Is natural gas a ‘game changer’ for Africa’s economy?

Godwin Sweto is the current managing director of South African firm Encorex, who specialise in energy consulting, strategy advisory, investment and petroleum product trading. We caught up with Godwin who will be speaking at the Onshore Gas Africa conference in a couple of months as he shares with us his insights regarding natural gas and its potential to be a game changer for Africa’s economy.

Sub-Saharan Africa has undoubtedly emerged as a major player in natural gas, and is perceived as a game changer for the economy – what is your opinion on this?
Godwin Sweto (GS): This is certainly true, in view of the major offshore discoveries in East Africa as well as the reported shale gas potential for South Africa. The International Energy Agency recently predicted that sub-Saharan Africa will outstrip Russia as a global gas supplier by 2040, with major producers seen as Mozambique, Nigeria, Angola and Tanzania. This is also in the context of declining output in Algeria, Africa’s largest gas producer. And yes, these discoveries have major potential to drastically improve the economic performance of the regional economies, especially those still heavily reliant on donor funding for their budgets.

Apart from the obvious benefits of increased foreign direct investments, job creation and direct support for such energy intensive industries as agriculture, manufacturing, mining and smelting, the natural gas finds have the very real potential of promoting increased regional integration. The supply sources e.g. the Rovuma basin, will need to be connected (e.g. via pipeline and LNG export/import infrastructure) to such demand centres as South Africa, while the possibility exists for pipeline spurs to Zimbabwe, Malawi and Zambia. The direct result is enhanced regional energy security, which is vital for regional economic upliftment.

However, whether such potential will be realised in the forecast timeframes remains in question. These projects (for the monetisation of gas) are by their nature long-term, highly capital intensive and will be most challenging in a region with a high infrastructural and energy market and regulatory backlog. This means that whilst there is cause for optimism, such optimism must be tempered with the realism that the game will take longer to change, and that public expectations will need to be managed accordingly.

The state of the international market plays a significant role in determining oil and gas prices – can you further elaborate on this statement?
GS: Well the accuracy of this statement is something that we are seeing in the oil market today, as Brent crude prices, for instance, have declined over 50% from a high of US$115/bbl in July 2014 to below US$60/bbl prices in February 2015. Clearly, the global oil supply overhang, largely owing to increased shale gas production in the USA, and the slow-down in such major consumers as China, Japan and Europe have had a direct impact on oil and gas prices.

The decision in November 2014 by OPEC not to intervene to correct market distortions by curtailing production also played a part in keeping the prices low.

While predicting the direction of the oil price is difficult it appears that, looking ahead prices will remain depressed for as long as the above conditions prevail, compelling companies to reassess/curtail their operations and activities in order to adapt to this situation. A medium term price recovery is inevitable, though, especially as the curtailment of projects alluded to above starts impacting on supply.

“The monetisation of gas will have enormous economic implications for South Africa” – please comment.

GS: If this relates to the monetisation of gas resources in SA, then yes, but such resources will have to be discovered first, in commercial quantities. After this, a route to market that is economical and serves the best interests of the country will have to be devised. The most pressing use will be electricity generation, whilst heating, fuel production and general industrial gas consumption will also benefit. But before any sense of hubris prevails, if it even should, regulations and institutions must be fully in place to ensure that exploitation meets the needs of the country and contributes positively to the economy. Indeed, plans are being made to import LNG into the country mainly for power ahead of shale gas development. This will introduce a market for gas use which should assist in creating a demand pull for shale gas development.

The construction of a $6 billion gas pipeline between South Africa & Mozambique is expected to be transformational to Africa’s energy infrastructure landscape – what are some of the key benefits of this project?

GS:

• Energy security, especially as this will help diversify South Africa’s energy mix. Currently gas’s contribution to the South African energy mix is barely 3%.
• South Africa would then use this gas to displace expensive diesel generation. In his recent State of the Nation Address, President Zuma emphasized governemnt’s commitment to shift towards gas power generation as part of the solution to South Africa’s chronic electricity shortages.
• Increased availability of gas for industry in South Africa.
• Side-linkages or spin-offs to the project will create additional economic opportunities along its path benefiting both countries. This includes gas supply to central and southern Mozambique for access to power, which remains shamefully low.
• Further monetisation opportunities for Mozambique’s gas outside of planned LNG export.

Finally, what conversations are you looking forward to having with your industry peers at the Onshore Gas Africa conference?

GS:

• Experiences and best practices from local, regional and global players in the petroleum industry.
• Perspectives on the potential that shale gas and other unconventional energy sources have, given challenges experienced elsewhere.
• The potential for, and possible implications of a complete decoupling of gas prices from oil prices.
• Developing an appreciation of mitigation and adaptation strategies employed by oil companies to limit the impact of the low oil price.
• Possible local and regional opportunities for the smaller enterprises in the industry.
• Technology advancements making significant contributions to mankind’s quest for enhanced energy security.