acquisition of a 40% stake by the US company in Ophir’s proposed Fortune LNG scheme in Equatorial Guinea, which will at the very least delay the project.

Tanzania’s plans for LNG terminals are also in trouble. Tanzania’s proven gas reserves are at present small, but these look set to grow strongly with further exploration offshore, which contains the northern part of the Rovuma Basin. Gas-in-place is estimated to amount to 40 tcf. In 2014, plans were announced for LNG exports of 2.6 bn cfd with the first deliveries taking place in 2018. Since then, enthusiasm for LNG has cooled given both the fall in gas prices and the prospects for early sales. It could be ten years before even a final investment decision on Tanzanian LNG is made. Plans to increase exports from existing LNG schemes elsewhere in Africa are also likely to be delayed, as is the resumption of LNG exports from Libya.

Selling locally

A solution to Tanzania’s LNG difficulties appears to be emerging, however, in the form of sales to the domestic market. An onshore discovery in the Ruvu Basin could provide the country’s largest city, Dar es Salaam, with gas for electricity generation and other uses as early as 2018 if all goes well with the exploration and financing of the scheme.

There are other possibilities for gas sales within Africa, especially for power generation. Mozambique, which supplies South Africa with about 385 mn cfd of gas by pipeline, is planning a second one. South Africa faces power shortages without further gas supplies, and delays to shale gas exploration there mean it will have to import more. The construction of a gas grid across southern Africa could enable several other countries to import African gas: and there are growing markets elsewhere across the continent. Between 2005 and 2015, Africa’s consumption of natural gas increased by 60% compared with a global average of only 25%.

If you’ve found this blog helpful and would like other topics covered, please feel free to drop me an email with suggestions. You’re welcome to subscribe using ‘Subscribe to Blog via Email’ section and this will get you the latest posts straight to your inbox before they’re available anywhere else

Video

References
  1. The Institute of Energy Economics, Japan. Economic and Energy Outlook of Japan through FY2017; https://eneken.ieej.or.jp/data/6852.pdf.
  2. LNG exporters face a future of low prices, weak demand and too much gas. Oil and Energy Trends 2016; 41:4; pp 3–6, DOI: 10.1111/oet.12362.
  3. LNG exporters face a future of low prices, weak demand and too much gas. Oil and Energy Trends 2016; 41:4; pp 3–6, DOI: 10.1111/oet.12362.
    Arctic oil and gas fall victim to politics and economics.
  4. Oil and Energy Trends 2016; 41:11; pp 3–6, DOI: 10.1111/oet.12434.
    Gas and Power: Burning of coal set to rise despite UN pledges to cut carbon emissions.
  5. Oil and Energy Trends 2016; 41:1; pp 7–8, DOI: 10.1111/oet.12344.

I'd love to hear what your thoughts are...please feel free to leave a reply