Continental divides: Africa’s gas market is becoming increasingly competitive

Commodities have played a key role in Africa’s growth narrative for centuries, most notably at the Berlin Conference of 1884, when Europe’s imperial powers sought to divide up a continent based in part upon its abundance of natural resources. In the intervening years, African countries have churned out everything from platinum in South Africa to gold in Ghana to oil in Libya. However, over the past decade, another commodity has begun to emerge that looks set to supplant the others in terms of sheer volume and, potentially, revenues: natural gas.

REGIONAL DEVELOPMENT: Thanks to improvements in technology and a boom in global demand for gas, explorers have been scouring the African landmass and its associated offshore waters in a bid to unearth new deposits – and with some impressive successes. With East Africa stumbling across massive new deposits and shale gas surveys being conducted in South Africa, the entire continent is seeing ever more capital flowing into gas-related exploration and production.

This comparatively sudden boost in output across the continent – in line with worldwide increases – affects Nigeria’s gas industry by expanding global supply and increasing export competition, particularly for the country’s crucial markets, such as Asia and North America. As a result, with export demand slowing, it has an effect on how the country divides its production between exports and domestic consumption. This in turn can play a role in determining local energy policies, such as subsidies and pricing, two of the country’s most sensitive issues. There are a number of elements that are conspiring to loosen gas markets, but a rise in reserves of more than 106trn cu feet (tcf) in Africa over the past decade – with scope for at least 494 tcf more – is worth examination because it is perhaps the most dramatic.

LOCAL SUPPLY: At over 180 tcf, Nigeria has more natural gas than any other country in Africa, although a lack of processing facilities and pipelines limits the extent to which the country can process its mainly associated deposits. As a result, reinjection, venting and even flaring are commonplace. In fact, the country is one of the biggest culprits when it comes to flaring gas, second only to Russia.

However, Nigeria nonetheless exported more than 17m tonnes of liquefied natural gas (LNG) in 2010, primarily through one of the world’s largest liquefaction facility on Bonny Island in the Niger Delta, and the government has unveiled aggressive goals to raise that figure. Currently, Bonny – the only LNG plant operating in Nigeria – is massive, with six trains and 22m tonnes of capacity, and accounting for 66% of the country’s total gas production. This facility brings in more than $10bn a year for the consortium running the plant, and plans are afoot to introduce a seventh train in the future. A Gas Master Plan and two new facilities are both on the cards – which would significantly affect export volumes.

Once one of the world’s largest producers with 10% of production, Nigeria’s influence on today’s LNG export markets is variable at the best of times. Export volumes dropped by nearly a third in 2009, due to shut-in supply and low-level violence around production areas, and it has since been passed in dramatic fashion by Qatar and will soon be overtaken by Australia. The country exports most of its LNG to Europe and the US, two places where demand is falling, prompting the government to increasingly prioritise domestic use. The extent to which this can be achieved will depend in part upon the tightness of export markets. As global demand slows, the government may face a drop in opportunity costs that will in turn allow it to more ably shift production towards local electricity generation and industrial feedstock, which could have long-term benefits for the country’s diversification.

INCREASING COMPETITION: The jump in African production is a plus for all of the obvious reasons, but it has also noticeably increased competition in the export market, particularly as the US continues to boost domestic output, which in turn has affected the outlook for some of the African producers. Lower pricing structures in the US, which have hit a 10-yearlow, have resulted in an increase in interest from foreign markets, particularly in Asia, where Chinese and Japanese buyers are entering into contracts for future supplies from American exporters.

NEW MARKETS: But demand is also rising significantly, thanks to higher levels of consumption in emerging markets, with the International Energy Agency estimating that it will grow by 50% by 2035. However, given the potential jump in supply, whether revenues will be sustained during that period is less clear. Demand has already slackened during previous slower periods. During the height of the financial crisis, demand for LNG dropped, prompting exporters like Algeria to scale back production by 10%.

At the same time, new LNG operations in countries including Qatar, Yemen, Indonesia and Russia have added supply to the market. In late 2009 major LNG importers such as Italy, South Korea and Japan were buying less than usual, and European stocks stood at higher than normal levels. With the eurozone debt crisis continuing to dampen demand in one of the world’s largest gas markets, and with China’s momentum slowing, the increase in demand may be more than offset by the boost in supply.

