Liquefied Natural Gas in Africa

Posted by: Kim Jansen

November 15, 2013

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With all eyes on Africa as the final frontier for the world’s natural resources and the discovery of massive gas deposits in southern and eastern Africa, governments in these markets have come to realise the potential for these reserves to stimulate their economies as well as to be used as an energy alternative.

For investments in gas-to-power to be feasible, it will have to compete against other baseload power generating technologies, such as coal and nuclear – not to mentioned renewable energy. Gas-to-power however is more flexible – it’s more efficient than coal baseloads and more constant than renewable energies like solar and wind – and as such, has an important role to play in energy generation.

Liquefied Natural Gas (LNG), for instance, is a key component of the global energy supply mix (which is seen as a high growth market set to last for the next decade and beyond) and it is a core strategic focus area for global oil and gas companies. If we look at east Africa and Mozambique, these markets are emerging as key players in the world’s LNG reserves as LNG is expected to be very competitive in specifically the Asian gas markets.

Projects to extract reserves, combined with constructing LNG trains in remote locations, is however complex and costly. Such projects are often impacted by five major influencers, each with their own associated challenges. These include:

A large number of complex contractual arrangements between partners, contractors and governments may result in cost overruns, cash flow forecasting unreliability, missing key milestones and potentially ultimately result in off-take agreement implications.

The remote locations without adequate infrastructure could result in risk of logistical ineffectiveness, supplier constraints, safety concerns, lack of skilled labour and may ultimately result in unforeseen costs and time delays.

Multiple stakeholders in Africa projects (government, owners, contractors, workforce etc.) place an even greater focus on governance around local content rules, taxation regimes, cost allocations, legal compliance and developing/changing legislation.

Sovereign ratings of many emerging African countries are not at investment grade levels resulting in higher financing costs when compared to traditional Western and Middle Eastern projects. Construction of new liquefaction and storage facilities is therefore very costly and requires a stable positive long-term investment.

Some countries are still forming policy and governance structures to facilitate the development of their oil and gas assets, where government policy vacuums often results in delays in appropriately monetising on resources.

There are certainly many more risks and challenges than the above mentioned to gas projects, as numerous industry features are constantly adding to the complexities of the operating environment. The ability to deal with and overcome these competitive challenges has become paramount for oil and gas companies wanting to do business in Africa.

By Alwyn van der Lith, KPMG southern Africa oil and gas director

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