LNG-to-power a hard nut to crack in Africa
There is strong interest across the industry in making LNG-to-power work in sub-Saharan Africa, but nobody has yet cracked a structure that works
Liquefied Natural Gas (LNG) is experiencing a purple patch which African stakeholders don't want to miss out on. A supply glut and growing global experience with the technology mean that contracts are becoming more flexible and suppliers are looking for buyers. Electricity generators also see the benefits, with many of Africa's cash-strapped state utilities viewing the technology as a way of reducing costs at expensive thermal plants and supporting renewable generation. For private developers, LNG offers a way to short-circuit difficult and politicised discussions around domestic gas and reliance on midstream projects coming to fruition (and operating reliably).
North Africa has taken a lead in using LNG, but away from big markets like Egypt, numerous attempts to introduce an LNG supply have fallen flat across the continent. In South Africa, at one time the most prospective market, politics intervened in a promising procurement programme, which is unlikely to get moving again until later next year after the country's finalised Integrated Resource Plan is released.
In Ghana, a number of programmes have failed to take off. An early attempt by Denham Capital's Endeavor Energy and General Electric to set up a 1,000-megawatt (MW) power plant fuelled by a floating storage regasification unit (FSRU) stalled. Another developer, Golar, failed to make headway in its attempt to supply the gas enclave at Tema despite having an FSRU moored off the coast for a year.
Ghana is a particularly striking example of one the principle challenges facing LNG-to-power projects in sub-Saharan Africa (SSA): the problem of scale. The economics of an LNG supply currently mean that demand from around 1,000MW of gas-powered generation operating most of the time is needed for an FSRU to be profitable. For onshore facilities it is even more. In nearly all African countries this would represent a very large proportion of current installed capacity.
By end-2018 the average installed capacity in SSA countries minus South Africa would be around 1,450MW, according to African Energy Live Data, with over 5,500 generation projects listed.
The small size of African power sectors represents both a technological and a commercial challenge for proponents of LNG-to-power. What is needed are smaller volumes, which means smaller FSRUs or onshore facilities. LNG shuttling has been proposed as a way to secure favourable LNG prices and make use of large offshore discoveries in Mozambique, Tanzania and Senegal within Africa. Isocontainers are seen as another possibility, with containers brought in on cargo ships and transported to power plants on trucks or trains for regasification onsite. But despite much bluster from marketing departments, nobody has yet managed to really make this work.
With small-scale LNG not yet a reality, stakeholders have started trying to cobble together enough demand to justify an FSRU. In Kenya, the 104MW Iberafrica plant was recently purchased by a Johannesburg Stock Exchange-listed vehicle with the intention of converting the plant to LNG after its power purchase agreement expires later this year. KenGen is also keen to convert its Kipevu I and III plants to LNG. But although these plants are located on the coast, most of the industrial demand and potential demand from other thermal power plants is located inland, necessitating a pipeline and making conversion uneconomic.
Even if sufficient demand groupings can be assembled, LNG-to-power developers need an aggregator. This adds an additional layer of complexity and potential for delay, with state entities often wanting to play the role but lacking the capacity. This has complicated the South African programme, with reluctance to make PetroSA the aggregator has led to pushes for a bundled approach, with LNG suppliers coming in as part of consortia to develop integrated projects.
Perhaps the most promising initiative in the region is in Lagos, Nigeria, where the Lagos State government is looking to procure 1,000MW over the next year or so and a further 2,000MW subsequently. Nigeria's teeming commercial capital is seen as an ideal location for LNG-to-power, with an estimated 20GW of suppressed demand in the city - now largely met using diesel generation - good access to ports, and relatively strong distribution companies.
The project would use 250mmscf/d and provisional terms for an FSRU have already been signed with Golar. A new law was passed to allow the initiative to go ahead. Industry executives believe the programme could one day bear fruit. Middle Eastern LNG suppliers are said to be interested.
But problems remain. Currency is a major barrier: plans at present envisage annual revisions to LNG pricing and an initial two-year fixed term, but not necessarily priority access to foreign currency. The project will also require pipelines and a 200km transmission line to be built, a significant risk for project development. And LNG schemes are subject to all the same development risks as other power projects in Africa. In Côte d'Ivoire, there has been little in the public domain about the 372MW Songon project since Endeavor began arbitration against its local partner Starenergie 2073, which tried to force Endeavor out of the project.
What's the alternative?
There is a clear need and appetite for gas-fired power in Africa. Although renewable energy remains a small part of current installed capacity, the price revolution means it is now the cheapest technology to add and has other benefits for governments and utilities in terms of low construction risk, a more predictable impact on foreign exchange reserves, and some location flexibility.
On the basis of the current pipeline alone, estimates based on the projects recorded by Live Data show solar capacity doubling by end-2020; wind capacity is expected to have doubled by 2021, and if current projects are followed through geothermal capacity will double during 2020 and treble by 2023. Although storage technology costs are coming down, thermal, geothermal, biomass and hydroelectric generation will be needed to balance the grid and ensure continuity of supply during periods of unusually low renewable generation.
Domestic gas and new pipelines are being considered. Currently, 22 African countries have proven gas reserves and most countries are underexplored. But where gas has been discovered, it has frequently been left stranded in the ground, flared, or lost in unreliable midstream infrastructure. Governments and developers have struggled to make the numbers add up for integrated gas projects, leaving long planned projects such as Kudu firmly stuck on paper.
There has been some progress in recent years, notably the Sankofa field in Ghana which is now supplying 1GW of projects in Takoradi, to the west of Accra, although nearly half of this is rented. There has been a major push to move forwards with the 400MW Temane gas power plant being developed by the United Kingdom's Globeleq, South Africa's Sasol, and the Mozambican national utility Electricidade de Moçambique.
But there are many problems. Mozambique's award of three projects in the Rovuma basin to use gas from Anadarko Petroleum Corporation has been criticised for poor execution of the tender, resulting in little publicity and limited competition. The preferred bidder for the main 250MW plant, Great Lakes Africa Energy Ltd, currently only operates one HFO plant at Ndola in Zambia. An economic case cannot be made effectively for further pipelines from Mozambique to South Africa before the LNG-to-power programme starts to build demand for gas in the continent's largest economy.
Fuel oil mainstay
Diesel and heavy fuel oil (HFO) remain mainstays of the African power system, although they have been decreasing as part of the overall energy mix. According to Live Data, plants running on fuel oil fell as a proportion of total capacity in every region other than Southern Africa in the nine months to September 2018 and in all regions other than North and Central Africa in 2017. In Kenya, the government is considering paying compensation to terminate the PPAs of three diesel plants built near Nairobi towards the start of the decade.
But in frontier markets, particularly where there is domestic supply such as in Madagascar, HFO is seen as the sensible fuel for getting electricity sectors going. A 90MW plant in Kayes, Mali, has just been commissioned, substituting older less efficient plants and providing some capacity to support renewables. The 40MW Mandroseza plant in Madagascar was recently restored and is the most dispatched plant in the country. Similarly in Sierra Leone, the 57MW Salone plant will have a key role in stabilising the grid and providing reliable supply to the capital. The benefits of technological simplicity and a mature fuel supply market mean that HFO still has an important role to play on the continent.
Daniel Marks is Senior Research Analyst and Contributing Editor at African Energy