CONTINENTAL ACTIVITY: While there are three major traditional LNG exporters active in Africa in addition to Nigeria – Egypt, Libya and Algeria – a number of new producers will be adding to the continent’s overall export figures. Although commodity production is not necessarily a zero-sum game among producers, as OPEC ably proves, the growth in African output has significant consequences for global supply.

Egypt has been pumping gas for more than 40 years now, with its first discoveries coming in the still-rich Nile Delta region, but over the past 15 years, the country’s prominence has risen significantly. Natural gas reserves were equivalent to just over 77 tcf by the middle of 2011, a 50% increase from the start of the last decade, and with more than 150 commercially feasible discoveries coming over the last 10 years, the expectations for future growth are sizable.

This recent jump in output – production more than doubled from 742bn cu feet (bcf) in 2000 to 2.2 tcf in 2011 – is likely to slow, however, due to the fact that recently tendered blocks are located in more technically challenging areas. Furthermore, Egypt’s export partners, including countries like Israel and Jordan, have long benefitted from cost-competitive pricing structures, although as the new presidential administration looks to boost growth by leveraging domestic gas production, this may change.

Meanwhile, the North African republic of Algeria has reserves in excess of 159 tcf, a large portion of which is found in the Hassi R’Mel field, the country’s oldest. Algeria was the first country to supply LNG in 1964, so it has a long and storied history as a gas producer, and now has a total capacity of 943 bcf spread across four complexes, with an additional 9m tonnes per annum (tpa) of new capacity currently being built.

Overall gas production regularly exceeds that of marketed sales, sometimes by as much as 3.5 tcf, most of which is accounted for by reinjection or shrinkage, but the country still manages to export in the region of 1.8 tcf annually. 1.1 tcf of this is piped out, via two European-bound pipelines to Italy and Spain, with the remaining volumes transported as LNG.

The country is targeting a rise in export levels to 3 tcf by 2015, much of which will be directed to Europe, which already accounts for more than 95% of Algeria’s outbound gas. While it is unlikely that US production will divert many customers away from Algeria’s piped product, output increases from Russia, the EU’s single largest supplier, may make prices more elastic.

Long a top-ranking oil producer, following the end of sanctions Libya has in recent years also seen a significant influx of capital from the major players into its hydrocarbons sector. Although oil dominates, with the country boasting some of the largest reserves in the world, Libya also hopes to reach its potential as an LNG exporter with plants to boost capacity at its Marsa El Brega facility from 0.6m tpa to 3.2m tpa. Italy’s Eni and BP are planning LNG export operations in Libya, but they will not begin building liquefaction terminals until exploration programmes under way now find enough gas to justify them. However, estimates for total reserves range as high as 54 tcf and in spite of the problems engendered by the civil war, Libya’s long-term ability to maintain a strong export profile is – like Algeria – dependent in large part on its direct pipeline to European consumers.

NEWCOMERS: Angola, which has shot to the top of the tables in oil production over the past decade, alternating with Nigeria for the first continental spot, has also begun to lay plans to better leverage its roughly 10.6 tcf of proven reserves. The country has already begun aggressively exploring for new gas deposits – its current reserves are roughly five times what they were 10 years ago – and has announced plans to get started with a 5m-tpa LNG train near Soyo, and a second is in the works. Crucially, the exports were originally destined for the US but with import demand in the US declining, the new production will be sold to clients in either Asia or Europe.

Elsewhere in the region, Equatorial Guinea is one of the more recent additions to Africa’s LNG producers, having filled its first cargo ship in May 2007. With 1.3 tcf of proven reserves, this tiny country has most of its deposits offshore, not far from Bioko Island. The majority of the country’s exports come from the main LNG terminal, with virtually all of the output going to Asia and Latin America. Korea alone accounts for roughly one-third and over the past year demand from Japan, which usually accounts for one-sixth of Equatoguinean exports, spiked on account of the temporary closure of more than 50 of Japan’s nuclear power plants. With Japanese clients increasingly turning towards the US, however, Equatorial Guinea may need to begin looking elsewhere for new contracts.

