The world may be poised at the beginning of “the Golden Age of Gas”. Indeed natural gas is the only fossil fuel whose share of the global energy mix is expected to grow.
Growth is expected to be driven by developments on the demand side, for example, energy demand growth in China, displacement of coal-fired and nuclear power, and on the supply side, like the unconventional gas boom and the growing role of liquefied natural gas (LNG).
o The unconventionals revolution
Relatively new, “unconventional” supplies of natural gas – including shale gas, tight gas and coalbed methane (also known as coal seam gas) – could transform the world’s energy markets.
While global gas reserves have been growing steadily for decades, over the last decade, the so-called unconventional gas “bonanza” has roughly doubled the resource base that can be economically recovered.
A decade ago, the world was estimated to have only 50 to 60 years worth of gas remaining. But with the new unconventional supply, the estimated resource life has risen to more than 200 years.
Until now, the unconventionals boom has been centred in the US, though parts of Europe, China, Argentina, Brazil, Mexico, Canada and several African countries are opening up as gas frontiers.
o Zooming in on Africa
North Africa represents the “Old Guard” of the continent’s natural gas sector, with Algeria and Egypt the two largest gas producers and consumers.
Algeria has long been a major player in global gas markets, and has historically been the second-largest gas supplier into Europe.
It is seen as a “reasonably open and mature market for oil and gas exploration and production”. Broadly open to international competition, with more than 35 foreign companies currently participating, E&P contracts are typically via production sharing agreements (PSAs) with the national oil company, Sonatrach, holding at least a 51% interest in all new projects.
Foreign participants are expected (but generally not required) to invest in social development, infrastructure and training. The government’s explicit energy strategy is to expand its gas reserves and infrastructure for exports.
In the wake of last year’s overthrow of the Mubarak government, natural gas has become an intensely politicised issue in Egypt. This country has long been Africa’s biggest consumer of gas, and the focus of the industry in Egypt was originally to provide cheap domestic energy.
However, in recent years, exploration and development success has led to growing export temptations and subsequent over-commitments of export supply, resulting in domestic shortages and high prices.
Domestic fuel subsidies have long been an issue, and the new government will likely be very sensitive to public opinion.
As a result, the new government is expected to scale back gas export ventures, via pipeline and LNG.
Egypt has generally been open to foreign participation, under PSAs with state NOC participation (EGPC or EGAS) generally up to 50%.
o West Africa
The underlying theme of West Africa’s future gas development is the monetisation of the under-utilised resource base through dramatically reduced flaring and the capture of associated gas for export, and more importantly, for domestic use.
Throughout the sub-region, two critical components of the gas development theme are downstream infrastructure development (for example, “integrated” gas development that could include power generation and/or industrial development) and increasing local content focus – again, using development as a broader prime mover.
Most notably, the sub-region’s largest producer, Nigeria, could see its long-awaited Petroleum Industry Bill (PIB) finalised late this year or early next, with a major focus on the optimal development of domestic gas supplies, and on stronger local content requirements for all future oil and gas development.
Whether or not the PIB can resolve the controversy over fuel subsidies will be one of Nigeria’s greatest challenges.
There are big plans for substantial additions to LNG export capacity in the West African sub-region. Many of these are, however, seen as speculative, particularly many of the proposed Nigerian projects.
Expansions of throughput on the West African Gas Pipeline are being discussed, but are largely being postponed due to growing Nigerian domestic gas requirements.
o East Africa
East Africa is the newest frontier – with the recent massive discoveries, it represents the growth engine for Africa’s natural gas sector. While it may not be the next Qatar or Australia, it certainly has the potential to be an LNG heavyweight on par with Nigeria.
The Anadarko and ENI discoveries in Areas 1 and 4 in Mozambique could hold more than 3trillion cu.m of gas (more than 100trillion cu.ft) and could theoretically support as much as 50million tonnes per year of LNG exports. The discoveries could hold as much potential value as 30 to 40 times the current GDP (gross domestic product) of Mozambique.
East African LNG is expected to be very competitive in Asian gas markets; consultants at Wood Mackenzie estimate that the break-even for East African gas is around $7 per million BTUs, in contrast to around $10 per million BTUs for Australian LNG.
The main questions are concerned with the number of future LNG projects, and whether or not they will be unitised or combined. The proposed projects present enormous opportunities not just for the upstream companies, but also for the other participants in the oil and gas value chain – drilling companies, service providers and equipment manufacturers, along with local construction and service and supply companies.
o Golden opportunities
Africa’s “Golden Age of Gas” will be more than just headline opportunities for the NOCs, the deep-pocketed oil and gas majors, their big international E&P counterparts and the well-known African oil and gas specialists.
Opportunities will extend in most areas to the smaller, local E&P players as well, most often in partnerships with the larger, more-experienced players.
The ramp-up in E&P activity brings opportunity for the oilfield services (OFS) segment, and also for local and regional companies that can contribute to the supply chain and the associated upstream support infrastructure build-out.
African governments and local/regional NGOs will of course have critical roles to play.
Their first and foremost role will be developing a meaningful and practical master gas development plan, one that addresses the upstream tax and licensing models.
Secondly, they will need to address the necessary infrastructure, investment, local training and job creation issues. Collaboration and partnerships with the IOCs, big and small, will also be critical.
Ally Rule is transaction advisory services partner at Ernst & Young in Aberdeen arule@uk.ey.com
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