As part of the U.S. Gas Infrastructure Exports Initiative, USTDA staff spoke with Slav Gatchev, Managing Director of Delphos International, Ltd., a Washington, D.C.-based project finance advisor, about Liquefied Natural Gas (LNG) related export opportunities for U.S. companies in sub-Saharan Africa. Delphos International has worked on USTDA-funded activities in Latin America, Southeast Asia, sub-Saharan Africa, and Central and Eastern Europe.
USTDA:
What role do you see U.S. companies playing in the development of South Africa’s and Mozambique’s gas sectors, and how does LNG fit into that equation?
Delphos International:
South Africa is seeking to diversify its energy sources to enhance energy security and reduce its carbon footprint. The country plans to import LNG initially until developing indigenous resources (principally, coal-bed methane) becomes commercially viable. The timing is fortuitous as South Africa will be seeking to negotiate sale and purchase agreements for LNG imports as the export capacity of the United States is expanding. In addition to U.S. LNG exporters and traders, U.S. contractors and equipment suppliers should be competitive when bidding for projects related to the construction and implementation of import-focused floating storage and regasification units (FSRUs), associated maritime and land-based infrastructure, gas-fired power generation (supplying turbines, building power plants, etc.), and electricity transmission infrastructure. As the South African gas-to-power program will rely on private-sector investment, there should be opportunities for U.S. contractors and strategic/financial investors alike.
Mozambique’s efforts to develop its natural gas resources have increased in recent years. With the expansion of off-shore natural gas exploration and production, U.S. companies could be involved throughout the value chain. ExxonMobil, for example, is a significant investor in the $8 billion Coral floating LNG project, which recently achieved financial close. Additionally, we will likely see opportunities for U.S. companies related to the construction of export terminals, liquefaction facilities, gas storage and transmission, and in engineering, procurement, and construction (EPC) services and supply of combined cycle gas turbines for domestic power generation.
USTDA:
How do South Africa and Mozambique benefit from developing their LNG sectors?
Delphos International:
Domestic natural gas resources in South Africa remain mostly undeveloped because of the high costs of offshore development, lack of coal-bed methane exploration, and the abundance of coal, which has traditionally been the default feedstock. As a result, the development of South Africa’s LNG sector is focused on imports with power generation projects likely serving as anchor customers. Since 2007, South Africa has been experiencing significant power shortages due to the unreliability of an aged coal fleet, which accounts for more than 90% of the country’s generation capacity. While shortages have been abated in the last couple of years with the growth of renewables and subdued industrial demand, imported LNG will provide a more reliable alternative to help meet the country’s long-term power demand. The development of the LNG sector will help replace coal with cleaner LNG and could thus greatly reduce South Africa’s carbon emissions. LNG-fired, dispatchable power plants will also serve as a hedge against intermittent wind and photovoltaic solar power plants. Finally, imported LNG can be a boon to industrial users near potential import hubs such as Coega, Richards Bay, and Saldanha Bay.
Mozambique, on the other hand, has more promising indigenous gas resources coupled with a relatively small domestic energy market, making its gas sector primarily export-focused. Mozambique already exports natural gas to South Africa through a terrestrial pipeline but future growth opportunities will be driven by off-shore LNG export projects. Royalties and taxes on such gas exports will shore up Mozambique’s fiscal and external balances amid an ongoing debt crisis. In addition to budget inflows, downstream gas sector development (which first and foremost will mean the construction of gas-fired power plants) will spur the economy through cheaper and reliable electricity and direct and indirect skilled job creation.
USTDA:
How will LNG projects impact citizens in sub-Saharan Africa?
Delphos International:
Like we have seen in the cases of South Africa (an importer) and Mozambique (an exporter), both LNG exporting and importing countries should expect to see improved electricity reliability, lower electricity costs, greater energy access, and improved employment opportunities. For example, in Mozambique, GE subsidiary, Baker Hughes, has been helping build the infrastructure and develop local expertise to support the installation of a 3.4 million tonnes per annum floating LNG facility connected to six subsea wells. This project is an example of how developing the LNG sector can create local employment opportunities. In fact, 20 local engineers were hired and have received training for this project. Gas exporters such as Mozambique and Tanzania have adopted policies to ensure that a portion of their production is earmarked for domestic consumption. Gas importers such as South Africa, Ghana, and Morocco should see more balanced and sustainable power generation sectors, lower electricity costs to consumers, and economic opportunity through non-power industrial applications.
USTDA:
What needs to happen for the LNG market in sub-Saharan Africa to thrive?
Delphos International:
The LNG industry requires an enabling regulatory environment and creativity and flexibility in project structuring and approvals. Governments need to enact policies that attract foreign direct investment to propel infrastructure development and get the industry up and running. For example, a power purchase agreement (PPA) for the capacity and energy of an LNG-fired power plant, which benefits from a government guarantee, can anchor an LNG import scheme. In other cases, the national hydrocarbons company may opt to become the LNG importer (either by investing in import infrastructure or agreeing to a tolling arrangement with a private-sector terminal) and will then resell the gas to independent power producers (IPPs) and other domestic users. Sustainable structures must anticipate and allocate the risks of both short-term price shocks and long-term changes in supply and demand. For example, a $1 billion LNG export terminal in Egypt was mothballed because gas had been diverted to domestic consumption rather than being tolled through the facility. In the U.S., LNG import terminals had to be refashioned as export facilities after the shale gas revolution.
Project finance plays a critical role in the development of export and import LNG projects. The significant capital cost of LNG projects, the long construction period of up to 5-7 years (shorter for FSRU-based projects), and complex contractual arrangements require highly structured financial solutions (payment guarantees, political risk insurance) and the participation of multiple lenders (development finance institutions, export credit agencies, and commercial banks).
USTDA:
Where else in sub-Saharan Africa are there LNG-related opportunities for American companies?
Delphos International:
There are liquefaction and related export opportunities in Nigeria, Senegal, Cameroon, Republic of the Congo, Equatorial Guinea, Angola, and of course Mozambique. Ghana has taken steps to bring in imported LNG and U.S. companies such as GE and Endeavor Energy are working on LNG-to-power projects in that country. In addition to South Africa, Morocco is also developing a $5 billion LNG-to-power project and will structure it as an IPP.