The Gulf of Guinea as a whole is beginning to attract increasing attention. Ghana’s Jubilee field, which came on-line at the end of 2010, has substantial associated deposits, with estimates of reserves ranging as high as 2472 tcf. The country, which only discovered commercially viable quantities of hydrocarbons five years ago, has since scrambled to put in place the necessary infrastructure to handle the gas. Flaring there is banned and continued reinjection risks destabilising the current oil deposits. As a result, Ghana has paired up with China to put in place preliminary infrastructure over the next 12 months to handle the gas for both local processing and for transport to the West African Gas Pipeline. Exports from the associated condensates are likely to be regionally-orientated but a recent second discovery by Eni of a new deposit offers the potential for LNG exports.

THAT’S NOT ALL: While these relatively new producers have already begun to shift supply to the global market, there is more coming down the pipe. New discoveries in East and South Africa look set to have an impact on worldwide supply, particularly in the LNG segment. Formerly regions where hydrocarbons were few and far between, finds have begun to come at increasingly rapid pace, with firms pouring into the region from Kampala down to Cape Town.

Perhaps the biggest recent announcements have been in East Africa, where Tanzania and Mozambique have come across substantial new discoveries. Both Eni and US-based Anadarko have made significant finds in the waters off the shores of Mozambique that between them come up to a potential recoverable estimate of 99 tcf, vaulting the former Portuguese colony into the ranks of Africa’s top producers. Discoveries from firms like Norway’s Statoil in Tanzanian waters have helped to triple that country’s estimated reserves in recent months to roughly 2.8 tcf.

Finally, South Africa, whose forté has traditionally been in minerals and coal, has the potential to dramatically change the game. Recent studies by Shell indicate that the Rainbow nation may be sitting on as much as nearly 494 tcf of shale gas, a figure that would double the entire continent’s gas resources if proven. Whether that will actually happen is uncertain, given that the deposit sits primarily under the protected nature reserve of the Karoo, but it certainly would affect export markets around the world.

Even smaller countries like Mauritania are exploring for gas. Africa’s gas reserves are estimated at above 530 tcf now, as opposed to 424 tcf in 2000, and LNG capacity is projected to increase by 44.9m tpa by 2014, according to industry journal, cumulative growth in gas production from Nigeria’s neighbours will have ramifications for the country’s gas production and long-term strategy.

DOMESTIC USE: Of course, a slackening export market and more competitive producers will lessen the appeal of sending production abroad, but the alternative – leveraging that production for domestic usage – has not been alluring either. The use of gas resources to address the country’s significant shortfall in electricity generation – Nigeria, a country of 160m people, currently generates less than New York City’s total capacity – is not new, and a Gas Master Plan launched in 2008 sought to encourage producers to shift half of their gas to domestic clients. But with low electricity tariffs and uncertain revenue streams, combined with a significant infrastructure deficit for gas distribution, there was little incentive for private investors to finance or develop projects.

Still, that may be finally changing. The government has pushed increasing power generation to the top of the country’s policy agenda, and privatisation of the Power Holding Company of Nigeria will finally begin to help open up space for new investment. Similarly, a rise in electricity tariffs of over 40% means that domestic energy production now offers improved prospects for cost recovery to investors. The government estimates that the country will need an additional 2 bcf of gas per day in the short term alone to meet the demand of the new projects.

LOOKING AHEAD: There is no doubt that the debate over how Nigeria’s natural wealth is used will continue, and however the balance is struck, it will be the result of myriad factors, including pricing, socioeconomic developments and power consumption. It is clear that the immediate benefits of Nigeria’s current export policy, particularly in light of the success of Bonny, have the ability to pay short-term dividends, by providing the government with access to revenues.

However, the long-term trend appears clear. While Nigeria will likely continue to pipe or ship a portion of its gas abroad for at least a decade to come, its ability to maintain its export commitments will come under increasing pressure, not only from domestic demand, but also from global market conditions, with clients shifting towards cheaper US production. Indeed, the ability of Nigeria to ensure sustainable revenue flow from its gas exports is likely to be weakened.