Sub-Saharan African Gas Investment: What Do Financiers Really Think?


There’s no doubt that Sub-Saharan Africa is rich in gas.

The continent has estimated reserves of 450 tcf; around 60% of which are undeveloped and have no current plans for development. It’s also a rapidly industrialising region with a young population, dual factors which will guarantee a growing energy appetite in the coming years and decades. So, what’s hindering Sub-Saharan African gas development, and is the region becoming a more attractive destination for gas investment?

Read on to learn more, based on insights shared by our panel of experts from Absa, Société Générale, AIIM and Wood Mackenzie at last week’s AOWebinar.
 
State Participation

As Shirley Webber, Absa’s Natural Resources and Energy Coverage Head, puts it, “governments play the most important role in the development of their country’s resources. Top of mind for all investors is a stable political environment”. Historically, Sub-Saharan Africa has struggled in this regard; the continent has high levels of state participation and policies have often changed as regimes have come and gone, pulling the rug from under investors. However, state participation is by no-means onerous across the board. One can look to countries like Mauritania or Nigeria – where there is no mandatory state participation in PSCs – as an example.

Fiscal Terms

It’s no secret that investors look for simple, transparent terms with a degree of flexibility. Sub-Saharan African governments, on the other hand, often prioritize early revenue generation, which can be off-putting. Wood Mackenzie’s Principal Fiscal and Valuations Analyst, Greg Roddick, cites Tanzania and Senegal as examples of this. Pleasingly however, Many Sub-Saharan African countries, including Cameroon and South Africa, have passed legislation to render their gas terms more favourable in recent years.

Incentives

Though steps are being taken across the continent to attract gas investment, material incentives for gas development remain few and far between. The notable exception is Nigeria, where the Associated Gas Framework Agreement (AGFA) allows producers to offset their gas costs against oil production. This has undoubtedly helped build Nigeria’s domestic gas market and is likely to remain, albeit in a diluted form, in the country’s long-awaited Petroleum Industry Bill. It’s also worth highlighting that there is a similar, but still untested framework in Angola.

Lack of Infrastructure

Wood Mackenzie’s Greg Roddick describes Sub-Saharan Africa’s lack of gas infrastructure as “a chicken and egg problem”. In order to build large infrastructure projects, a significant customer base is required. However, customers are not likely to materialize with no infrastructure in place.  

So, what’s the solution? Olusola Lawson, Co-Managing Director at African Infrastructure Investment Managers (AIIM), says that “for largescale domestic gas projects, you’re going to need an underpin from a largescale power plant. The reality is that in many markets across the continent, you’re not going to find the credit quality you need to start building these things out… It’s more a case of building on what you have….Virtual pipelines and CNG are probably a better way to mitigate your risk as you’re more diversified in terms of the customers you’re selling to and...you’re more nimble in terms of how you scale back your volumes.”

The Energy Transition Effect

The energy transition has seen many investors, especially those based in Europe, choose to cease funding hydrocarbons projects. Those who continue to do so are now stress-testing oil and gas projects with lower long-term prices. Despite this, gas is now well-established as a key bridging fuel. As Katan Hirachand, Co-Head and Managing Director of Advisory and Project Finance for Energy EMEA at Société Générale, ​points out, “the African context is unique. Even if you were to triple electricity consumption in Sub-Saharan Africa, that would still be less than 1% of global emissions. The continent clearly needs a big leg up in terms of raising gas penetration”.

What have we learned? Though no single Sub-Saharan African country has the perfect mix of political stability, favourable terms, top tier prospectivity and infrastructure in place, there are certainly steps governments can take, and are taking, to improve their standing with investors. With record-breaking gas projects underway in Mozambique and exciting recent gas condensate discoveries offshore South Africa – to name but a few examples from across the continent – it seems the future of Sub-Saharan African gas may indeed prove to be bright.

For more insights on African gas investment, watch the recent AOWebinar “Unlocking Sub-Saharan Africa’s Gas Potential: What Do Governments Need to Do to Attract Investors?”, available on-demand now.
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