BusinessDay

How African gas producers can position for new markets

Recent sanctions on Russia by some western countries have seen the global oil market shift its attention to other sources for its gas supply, and a new World Bank report says Africa can position itself to meet some of that need.

According to the World Bank, sub-Saharan Africa, with an estimated proven natural gas reserves of 136 trillion cubic feet, needs to maximise this opportunity to meet global demand.

Price benchmarking

The World Bank outlined in its report titled ‘Harnessing African Natural Gas: A new opportunity for Africa’s energy agenda? that the minimum wholesale price and the Liquefied Natural Gas (LNG) netback price are the options for gas commercialisation.

The minimum wholesale price is calculated by adding upstream capital and operating costs, royalties, and taxes, as well as a minimum after-tax rate of return, which is set at 15 percent in the report.

Meanwhile, the LNG netback price is the delivered LNG price in the destination market less the costs of liquefaction and shipping.

According to the report, the two benchmark prices carry implications for the allocation and pricing choices facing the large-resource holders in sub-Saharan Africa.

Price benchmarking means comparing one’s prices to the prices of competitors in a particular market segment, a valuable tool in determining prices to achieve greater value.

Gas-to-power

In sub-Saharan Africa, gas-to-power is being considered a complement to the continent’s abundant hydropower resources, as well as a replacement for more carbon-intensive coal and liquid fuels.

However, the concentration of gas resources in just a few countries, as well as the virtual absence of gas transportation infrastructure, creates economic barriers to the wider adoption of gas as a power generation fuel.

The report called for gas-fired power plants to complement renewables, providing backup against drought-induced hydropower shortages and compensating for the intermittent nature of wind and solar generation

Gas transportation potential

Apart from coastal Nigeria and a few small sub-regional projects, gas pipeline infrastructure in sub-Saharan Africa is almost non-existent, according to the World Bank, which urged more investments in this area.

According to the World Bank, economies of scale are the main challenge to the development of gas pipeline infrastructure in sub-Saharan Africa, using five potential new pipeline projects as a case study – Nigeria inland route, West Africa Gas Pipeline expansion/extension, Mozambique to South Africa, Tanzania to Kenya, and Tanzania inland route.

Nigeria’s inland route, which is a 950-kilometre, 36-inch pipeline from Calabar to Kano, would have very low per-unit transportation costs, resulting in delivered gas prices of $3‒ 5 per million British thermal units, far cheaper than liquid fuels delivered to inland locations in the country.

“In most cases, the markets are too small and the distances too great to make pipelines economically viable,” the report said.

Read also: How Nigeria can end importation of cooking gas with CBN N250b intervention

Regional gas markets

The World Bank said that the development of regional gas markets depends not only on the availability of gas resources and the policies and plans of producing countries but also on those of importing countries.

“Much also depends on the cost-competitiveness of gas versus other available power sources for baseload, mid-merit, and peaking power,” it said.

The report said the presence of regional gas markets would improve local supply and position the continent for exports outside the region.

Gas commercialisation

The commercialisation of gas in African countries faces significant challenges including the loss of economies of scale that comes from developing and producing smaller gas fields, the World Bank said.

It said: “For countries with smaller resource endowments, the potential benefits from harnessing gas to address domestic energy needs are similar to those in the larger-resource centres.

“Gas-fired power plants, being relatively quick to construct, can be effective in addressing acute, short-term generation deficits.”

The World Bank report encouraged the creation of a viable local gas market within the continent marked by the presence of commercial agreements which will prepare the continent to serve Europe where the market is highly developed.

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