In the second part of an exclusive interview with Africa Oil & Power, Secretary General of the GECF H.E. Yury Sentyurin discusses the impact of COVID-19 on the current project pipeline and timeline for final investment decisions.
Given current oil price volatility, will COVID-19 lead to an even greater push towards natural gas exploration in Africa?
Africa is a very important continent. I would say it is the next booming region in the world and can be a game changer. It is a rich mainland with huge natural resources, and paradoxically, significant lack of access to energy. As the Gas Exporting Countries Forum (GECF), and in line with our Declaration of Malabo of the 5th Summit of Heads of State and Government of the GECF Member Countries held in November 2019 in Equatorial Guinea, we are promoting the use of gas as the core source of energy in development programs in African countries. Moreover, we are aiming to overcome energy poverty, enhance development and mitigate CO2 emissions in the African continent.
It is worth mentioning that GECF counts six African countries as members, which account for more than 90% of Africa’s proven gas reserves. Such access to energy shall be done through developing infrastructure in Africa and unlocking the considerable natural gas resources of the continent. We have confidence to see further developments in natural gas exploration in Africa, knowing that lots of areas are underexplored in many African countries.
However, there are challenges posed by volatile oil and gas prices, aggravated by COVID-19 that caused cost cuts by many oil and gas companies and project postponements all over the world. This will include upstream, transport and LNG facilities. The behavior of the banks and lending organizations is also unpredictable post-COVID-19. Some major banks such as the European Investment Bank announced strategies to phase out funding of fossil fuels projects by end of 2021. All of these decisions are tightening investment opportunities around natural gas worldwide.
With all the uncertainty caused by COVID-19 and the level of gas and LNG prices, we do not think that investors will reduce their appetite for new investments in Africa since the continent remains a great potential for both new discoveries and new markets for natural gas consumption. Nevertheless, they may keep them on hold after the situation post-COVID-19 stabilizes.
With ExxonMobil recently delaying its $30 billion LNG project in Mozambique, what does COVID-19 mean for the project pipeline?
As far as African projects are concerned, despite the ambitious plans of governments in Mozambique, Senegal, Mauritania and Tanzania boosted by the significant gas discoveries made, there is a risk of delays. It was declared that the Greater Tortue project (Senegal and Mauritania) would face delay after the contractor claimed a force majeure notice following the outbreak of COVID-19. For Mozambique, which is set to become one of the largest LNG producers in Africa with 30 mtpa capacity, the 15.2 mtpa Rovuma LNG project has been delayed by ExxonMobil following the budget reduction adopted by the company. While Tanzania is still in discussions with projects developers to postpone the FID, we expect that the projects shareholders will not take FID in the near future.
The global LNG industry is in a delicate situation with prices at an all-time low. This is driven by an oversupplied market, which has worsened due to weakened LNG demand as a result of the COVID-19 outbreak. Several oil and gas majors slashed spending for 2020, as revenues from the sector are expected to decline amid the lower oil and gas price, which is forecasted this year. From January to the beginning of April, global oil prices slumped by around 50% to less than $30 per barrel. ExxonMobil followed other global oil and gas companies last week in reducing capital and operating expenditure due to the low oil and gas prices. In 2020, Exxon will reduce CAPEX by 30%, which is equivalent to US$10 billion, and OPEX by 15% compared to 2019.
The Rovuma LNG project in Mozambique is being developed by ExxonMobil, and other partners in the project include Eni, CNPC, Galp, KOGAS and ENH. The slash in Exxon’s CAPEX in 2020 has resulted in the delay in the FID of the 15.2 Mtpa LNG project, which was expected to reach FID in the first half of this year. The FID on Rovuma is likely to be taken in 2021, provided a recovery in market conditions.
Several other LNG projects with a combined capacity of more than 50 Mtpa at the pre-FID stage have also announced delays in their FID. These projects include Woodfibre LNG in Canada, Papua New Guinea LNG expansion, Pluto LNG expansion in Australia, Phase 2&3 of Tortue LNG in Senegal/Mauritania and the second, third and fourth FLNG vessels from the Delfin LNG project in the U.S. In addition to the current low price environment, COVID-19 is also impacting project discussions with potential partners, investors, buyers and other stakeholders, which has contributed to some delays. Qatar Petroleum has also announced a delay in the final award of contracts for the first phase of its LNG expansion, which is expected in Q4 2020, since contractors have requested additional time for submitting bids due to COVID-19. Following the delay in FID of LNG projects, around 135 Mtpa of LNG capacity is targeting FID in 2020. However, it should be noted that FID on some of these projects may also be delayed if low oil and gas prices and COVID-19 persist for several months.
