Countries in Africa could become increasingly important players in the world’s natural gas markets, especially in the global liquified natural gas (LNG) trade. In the last decade, there have been major natural gas resource discoveries across the continent, adding to the reserves already held by the large incumbent producers in West Africa and North Africa.
The African Climate Foundation commissioned Willis Towers Watson (WTW) to help to develop a body of work around natural gas on the African continent, particularly regarding the factors, incentives, and transitions that will shape the future of gas in Africa. This study, which is the outcome of that work, explores key themes and issues around natural gas development on the continent, specifically in relation to the impacts of global climate transitions on the viability of gas investments.
The report splits African gas producers into two archetypes – existing and emerging – defined by the factors that help shape the predominant challenges these nations face in developing their natural gas endowments. These include the maturity of respective gas markets (whether the country is an existing major producer or new emerging producer) and the degree to which each country is facing challenges with meeting demand from a growing domestic base or maintaining natural gas export potential.
The analysis quantifies the economic value of natural gas production in each country in a range of global climate transition scenarios, each of which represents different speeds of potential decarbonisation globally. These range from “No Holds Barred” (NHB) as the slowest decarbonisation trajectory, to a global 1.5°C “Net Zero Emissions” (NZE) scenario as the fastest decarbonisation trajectory. This report summarises the current gas landscape in Africa across ten of the 12 countries and explores their domestic challenges. It also provides a high-level assessment of climate transition risk on any LNG-related export industry. A second report, published alongside this one, develops a deeper analysis of how climate transition risk could affect Mozambique and Tanzania’s nascent LNG export industries specifically.
All African gas producers face material exposure to “external” climate transition risk.
In scenarios with faster global decarbonisation, lower natural gas demand and lower long-term prices will reduce the value of existing African natural gas industries and damage the economic viability of future LNG projects. The economic viability of gas resources targeted at domestic demand could also be impacted, depending on the requirements of investors in those resources. These risks from structural changes occurring at the global level are termed “external” climate transition risk.
Domestic demand is unlikely to be a viable anchor for investments in new gas resources as domestic gas prices are often significantly below LNG prices.
For investors in new gas resources, growing domestic or regional demand as a hedge against an uncertain outlook for exports is unlikely to be viable, as gas prices in African markets tend to be lower than gas prices in increasingly globalised LNG markets. African natural gas prices are often capped or regulated to encourage growth in gas uptake or because of the low ability to pay in countries where natural gas is used. This may mean that revenues from servicing domestic or regional demand are unlikely to be a sustainable substitute for dollar-denominated export revenues.
Growing domestic markets may lock in additional domestic transition risk.
Investments in the upstream and midstream infrastructure required to enable growth in domestic or regional demand will add further transition risk to African economies, this time in relation to their own transitions. Increased competition from low-carbon alternatives and rising long-run gas prices are likely to lead to gas becoming uncompetitive before the end of those infrastructure assets’ lives.
Emerging producers exhibit lower starting levels of economic resilience.
Many future or “emerging” African natural gas producers (other than South Africa and Namibia) are relatively less developed than existing producers and have weaker sovereign credit ratings, with public finances less suited to absorbing the impacts of climate risk (physical or transition).
These countries also face more transition risk than existing producers – this is because investments in developing new resources are generally subject to more downside risk than those in resource bases already in production. Payback on investments on long-life infrastructure for new resources may not be complete before the global shift away from gas to meet the Paris Agreement targets begins.
The war in Ukraine and its impact on gas global markets could potentially expose producers to many more severe long-term risks.
The war in Ukraine has caused global LNG prices to shoot upwards. If investors and host governments fast track new developments with the aim to capture short-term gains (from higher short-term global LNG prices), they expose themselves potentially to many more severe long-term risks in the process, because of the much bigger gap between artificially elevated valuations today and valuations in a 1.5°C scenario. Given the limited capacity of countries (especially emerging producers) to bear economic and financial risk, it is now even more important to assess transition risks before investment decisions are made.
|Natural gas in Africa amid a global low-carbon transition