In November 2016, the U.S. government’s inter-agency Power Africa development initiative issued its third handbook entitled “Understanding Natural Gas and LNG Options” for the purpose of promoting a better understanding of LNG project development in sub-Saharan Africa. Impressive in its breadth, the handbook covers topics such as the LNG value chain and typical project structures, the process of LNG project development, project financing, LNG pricing, recent trends in the global gas markets, local content policies, and how to evaluate competing demands for the domestic supply of natural gas.
The role of government in LNG projects is discussed in some detail, given that almost all LNG export projects in Africa involve the participation of the relevant state-owned national oil company and are heavily influenced by government. Often, this translates to increased political risk for the other sponsors which, as recent events have shown, is not limited to the development period. Even the region’s largest and most successful LNG project–Nigeria LNG–has faced threats from legislators seeking to amend certain investment protections set forth in the law that was enacted in 1989 to catalyze its development.
As a policy tool, the handbook will be useful to inform and educate government officials and others on the fundamental commercial principles underlying LNG projects and their execution. However, for many readers, the most relevant and instructive guidance for the near-term appears in a twenty page chapter buried near the back of the handbook, which concisely describes LNG import projects and, in particular, floating storage and regasification units (FSRUs).
Advantages for importing LNG
Around the world, emerging natural gas consumers have chartered 21 FSRUs to import LNG for power generation and domestic consumption. FSRUs bring significant advantages over onshore import terminals, in that they can be more quickly procured and deployed, and chartered over a limited period of time, thereby making them less capital intensive for consumers. The location of an FSRU offshore also obviates the need for a large, coastal project site and as such should isolate it from a number of important site-and security-related risks. Because the vessel is constructed and/or converted at a ship yard under controlled conditions, numerous issues such as geological conditions, seasonal climate events, and civil unrest that might interrupt construction of an onshore import terminal can be avoided. Finally, the regasification and storage technology utilized in FSRUs is well-tested and operating capably in several other markets.
More importantly for readers of the handbook, (i) the predicted sustained oversupply of LNG in the global market, (ii) relatively low LNG prices, (iii) increasing competition among FSRU suppliers, and (iv) increasing interest from LNG suppliers who are seeking to create new demand through developing new import markets collectively have created a very favorable environment for African governments and state-owned utilities to negotiate and contract for LNG supply and FSRU chartering as the basis for LNG-to-power projects. At least two such FSRU projects are expected to take a final investment decision this year–Ophir Energy’s Fortuna LNG project in Equatorial Guinea and the Total-led Ivory Coast LNG. South Africa is also taking significant steps in this direction through its LNG-to-power independent power producer procurement program. At a time when increasing reliable access to electricity remains the most important policy issue throughout the continent, there are several other countries in Africa that could benefit from LNG-to-power initiatives utilizing an FSRU, which, in turn, would collectively support further LNG export projects in other regions. Admittedly, the creditworthiness of the LNG purchaser remains an issue, as the lenders and financiers who support the LNG suppliers often insist on strong, creditworthy trading counterparties. However, that issue has been successfully addressed in other contexts on the continent, such as the power sector, and through careful structuring FSRU-based LNG projects should be financeable, as recently demonstrated in the Fortuna LNG project.
Befitting its status as a U.S. government-led policy guide, the handbook understandably avoids weighing in on whether LNG projects would be advisable, and if so, which business model would be appropriate for a particular country in Africa. However, if readers of the handbook in Africa are eager to take advantage of current LNG market conditions, they might start at page 202.
