Africa Focus: Autumn 2018: Powering Africa: The LNG gas-to-power option

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Current LNG gas-to-power projects could successfully pave the way for other African countries

Liquified natural gas (LNG) is a rapidly growing source of energy around the globe for obvious reasons: It is cleaner, cheaper and considerably reduces greenhouse gas emissions.1

Despite their valuable natural gas resources, African countries are straining to strike an adequate balance between their energy supply and demand. This makes it essential for African countries to capitalize on their reserves by investing in LNG projects to meet their energy needs, thereby creating sustainable economic development within the continent. Some countries, such as South Africa and Morocco, hope to successfully pave the way for other African countries, though these types of projects may not be suitable in all circumstances.

New gas discoveries have enabled Africa to emerge as a major supplier of natural gas

The LNG gas-to-power journey is associated with certain foreseeable risks that must be given proper consideration, notably those related to currency and state participation.

Yet a proper assessment of these risks and the implementation of adequate preventive measures, as described below, could allow them to be addressed appropriately.

LNG AS A SOURCE OF ENERGY PRODUCTION

Natural gas is playing an increasingly important role in the world's energy portfolio due to the discovery and development of new gas fields. Between 1980 and 2000, global natural gas consumption doubled.2  By 2016, natural gas accounted for 21.5 percent of world energy consumption.3  The International Energy Agency (IEA) has predicted that natural gas consumption will continue to increase at a rate of 1.6 percent over the next five years, outpacing the growth rate of all other petrochemical sectors. 4

This suggests how much countries recognize LNG to be cheaper than other sources of energy.5 Its lower pollution and greenhouse gas emissions, relative to other carbon-based energy sources, makes its use consistent with the current energy transition schemes.6

Historically, Africa has had a relatively small portion of the global natural gas reserves, with 7.6 percent of global natural gas reserves in 2016.7  This figure is dwarfed in comparison to that of its Middle-Eastern counterparts, whose natural gas reserves accounted for 42 percent of the natural gas reserves available worldwide during the same period.8 Similarly, Europe and Eurasia's natural gas reserves accounted for 30 percent of global reserves9 (Figure 1).

Despite this, and led by Algeria, Nigeria, Angola, Egypt and Equatorial Guinea, new gas discoveries have enabled Africa to emerge as a major supplier of natural gas.

For example, Nigeria, with its estimated 5,300 billion cubic meters (bcm) of gas and rising investments in gas production, is in the process of becoming one of the largest LNG suppliers, after Qatar.10 Recently, Mozambique, Tanzania, Mauritania and Senegal have also emerged as key players in the African gas industry in light of their newly discovered gas reserves.

56
days per year, African manufacturers experience power outages
World Bank

These LNG discoveries have come at a critical time, as Africa is in the midst of an energy crisis.11  Some estimate that "only 24 percent of sub-Saharan Africans have access to electricity, and the energy generation capacity of Africa (excluding South Africa) is only 28 gigawatts, equal to that of Argentina alone."12

Despite these shortages, Africa's demand for energy is predicted to rise with increasing population, urbanization and economic productivity. According to the World Bank, African manufacturing enterprises experience power outages on average 56 days per year.13  Given Africa's existing power deficit, it is incumbent upon the region to address the current and future power supply, transmission and distribution needs.

LNG's share of Africa's primary energy demand (total energy demand from all sources) excluding biomass will likely increase modestly, from 15 percent in 2020 to 18 percent in 2035 (Figure 2). As a source of energy for electricity generation, LNG could grow from 10 percent of installed capacity in 2015 to 23 percent by 2030 (Figure 3).

 

Countries such as Mozambique are rising within the LNG sector globally. Mozambique is expected to be a future leader in the global LNG industry given its plan to develop an LNG facility on the Afungi Peninsula in the Cabo Delgado province.14

Other African countries are also increasingly getting involved in developing gas-to-power facilities. LNG gas-to-power projects will aim at developing the domestic production of electricity and provide for the construction of key gas and electricity infrastructure.

CURRENT ATTEMPTS IN AFRICA: A FOCUS ON MOROCCO

To date, there have been very few gas-to-power initiatives in Africa.

In 2016, South Africa launched an LNG-to-power program involving 3,000 MWs allocated between two gas-fired power generation plants.

