Policymakers are no exception, for whom the pandemics' uncontrollable nature has placed them in a difficult situation; the choice between the health of the nation and the economy. The impact of the lockdown has affected the supply and demand on a global scale not seen in our lifetime resulting in our first global depression. The effect will inevitably lead to an increase in inequalities and poverty, and the world may record its first increase in poverty since 1998.
Financing Africa’s gas future is a big undertaking
The opportunities are clear - Africa needs power, and it has the gas resources to provide it. It will need to attract the finance however, with the right policy mix to unlock investment.
Global energy giant Exxon Mobil recently marked a major milestone in its bid to develop the Mozambique Rovuma Liquefied Natural Gas (LNG) project, when it awarded the contract to a Japanese-led consortium.
The project is estimated to cost up to $30bn
The transformational impact of the 15.2m ton LNG project for Mozambique and the sub-region will not go unnoticed – Mozambique government estimates suggest the country could earn $46bn in revenues from the project over the next 25 years.
But despite the significant sum involved in developing the export-focused project, it represents a fraction of the total investment and financing that will be required for gas development projects on the continent in the next decade.
- The gas industry in Africa will require $721bn between now and 2035.
- The significance of the sector’s underfunded status cannot be underestimated as natural gas constitutes 25% of the continent’s power generation source.
Production of gas from Africa as a whole could reach 440 billion cubic metres (bcm) by 2035 (BP statistical review of World Energy), accounting anywhere between 9% – 12% of total global supply. But those targets are only likely to be achieved if there is adequate funding.
Most gas projects in Africa are greenfield with large capital requirements. And many African countries considering gas for power or industrial use lack the adequate pipeline and infrastructure networks to supply and distribute gas.
- Current levels of financing for the energy sector in Africa as a whole are woefully inadequate running at around $8bn year or 0.4% of the continent’s GDP (African Development Bank).
- LNG projects alone will require at least $80bn in investments over the next decade, pipeline infrastructure another $20bn and gas-to-power projects another $8bn in investments.
According to the United Nations (UNDP) at the current rate of investment in energy infrastructure, including gas-to-power, the continent will fall short of achieving universal energy access by 2030, with a 50-year delay likely.
Big money is actually pouring into many export-oriented projects where, on the face of it at least, the economics appear more commercially viable.
Investment in energy infrastructure to serve domestic consumer and commercial markets is a lot more challenging as operational and regulatory risks undermine the willingness of investors to take risks.
Project developers and governments often have to make strategic, and sometimes, political decisions around utilization of gas for domestic industry or for export projects.
- Although the latter typically sink more capital, they have historically been able to capture a part of demand and consumption markets in Asia (excl. China), Europe, and to a lesser extent North America.
Crucially, for investors looking at the untapped global potential of Africa’s gas reserves e.g. in East Africa, a key issue will be how much of a return on investment LNG projects can truly offer, and how much more cost competitive they are than other LNG producing regions of the world.
In fact, since 2014, when oil prices began to head south, economics for gas projects in places like Mozambique and Tanzania have changed significantly, yet many energy fiscal regimes have not been amended.
Cooking on gas
Closer to home, industrial use of gas, particularly in replacing heavy fuel would also have both cost and environmental advantages, such as for cement manufacturers, and ceramic or glass manufacturers.
However, in frontier markets, demand from these industries is usually limited, and development would still need to take place in conjunction with power generation.
Beyond industry, residential markets for natural gas are limited, given restricted use for cooking and in some cases heating.
Power stations key user
The most pressing need is for funding of projects for power generation, via:
- local produced gas for those countries that have significant reserves
- importation of gas regionally by pipeline
- imports of LNG for coastal countries
Emerging gas hubs such as East Africa, can benefit from gas-to-power markets elsewhere in the region, with gas producers in Tanzania, Mozambique, and potentially Kenya and Uganda, being able to benefit from price arbitrage between expensive liquid fuels such as diesel, and gas.
