Africa’s floating LNG projects set to disrupt global gas trade

From Global Trade Review (GTR) | By Sarah Rundell

 The imminent final investment decision of Kosmos Energy and BP’s Tortue offshore floating liquefied natural gas (FLNG) project in the waters of Mauritania and Senegal underscores an important shift in Africa’s LNG ambitions. The project, which is targeting first gas from its floating vessel in 2022, suggests that Africa’s growing exports of natural gas won’t come from vast land-based LNG sites where most of the interest has focused in recent years. Instead, new FLNG vessels are set to anchor offshore to liquify natural gas on site for shipment directly to markets in a trend set to reverse Africa’s declining LNG exports – and disrupt global LNG trade. Although the FLNG liquefaction concept of converting gas from offshore fields into LNG has been around for decades, there are only a handful of units operational or commissioned in the world. At present Africa leads the way, with Cameroon blazing a trail for the continent. FLNG vessel Hilli Episeyo, moored 14km off the southern port city of Kribi, exported its inaugural cargo last May in what was also a pioneering proof of concept since Hilli is the first conversion of an LNG tanker into an FLNG vessel. Elsewhere on the continent, at the end of last year Eni signed off its US$4.7bn Coral South offshore project in Mozambique, with its FLNG production vessel coming on stream in 2021. Coral South is important because it is Africa’s first project-financed FLNG project, and is backed by a consortium of 15 international banks and five export credit agencies (ECAs). “It is likely to be the template for much of future Mozambique LNG documentation,” says Paul Eardley-Taylor, head of oil and gas, Southern Africa, at Standard Bank in Johannesburg, who sees advantages for FLNG in West Africa particularly. “Water depths and sea conditions are moderate and geographical locations favour Latin American and European markets,” he tells GTR. In its favour, FLNG is cheaper than the cost of building pipelines and onshore liquefaction facilities. Golar LNG, the company behind the Hilli conversion, said its refit cost US$1.2bn, coming in US$70mn under budget. “It can cost billions to develop a land-based facility. But taking an old LNG vehicle and converting it by adding regasification equipment costs a fraction of the price,” says Thomas Moore, a partner in Mayer Brown’s Houston office. It’s a point shared in a recent report from Energy Futures Initiative (EFI) entitled Investing in natural gas for Africans: doing good and doing well, which notes “significant cost reductions [and] offtake discussions” in FLNG projects. But FLNG’s appeal is not cost alone. The technology also makes Africa’s small-scale projects viable. Small-scale production cannot serve giant utilities in Japan or South Korea, but it can serve individual or smaller groups of power plants that suit more intermittent and flexible supply, or traders rather than end-users. Power plants switching to renewables which still need back-up generation are one example, says Moore. Small-scale production also has other advantages in the oversupplied LNG market. Smaller plants could help keep costs down, and having the cheapest gas will help win customers, he says. FLNG also offers an alternative to Africa’s onshore LNG projects which have struggled to secure the long-term off-take agreements with utilities needed to attract finance. Lengthy contracts are key to financing projects because ECAs, banks and other financiers want security for the large, upfront funds they provide, yet getting those contracts for African producers has proved a challenge. It is also faster to develop FLNG than onshore LNG: Coral South is running at least 12 months ahead of Mozambique’s onshore project, which isn’t expected to achieve final investment decision until 2019, says Standard Bank’s Eardley-Taylor. Although the bulk of production is destined for export, FLNG also has important implications for Africa’s undeveloped power sector. Despite the continent’s abundant natural gas reserves, few countries can transport gas over long distances and the lack of grid infrastructure and pipelines has resulted in localised power generation. “Natural gas infrastructure in Sub-Saharan Africa is sparse. The absence of a large regional market can lead to investment uncertainty and cause financing difficulties,” notes the EFI report. Yet FLNG offers another way to transport LNG into localised markets where power demand is strongest. “You could locate the vessels near port cities close to electricity demand,” says Moore. Nevertheless, there are downsides to this new development. Offshore facilities don’t bring the value add that comes with onshore sites, such as key infrastructure investment and spin-off manufacturing in fertiliser and petrochemical industries. It is also critical to find the right partners and sponsors who can bring project know-how and facilitate FLNG financing. “The technology is relatively new, so for new vessels financings will likely require sponsors to provide conventional completion support. For refurbished vessels, we would envisage sponsors are more likely to on-balance sheet completion risks rather than involve external lenders with high due diligence requirements,” says Eardley. But the idea that this could be a solution for Africa’s LNG exports is catching on. “This is really exciting for Africa,” concludes Moore.   The post Africa’s floating LNG projects set to disrupt global gas trade appeared first on Global Trade Review (GTR).
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