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Africa – a new frontier for FLNG

Mon 04 Dec 2017

Africa – a new frontier for FLNG
Ross McCracken: offshore discoveries underpin multiple African LNG projects

Floating LNG technology will unlock small and stranded gas reserves in the southern hemisphere – positioning sub-Saharan Africa as an LNG contender. Ross McCracken reports

Floating LNG (FLNG) is opening new offshore gas basins for LNG development in Africa. Producers are striking offtake agreements with portfolio players and traders, and sizeable long-term contracts are due to expire from 2020.

This, the ownership structure of Africa’s new LNG production and the willingness of international oil companies to deploy new technologies will drive the commoditisation of LNG and cement its growing role as such in the global trading of energy.

Uniquely, FLNG vessels will provide the first liquefaction plants in Mozambique and Cameroon and the technology is also expected to lead an expansion of capacity in Equatorial Guinea.

Italy’s Eni and its partners took a final investment decision (FID) on the 3.4M tonnes a year (mta) Coral FLNG scheme off Mozambique in June 2017. The project will be the first of this type to have as much as 60% of its cost funded on a project-finance basis, backed by 15 international banks and guaranteed by five export credit agencies.

Eni has signed an agreement with BP for the sale of all the LNG produced at Coral South for more than 20 years.

In August, Equatorial Guinea’s Ministry of Mines and Hydrocarbons (MMH), Ophir Energy and La Compania Nacional de Petroleos de Guinea Ecuatorial nominated trading house Gunvor as its preferred LNG offtaker for the 2.2 mta Fortuna FLNG project.

The deal takes the project an important step forward towards FID. Gunvor is committed to take the full contract capacity, which will be purchased on a Brent-linked, FOB basis for a 10-year term.

Meanwhile, BP and Kosmos’ Tortue FLNG project offshore Mauritania and Senegal is progressing on the back of positive drilling results. In August, KBR of Houston, Texas was awarded contracts for pre-front-end engineering and design and project-support services for development of the 15 Tcf Tortue/Ahmeyim field.

A string of large offshore gas discoveries in the region is sufficient to underpin multiple LNG projects and deliver BP’s stated ambition of developing a new West African LNG hub. However, Africa’s first FLNG deployment is likely to be in Cameroon.

The 125,000 mᶾ Hilli Episeyo has been contracted by France’s Perenco Cameroon SA and Cameroon’s Société Nationale des Hydrocarbures to produce up to 2.4 mta of LNG from the offshore Kribi fields. Hilli Episeyo set sail from Singapore for West Africa in October.

The Cameroon project has some unique elements. It is the first conversion of an LNG carrier to an FLNG vessel, which shipowner Golar LNG undertook on a speculative basis. Conversions potentially offer a cheaper and quicker route to FLNG deployment than newbuilds. Product from the project will be sold to Russia’s Gazprom.

Two-speed development

There are also major onshore projects planned in Sub-Saharan Africa, but they are progressing more slowly than the continent’s FLNG projects.

Mozambique LNG signed a sales and purchase agreement in September to supply Thailand’s national oil and gas company PTT with 2.6 mta. Project operator Anadarko has also secured agreements with Maputo, allowing it to design, build and operate the marine facilities for its 12 mta LNG project. At the time of writing, Anadarko and its partners needed to secure further offtake agreements before progressing to FID.

Tanzania also has substantial gas reserves earmarked for LNG development. However, the government there is proving to be less hospitable than in Mozambique. Tanzania’s gas ambitions received a blow in early July when the government decided to force all existing upstream investors to renegotiate the terms of their contracts and concessions.

The Natural Wealth and Resources and the Natural Wealth and Resources Contracts Bills affect all parts of Mozambique’s oil, gas and mining sectors.

FLNG, in contrast, is racing ahead as these projects’ smaller scale makes it easier to secure offtake agreements – often requiring a single buyer. Of note is the sale of FLNG-produced LNG to portfolio players and traders rather than to end-users: Coral to BP, Fortuna to Gunvor and Kribi to Gazprom.