Morocco intends to develop the first gas-to-power project in French-speaking Africa

Morocco intends to develop a gas-to-power project that is the first of its kind in Morocco and more generally in the French-speaking area of Africa. Morocco is highly dependent on imported energy and remains one of the largest net importers of hydrocarbons in North Africa.15 More than 90 percent of its energy comes from other countries, including coal and oil arriving from world markets (such as gas from Algeria and imported electricity from Spain and other African countries).16

Encouraged by the increasing need for electricity, Morocco has recently decided to expand the use of LNG through a gas-to-power project. Despite delays in the initial timeline, the government has mentioned its full support for the project on several occasions. The project involves the construction of a new LNG terminal within five years at Jorf Lasfar port, near the western city of El Jadida.  It will allow up to 7 bcm of gas to be imported by 2025, substantially diversifying energy imports. The terminal, along with the construction of a jetty and necessary pipeline infrastructure, is estimated to cost US$4.6 billion. The Moroccan government also launched an international tender seeking foreign investments for the LNG terminal, which attracted bids from more than 93 companies, including French, British, Spanish and American companies.

By 2020, Morocco aims at deriving more than 40 percent of its electrical capacity from renewable sources, strengthening both energy security and sustainability. By 2035, this is expected to grow to 52 percent, with LNG accounting for 23 percent of the total. The project's goals are to:

  • Meet electricity needs by increasing the electricity generation capacity
  • Secure the long-term gas supply
  • Develop a downstream gas market
  • Expand the use of energy in the industrial sector

The gas-to-power project will rely on:

  • A maritime jetty land, an onshore LNG regasification unit with a total capacity of 5 billion normal cubic meters (nm3)
  • LNG storage tanks
  • 400 kms of gas pipelines
  • New combined-cycle gas turbines (CCGTs with a combined capacity of 2,400 MWs)
  • Ancillary infrastructures

To attract foreign investment, Morocco has adopted a modern legal framework, conducive to the development of infrastructure projects.

Morocco's energy policy is set independently by two government agencies: the Office National de l'Electricité et de l'Eau Potable (ONEE), which sets electricity-related policies; and the Office National des Hydrocarbures et des Mines (ONHYM), which sets domestic oil & gas policies. These agencies have created sector-specific laws, such as law No. 48-15, aiming to liberalize the Moroccan energy sector. Notably, law No. 48-15 strives to ensure fair competition, continuity of service and compliance by the electricity industry participants with regulatory requirements. These sector-specific laws work in tandem with Morocco's new public-private partnerships law No.86-12 (the PPP Law).

The PPP Law is essential, because it introduces the concept of a partnership contract into the Moroccan legal framework, thereby enabling private partners to be remunerated by the relevant public authority while taking into consideration standard markets that are implemented in international project finance.

By 2030, it is anticipated that gas will account for 23 percent of Morocco's installed electricity generation capacity and renewables (wind, solar and hydro) for another 52 percent.17

POTENTIAL MAJOR LEGAL ISSUES

Gas-to-power projects are complex and face significant challenges, particularly in nations where these projects are the first of their kind.

Gas-to-power projects are complex and face a few significant challenges, particularly in nations where these projects are the first of their kind

The major challenges associated with gas-to-power projects in Africa relate to:

  • Commodity and currency risks. LNG procurement takes place in a commoditized global market, which exposes the project company to the significant risk of price volatility. Furthermore, the procurement of LNG faces currency risks, because LNG market price dynamics are driven by competition for LNG cargoes denominated in US dollars. As such, the strength of the US dollar affects the purchasing power of different currencies
  • Participation of the state (as guarantor or gas aggregator). State participation exposes the project company to political and economic risks, including the risk of expropriation, the risk that the government will enact fiscal measures that are not favorable to the project, and the risk that the government will enact regulations that make it burdensome or impossible to receive necessary approvals
  • Sovereign ratings, currency volatility and foreign currency reserves. There is a risk that a sovereign will fail to meet debt repayments, thereby lowering its credit rating and increasing the risk to the lender. Additionally, hard currency loans can create a currency risk if revenues are in local currency. For example, a power plant located in Africa may be financed in US dollars, but if electricity tariffs are in local currency, then this may create an asset-liability currency mismatch.18  If the local currency depreciates against the US dollar by 10 percent, revenues remain unchanged, but liabilities have increased by 10 percent. By contrast, if the US dollar depreciates against the local currency and the country welcoming the power plant had a large supply of US dollars in its foreign reserves, there is a risk that the host African country's foreign currency reserves would be depleted, thereby limiting government policy options.

TYPICAL REMEDIES

To avoid or respond to the aforementioned risks and other key challenges, particular attention should be paid to contractual frameworks, tariff structures, government support, financing frameworks, fuel flexibility and corporate social responsibility (CSR).

Receiving support from the state will be essential for managing risks associated with the state’s participation in the project.