For reference, around 92 Mtpa of LNG capacity reached FID in 2018 and 2019, with a record of 71 Mtpa in 2019. LNG exports from these projects are expected to come to the market between the period 2022 and 2028. Assuming an average annual LNG demand growth of 4% during this decade, the LNG market is forecasted to be well supplied through 2026, with a small undersupply possible in 2023. However, from 2027 and beyond, there is a need for additional LNG supply to meet the growing demand. Considering an LNG project takes around five to six years from FID to be completed, delays in FID projects this year are not expected to have a significant impact on the global LNG market in the medium-term. However, if LNG projects are delayed beyond 2021, this could result in a possible supply crunch post-2027.
What new challenges will be presented for investors in financing and erecting gas infrastructure?
Gas projects are long-term and capital-intensive. Sufficient investment is required across the gas supply chain to supply gas from onshore and offshore gas fields to end-users across the world. The global gas trade needs specific infrastructure, including international pipelines as well as LNG liquefaction, shipping and regasification facilities.
In our views, the investment climate in the gas industry looks quite optimistic in the long-term, as demand for natural gas will grow significantly. According to the GECF Global Gas Outlook, $9.7 trillion in investment is needed across the gas value chain by 2050, of which the bulk is to be dedicated to upstream. Trade infrastructure will require more than $400 billion. The period 1990-2018 reckoned $4.3 trillion. Upstream will continue to have the lion’s share of the global investment, with 96% in 2050 compared to a historical 84%.
However, the investment climate has changed recently, with the global natural gas industry facing various challenges today. There are various factors that have an impact on the current investment climate in the global gas industry. First, geopolitical stability is a prerequisite to secure funding for capital-intensive projects. In this context, geopolitical tensions can increase investment risks for gas projects. Investment in various countries, including GECF member countries, is threatened by unilateral economic sanctions imposed by some developed countries, which prevents them from developing their economies.
Second, sometimes unstable and unclear government policy is a barrier to investment. Policies should play a more critical role in securing gas demand. Many of the largest banks have adopted strategies to increase funding for renewables and stop funding certain sectors of the oil and gas industry.
Third, low gas prices, which we have witnessed recently due to LNG oversupply, could affect project economics and lead to a decline in investment. Traditionally, the major part of oil and gas projects is financed from the balance sheets of oil and gas companies, which highlights the importance of sustainable industry revenue in funding the sector. The current price environment poses a threat to the strength of the balance sheets of multinationals and some national oil and gas companies, which have to balance investment needs with relatively lower margins, dividend programs and debt commitments.
The fourth and most recent factor is a decline in gas demand in various regions in March-April due to the COVID-19 spread around the world. Hopefully, this decline is not as sharp as in the oil industry. However, market players might revise downward their investment plans because before the coronavirus outbreak, the prospects of global gas demand growth looked much more optimistic.
Fifth, securing timely funding for new projects in the gas value chain requires a risk sharing approach through long-term supply contracts. However, today we witness the reluctance of various consumers to sign long-term contracts, which decreases investment attractiveness of various projects.
Different subsectors of the global gas industry, in particular upstream, midstream and downstream, have their own investment specifics. Currently, the global upstream sector has suffered more than other subsectors. Upstream investment will fall sharply in 2020 as multiple oil and gas companies have already cut their budgets by up to 25%.
The rapid growth in LNG liquefaction capacity in recent years has led to LNG oversupply. As such, market conditions in the short-term, in particular gas prices and LNG demand growth, will bear an impact on this subsector. In early 2020, several developers already announced plans to postpone FIDs on LNG projects.
Large investments are also required for gas pipeline projects. In this context, GECF countries have recently invested huge resources in pipeline projects, with Power of Siberia, TurkStream and TANAP (the first stage of the Southern Gas Corridor) commissioned in November 2019 – January 2020, and Nord Stream 2 expected to come online in 2021. Some non-GECF countries have also finished projects, for example, the U.S. constructed various gas pipelines to Mexico. As a result, only few major pipelines are under construction in the world right now.
The bottom line is that the current investment climate is quite challenging for the gas industry, given the combination of low gas prices, shrinking gas demand due to the COVID-19 outbreak, geopolitical tensions and reluctance of some financing institutions to fund fossil fuel projects. However, there are reasons to believe that the global gas industry will successfully overcome these challenges thanks to dialogue, cooperation and coordination among all market stakeholders.
