The Emergence of Global Gas Markets: Africa

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The African gas industry has historically been centered in North Africa, with Algeria alone supplying 25 percent of the European Union’s natural gas imports. In the past two years, however, Africa’s eastern coast has emerged with the most discoveries of gas and oil worldwide.

Continuing in our five-part series on the emergence of global gas markets, I will take a look today at these and other developments in the resource-rich continent.

The World’s Next Gas Hub

It’s anticipated that the sufficiently large deepwater gas fields off the coasts of Kenya, Tanzania, Madagascar, and Mozambique could make East Africa the world’s next gas hub. As an example, recent discoveries in the Rovuma Basin have boosted Mozambique’s gas reserves to about 150 trillion cubic feet (Tcf), enough to supply Japan—the world’s largest importer of liquefied natural gas (LNG)— for 35 years.

Source: The Australian.

Major energy companies such as ENI of Italy, Malaysia’s state-owned Petronas, and Chinese giant CNOOC are already positioning themselves in the region, alongside Shell, ExxonMobil, Statoil, BG Group, and Total. Ecobank Research estimates that investments in infrastructure, such as pipelines, LNG plants, refineries, and storage tanks in East Africa could increase to $994 million– including the costs of drilling 33 exploration wells – within the year. In mid-2012, Tanzania secured a $1.2-billion loan from the Chinese government to build a new 230-km pipeline linking the Mtwara gas fields to Dar es Salaam.

The reason for the international excitement is that, while larger shale plays have been found in North America and Australia, the drier quality and shallower locations of East African gas make it cheaper to produce. Consultants at Wood Mackenzie estimate that East African LNG could be priced at around US$7/MMBtu. In contrast, Australian LNG is around US$10/MMBtu.

Gas Prices in Africa

For a long time, the natural gas produced in Africa was associated gas and considered a free by-product of oil production, so gas prices in African gas-producing countries have reflected the “low” cost of gas production. In June 2012, gas prices in the main African gas-producing countries were US$0.6/MMBtu in Algeria, US$1.25/MMBTu in Egypt, and US$1/MMBtu in Nigeria (up from US$0.1-0.3 MMBtu). South Africa is the only African country with more market-based gas-pricing mechanisms, based mainly on alternative fuel indexation and volume-based categorization, and includes a floor (Sasol’s cost of delivery) and a ceiling (European Benchmark Price).

Gas pricing in Africa will likely follow in the footsteps of South Africa as natural gas overtakes oil in importance, and countries like Algeria, Egypt, Nigeria, and South Africa begin to experience more acute gas shortages. Nigeria is in the process of introducing the Petroleum Industry Bill and Gas Master Plan, which will likely push gas prices higher and introduce more market-oriented pricing mechanisms. In East Africa, there will also be a need to factor in the cost of new infrastructure, since the infrastructure for commercializing natural gas does not currently exist.

Liquefied Natural Gas and Future Outlook

With commercial expectations high both domestically and abroad, planning has already started on the construction of LNG facilities to distribute East Africa’s newfound treasure across the continent and into the European and Asian markets. A Canadian Energy Research Institute (CERI) report published in February estimated that a combined capacity of over 600 million tonnes per annum (mtpa) in LNG projects could be proposed over the next 10 years. The figure below shows the forecast of African natural gas exports over the next two decades.

gas prod forecast

Figure 1. Forecast of African Natural Gas Demand and Export

In Tanzania, Statoil and BG Group are planning to build an LNG export terminal after their third gas discovery in a year. In Mozambique, a joint development between Anadarko Petroleum and ENI is already underway to build a 20-mtpa LNG facility offshore, with first delivery of LNG set for 2018. Onshore, they have plans to construct an LNG park with a capacity of approximately 50 mtpa. In Kenya, an LNG regasification plant and import facility with a capacity of 320,000 cubic meters will be built in conjunction with a 450-MW combined cycle power plant at Mombasa to help Kenya reach its goal of becoming an industrialized, middle-income country by 2030.

Overall, the outlook for East Africa seems to be an optimistic one, and if everything goes as planned, we could see the first batch of LNG ship from East Africa in 2018.

Stay tuned for the last blog of our series on global gas markets later this week, featuring Latin America.

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