Contractual frameworks

Establishing a solid contractual framework helps project companies protect themselves against commodity and currency risks, risks associated with state participation, sovereign risks and risks associated with the project's social impact.

Given the broad range of stakeholders involved with gas-to-power projects, it is important to adapt the usual forms of contracts to each project, especially with regards to the following provisions:

  • Treatment of unforeseeable event/unforeseeable conduct. These concepts and related relief may need to be extended to cover the entire LNG-to-power value chain (from import to regasification and supply)
  • Change in law. Relief offered related to additional capital expenditure, operational expenditure or in relation to consents might apply only in relation to the power plant or to the entire value chain, including LNG procurement, regasification, transportation and even distribution or third-party access-related matters
  • System events. Stakeholders will want to know if, in case of system events affecting the project, relief will extend beyond the grid, potentially also to port and gas transmission-related events
  • Force majeure. If the gas-to-power project is developed as a fully bundled project, specific attention should be paid to defining the circumstances and conditions under which parties will be excluded from performing their obligations if a force majeure event occurs

Tariff structures

Establishing an effective tariff structure is particularly important for managing foreign exchange risks. The tariff structure should be largely cost-effective and should be able to support the project funding. The manner in which foreign currency costs are passed through under the Power Purchase Agreement (PPA) should be a key area of focus:

  • Pass-through of base project (fixed and variable) costs. Since there is no guarantee that day-one "acceptable" third-party users or industrial gas users will exist, the costs associated with sizing infrastructure and contracts to accommodate possible third-party users or industrial gas users may need to be accommodated under the PPA in the first instance (unless sponsors are willing to bear this risk). Presumably, as third-party users or industrial gas users come on-stream, to the extent that these new users bear a portion of the costs, this will result in an appropriate abatement of costs and expenses being passed through to the energy purchaser
  • Foreign exchange risk. The currency retained by the public electricity entity will be of great importance in assessing the tariff structure. The cash flow generated by the revenue under the PPA will be used by the project company(ies) to, among others: (i) service the debt; and (ii) pay for the LNG purchases. As imported LNG is most likely to be priced in US dollars, there is a potential currency risk if the PPA revenues are denominated in a different currency

State support

Receiving state support will be essential for managing risks associated with the state's participation in the project. Both the nature and extent of a government's involvement will be of major importance in the gas-to-power project's success.

  • Financial support. It is critical to receive government financial support if the national power buyer or the state itself is unable to fulfill its payment obligations under the PPA. In some countries, such as Morocco, the government traditionally offers support in the form of a letter addressed to the sole project company covering specific instances (mainly the payment of termination indemnities). However, it is likely that sophisticated lenders will require a much more developed contract with the state based on direct agreements developed by international practice. Since the PPA is the only revenue stream for the gas-to-power project, the support of the state will be of great importance for the analysis of the lenders' risk allocation
  • Political support. Though political risks invariably exist, seeking government political support will help to mitigate the risk of property expropriation, lend legitimacy to the project, promote public confidence in the project, and limit the likelihood that the government will enact fiscal or other measures that discriminate against the project19

Financing frameworks

Establishing a strong financial framework is important for limiting currency and sovereign risks and for hedging general project risks.

Financing the gas-to-power project will involve a typical suite of finance agreements. Depending on the final corporate structure and financing terms, on-loan agreements and cross-guarantees by each of the project companies (if several) may be required.

Fuel flexibility

Promoting fuel flexibility enables project companies to reduce supply risks. This makes it vital for project companies to focus on:

  • Managing LNG storage effectively to ensure flexible dispatch. While an increasing degree of buyer flexibility is available to potential LNG buyers in the current buyer's market, unlimited and instantaneous flexibility is rarely possible under long-term LNG sale and purchase agreements (SPAs). Given the limited storage that a floating storage regasification unit (FSRU) offers and the possibility of industrial sales and third-party access, parties should consider how LNG is sourced and managed when the power plant experiences high plant load factors, especially on short notice
  • Allocating LNG-related liability. Gas-to-power projects may involve one or several project companies, depending on the scheme retained for the development of the project. Analyzing and structuring LNG arrangements involves understanding how take-or-pay or failure to take cargo-related liability is allocated to the gas company and passed on to other entities, such as the energy purchaser (especially when multiple failures of different parties cumulatively result in liabilities under the LNG SPA). The retained scheme will have to outline a minimum annual dispatch level (expressed as an annual average plant capacity factor) and a maximum monthly dispatch factor, both of which will be reflected in the PPAs
  • Planning for back-up fuel. Structuring a project to operate on back-up fuel and entering into related arrangements will have upfront and ongoing cost and efficiency implications. Given an emphasis on bidders' proposed solutions to optimize a plant's specification at the lowest cost, prospective bidders in a gas-to-power project should ensure that the project scheme is prescriptive as to the nature and extent of back-up facilities and arrangements—so that all bidders are held to the same standard.

