COMMENT
THOMAS MOORE & NICK KOUVARITAKIS PARTNERS AT MAYER BROWN LLP
T
o paraphrase Dickens, now is the best of times and the worst of times for LNG in Africa. Africa has at least 800 trillion ft3 of proven natural gas reserves much of which can only be monetised as LNG given the lack of gas pipelines connecting the gas reserves to markets. The lack of a gas pipeline network also means that LNG is the logical fuel delivery medium for gas-fired power generation in Africa to meet its burgeoning power needs. Yet in spite of the abundance of gas resources and the prospects for development of an African market for LNG, the total LNG liquefaction capacity that has come online in Africa in the last 15 years is only 45.7 million tpy, at a time when the worldwide demand for LNG increased by more than 360 million tpy. Three of the most promising LNG projects in Africa – Areas One and Four in Mozambique and Tanzania – have been postponed at the same time as the market for LNG for power generation in Africa has increased dramatically with LNG-to-power projects being proposed in South Africa, Morocco, Benin, Ghana, Kenya, Senegal, Ivory Coast, and even Mozambique itself. Although the reasons for the delay of projects in Africa are individual to each project, there are several reoccurring themes that explain why Africa has been unable to capture its share of the LNG market in spite of its gas reserves. First, the timeline for development of a major project in many parts of Africa is far longer than in places that do not present the same challenges. Using Angola LNG as an example, 10 years elapsed from the first consideration of an LNG project and project FID, and Angola LNG had the benefit of using associated natural gas from Angola’s offshore oil production, and was not dependent on natural gas exploration. The gas discoveries in Mozambique and Tanzania were initially made in 2010, and 11 years later, only the Coral South floating LNG project is actively proceeding, with Total’s Area One project under force majeure and FID for Eni/ExxonMobil’s Rovuma project being delayed. There is no single reason for the long gestation period for African LNG projects. Development of a project in an area without significant infrastructure as basic as power and transportation or even reliable land ownership records is challenging. The significant volatility in LNG prices and concerns with respect to the creditworthiness of the governments in various African countries have not helped matters. When the challenges of creating a fiscal and regulatory regime from scratch in a country with an evolving
and sometimes unstable political and security environment are added to the normal greenfield development challenges, the development timeline is significantly lengthened. For example, the prospects of an LNG project in Tanzania were derailed in 2019 when the government broke off negotiations pending a re-evaluation of its production sharing terms. Although Tanzania’s new government has stated a desire to have an agreement which would allow the project to move forward by mid-2022, Equinor, one of the major project sponsors wrote down its investment in January 2021, and even if the negotiations with the government quickly conclude, first LNG is not expected before 2026, at the earliest (and given the history of the project, that seems quite optimistic). Although a long gestation period does not in itself jeopardise an LNG project, it does expose the project to an increased risk of changes in the market and security conditions. FID for the Area One and Rovuma Basin LNG projects in Mozambique were delayed several times, in part to time the projects to come online when the LNG market could accommodate their volumes at acceptable prices. These market driven delays made the projects vulnerable to the deteriorating security situation in Mozambique, leading to further delays. The horribles that delay projects pre-FID do not disappear with FID. FID for Angola LNG was taken in 2007 based on the sale of LNG into the US gas markets with an expected Henry Hub price of above US$10.00. Since 2010, the Henry Hub price has averaged US$3.24, and the Angola LNG project was forced to abandon its planned sales into the US in favour of sales into the international LNG market. Similarly, the security situations in Algeria and Nigeria have fluctuated since their LNG projects were first developed. However, there is a significant difference between reacting to market and security headwinds after the capital for a project has been invested and investing the capital into those headwinds. As a result, African LNG projects often seem to be waiting for a time that never seems to come. The projects that have been built demonstrate that successful LNG projects in Africa are possible, and that LNG is a viable way to monetise Africa’s gas reserves. However, as cautioned in a recent op-ed by Equinor and Shell, the time horizon for African LNG may be limited, and changes in the worldwide demand for carbon fuels may mean that some African projects could be delayed beyond the time when the world energy market wants the LNG they will produce. January 2022
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