Moreover, operating companies are keen to get early experience of a new technology that offers the ability to exploit large, formerly stranded offshore gas assets – and that does this in a way that reduces the risk of the civil instability that can affect onshore developments.

There is even the prospect of emerging intra-African trade. Ghana is expected to become Sub-Saharan Africa’s first LNG importer. The floating storage and regasification unit Hoegh Giant is slated to start a 20-year contract with Quantum Power from mid-year.

This reflects, in part, the unreliability of gas supplies via the West African Gas Pipeline, which originates in Nigeria’s Niger Delta region, again a reminder of the enhanced security that offshore production requires in parts of Sub-Saharan Africa.

FLNG developers’ willingness to sell to trading houses and portfolio players is reflected elsewhere in Africa too.

Angola LNG, having overcome its technical difficulties, signed an agreement with France-based EDF Trading in March 2016. It followed this in September 2017 by signing separate deals with traders Vitol, Glencore and Germany-based RWE Supply and Trading.

Angola LNG may prove a model for contract renewal as long-term deals move towards expiry for Africa’s legacy LNG producers. Contracted volumes from Nigeria’s LNG plants will fall sharply in coming years, from 20.75 mt in 2017 to 9.6 mt in 2026.

This frees up significant volumes to be re-contracted on new terms, sold to new buyers or traded spot. There is already a clear shift in balance between Nigerian contracts signed for delivery into a specific national market and those with portfolio players.

The proportion is 63% to specific end-use markets versus 37% to portfolio players. Based on existing contracts, by 2025 this is reversed to a 36% to 64% ratio.

Direct contracts with end-user markets may be renewed, but portfolio players appear more willing to contract forward.

Equity structure

The upstream involvement of international oil companies in Nigeria’s LNG projects lends itself to contractual arrangements with portfolio players and trading houses, as opposed to Africa’s other main producer, Algeria, whose sales and production are controlled by state-owned Sonatrach. Notably, all of Sonatrach’s current contracted volumes are with specific end-use markets, all of which are in Europe and Turkey. However, Algeria, too, will see contracts expire, with contracted volumes falling from 15.4 mt in 2017 to just 5.6 mt in 2020 and then to 2.7 mt in 2024.

Sonatrach, which has already said it will consider shorter-term contracts, needs to secure both its pipeline and LNG supplies to its principal markets. However, it faces increasing competition in the Atlantic Basin, not just from the US and Qatar, but also from the traders to which the new West African producers are contracted.

The new FLNG projects mean that the East and West African LNG hubs are emerging on a model similar to Nigeria's, but with fewer onshore risks. Joint ventures of international oil companies develop the upstream project, carrying minority shares held by less technically able national hydrocarbons companies.

Starting small with FLNG, the new East and West African trading hubs could expand hugely from 2025, with larger-scale onshore developments, providing a rich new dimension to global LNG trade.

 

Box: Africa – an LNG star is reborn

Africa has been at the heart of LNG trade since its inception. The first supply agreement was signed between Algeria and the UK as far back as 1962. Libya soon joined the industry and, by the early 1980s, Algeria was the world’s largest LNG producer.

By 2017, Africa had six countries with liquefaction capacity – Algeria, Libya and Egypt in North Africa and Nigeria, Equatorial Guinea and Angola in the Sub-Saharan region. However, LNG volumes have been falling.

In 2016, Africa exported 33.5 mt, still 12.7% of the global market, but down from 38.5 mt in 2012. The fall reflected a multiplicity of problems: conflict in Libya, a dearth of gas in Egypt, technical problems in Angola and persistent social unrest in the Niger Delta, the source of Nigerian LNG plants’ feedstock.

However, the tide now appears to be turning. Africa is forecast to see volumes rise above 50 mta by 2021, reflecting the recovery of legacy producers and the emergence of new African LNG. It is the nature of the new capacity coming on stream that will drive the commoditisation of LNG.

 

Ross McCracken is managing editor of Platts Energy Economist. A version of this article first appeared in S&P Global Platts’ Dawn of a global commodity: LNG-trading transformed

 

 

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