Corporate social responsibility

  • Channeling benefits directly to local communities. Direct and indirect employment, contributions toward poverty alleviation, education, training and maintaining open communications and good relationships with local communities can reduce the likelihood of friction and even work disruptions by protest actions. To ensure that CSR obligations are properly fulfilled, the mechanisms by which project personnel engage with local communities need to be explicitly included in the contract documentation and the obligations themselves included formally in the project plan

With new discoveries of natural gas in Africa, large projects could be developed in several parts of the continent, including cross-border and remote areas. States and private developers will therefore need to work together to develop projects onsite. This will also mean achieving a fair split of the costs, risks and benefits. Despite these significant challenges, the future seems bright for African LNG, as gas-to-power projects are likely to expand due to strong demographic growth and an ever-increasing demand for electricity.

1 Shell Global. "Liquefied Natural Gas." Available at: https://www.shell.com/energy-and-innovation/natural-gas/liquefied-natural-gas-lng.html.
2 United States Energy Information Administration. "Global Natural Gas Consumption Doubled from 1980 to 2000." April 12, 2012. Available at: https://www.eia.gov/todayinenergy/detail.php?id=5810.
3 CEDIGAZ. "Natural Gas in the World—2017 Edition." October 2017. Available at: http://www.cedigaz.org/documents/2017/NGW%202017/NGW2017EditionSUMMARY.pdf.
4 International Energy Agency. "Gas 2018." No date. Available at: http://www.iea.org/gas2018/
5 Prima LNG. "Benefits of LNG." No date. Available at: https://www.primalng.com/about-lng/benefits-of-lng.
6 Elengy. "LNG: an energy of the future." No date. Available at: https://www.elengy.com/en/lng/lng-an-energy-of-the-future.html.
7 Statistica. "Distribution of proved natural gas reserves worldwide from 1992 to 2017, by region." No date. Available at: https://www.statista.com/statistics/273584/distribution-of-natural-gas-reserves-by-region/
8 Statistica. "Distribution of proved natural gas reserves worldwide from 1992 to 2017, by region." No date. Available at: https://www.statista.com/statistics/273584/distribution-of-natural-gas-reserves-by-region/
9 Statistica. "Distribution of proved natural gas reserves worldwide from 1992 to 2017, by region." No date. Available at: https://www.statista.com/statistics/273584/distribution-of-natural-gas-reserves-by-region/
10 James Denton-Brown and Michael Tomet. "Africa LNG: The New Middle East." 2014. Available at: https://www.bechtel.com/about-us/insights/africa-lng-the-new-middle-east/
11 Benedict Peters. "Africa's Energy Crisis Is Growing and The Solutions Are Getting Smaller." May 17, 2017. Available at: https://www.huffingtonpost.co.za/benedict-peters/africas-energy-crisis-is-growing-and-the-solutions-are-getting_a_22077474/
12 Michael Waiyaki Nganga. "Understanding Africa's Energy Needs." November 17, 2016. Available at: https://www.weforum.org/agenda/2016/11/understanding-africas-energy-needs/
13 The World Bank. "Fact Sheet: The World Bank and Energy in Africa." No date. Available at: http://go.worldbank.org/8VI6E7MRU0
14 Mozambique LNG. "A Cleaner Source of LNG for the World." No date. Available at: http://www.mzlng.com/The-Project/
15 United States Department of Commerce. "Morocco: Energy." October 25, 2017. Available at: https://www.export.gov/article?id=Morocco-Energy.
16 Xinhua. "Morocco takes legal move to stimulate liquefied gas growth." December 16, 2017. Available at: http://www.xinhuanet.com/english/2017-12/16/c_136831021.htm.
17http://www.ramboll.com/projects/rog/securing-supply-and-diversifying-the-energy-mix-in-morocco.
18 Wim Verdou, David Uszoki, and Carlos Dominguez Ordonez. "Currency Risk in Project Finance." August 2015. Available at: https://www.iisd.org/sites/default/files/publications/currency-risk-project-finance-discussion-paper.pdf.
19 Nicholas Grambas. "Role of Government in Project Finance: Host Government Support." Page 196. International Business Lawyer 23 Int'l Bus. Law (1995). Available at: https://heinonline.org/HOL/Page?collection=journals

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.