However, natural gas transportation is more capital intensive than oil or coal shipping since the fuel has a lower density and therefore a lower energy content per volume unit, while prices between different geographic locations may also differ substantially.
Another area hampering the development of local solutions is that break-even for pipeline and large-scale LNG transportation is typically achieved at about 3,000 km.
- This is why lenders and investor may be harder to convince on the prospects of domestic and regional markets for Africa’s gas – such as via small scale LNG projects for local markets.
Liquefaction projects are likely to take up to 30% of sunk costs along the LNG supply chain and would normally require investments in much more specific infrastructure than regasification facilities.
In some countries however, the commercial decisions may be directly informed by government policy and regulation where gas producers are obliged to supply a portion of production to domestic markets.
Investing in Africa’s gas sector is not for the marginal player, and since many project time leads will probably outlive current global financial and economic conditions, investors have to take a long-term view, given the detailed contractual structures and stakeholder agreements involved.
Unless you are an oil major funding a project from your balance sheet, the bulk of the financing requirement for gas infrastructure is likely to be met by debt financing.
This could come in the form of hybrid financing structures supported by multilateral lenders, export credit agencies, private investors, locally syndicated bank lending, and low-interest Development finance Institutions or even Chinese financing, could combine to offer companies longer tenors and better terms, while underwriting country risks for investors.
One such project, the Amandi Energy gas to power project took off in Aboadze, Ghana in 2016.
Supplied with gas from Ghana’s offshore Sankofa gas field, the $552million project – which will see gas supplied to the Electric Company of Ghana under a 25-year power purchase agreement (PPA) – attracted funding from Power Africa and the Overseas Private Investment Corporation (OPIC), of $250 million in financing and $210 million in political risk insurance respectively.
- Equity was provided by Harith General Partners as well as Africa Infrastructure Investment Managers (AIIM).
This typical complex web of actors – banks, equity providers, guarantors etc. – need to collaborate to make these projects successful.
Security of payment
Even where there is demonstrated willingness to invest, tariffs do not always cover projects costs, and payment security needs to run right from end-user collections, through to the upstream suppliers of gas.
Many countries have little to no creditworthy off-takers, and limited government support, which hampers available guarantees
With the limited availability of capital, global investors in particular are also increasingly selective in which projects attract funding.
Recently, the board of the European Investment Bank (EIB) announced that directors would vote on whether to stop lending to all fossil fuel projects including natural gas, by 2020 after previously halting lending to coal projects.
The growing divergence of views on the role of gas in the low-carbon energy is become a factor in funding decisions particularly among global investors and financial institutions.
Granted, African FIs, such as the AfDB whose Africa50 infrastructure investment platform is a main proponent of gas sector development on the continent, are not likely to adopt such a stance. However, tightening global credit for natural gas, could reduce the overall pool of capital available to scale projects regionally.
This underscores the need for local capital markets, including pension funds, to offer alternative sources of financing; African pensions funds have an estimated $300bn in assets under management, while sovereign funds have roughly $20bn.
Part of the challenge in mobilizing such institutional investment for infrastructure project is creating a pipeline of bankable opportunities.
- At present initiatives to pool risk-averse in other assets such as infrastructure bonds, so that these funds invest at arm’s length, are underway.
Africa’s major gas producers can potentially supply almost 90% of new gas- fired power generation projects in the next two decades, and there will be a need to develop a mix of projects, including small scale gas projects such as CNG, small-scale LNG projects alongside large-scale LNG and pipeline projects.
However, the funding mix will need to be just as innovative.
A combination of public and private sector collaboration will be crucial in identifying financing innovation such as securitization structures and instruments that can boost government and utility balance sheets.
Bottom Line: Ultimately a prioritization of projects is key. With the infrastructure gap on the continent running at approximately $130bn (AfDB), interventions to plug leakages that can save governments millions of dollars, such as the phasing out of fuel subsidies, may also have to be considered.