Energy & Infrastructure Insight - Issue 2

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WHAT IS CONSTRAINING NATURAL GAS? Promoting gas generation is not new—the 2016 Power Africa Roadmap outlined plans for the public and private sector partners to work together to add 30,000 MW of new electricity generation capacity and 60 million new connections by 2030. The question therefore is why African countries, lacking investments and infrastructure, have yet to take full advantage of their natural-gas reserves? While the flexibility of gas for electricity generation makes it an attractive option, the associated infrastructure required to transport and distribute it can significantly restrict its use, potentially limiting it to locations where both demand and infrastructure is well established. Although the use of natural gas for power generation and other uses could support and encourage infrastructure development and regional integration, there are significant challenges to its development, including the availability of the gas (in terms of both source and delivery point), the relatively small size of the current markets and large distances between markets, the financial position of the offtakers, the lack of adequate downstream infrastructure and the relative size of the markets into which gas might be delivered and the markets ability to take it. More generally, a challenging operating environment, coupled with a lack of transparency in the resources sector, regulatory uncertainty and policy instability, and a continuing infrastructure deficit, have all deterred investment. Overcoming these various challenges and addressing the need for environmental and market reforms will be critical to the development of Sub-Saharan African gas-to power markets. WHAT CAN BE DONE ABOUT IT? There are any number of risks which will need to be addressed in order to create a suitable environment for the development of African gas resources—political, economic, legal and operational risks, which will have varying prevalence across the Sub-Saharan region but which will need to be identified and mitigated by the appropriate actions. These include: • Participation of the state (as guarantor or gas aggregator). State participation brings with it political and economic risks, including the risk of expropriation, the risk that the government may enact fiscal measures that are not favourable to the project, and the risk that the government may enact regulations that are burdensome or refuse to grant requisite licences or approvals • Sovereign ratings, currency volatility and foreign currency reserves. A sovereign may fail to meet debt repayments resulting in a lower credit rating and increased the risk to lenders. Additionally, hard currency loans can create a currency risk if revenues are denominated in local currency • Commodity and currency risks. LNG procurement takes place in a commoditized global market, which exposes the project company to the significant risk of price volatility. Furthermore, the procurement of LNG faces currency risks, because LNG market price dynamics are driven by competition for LNG cargoes denominated in U.S. dollars The challenge is how to use the various measures available to mitigate these risks, including: • Contractual framework structuring which protects the project company, as far as possible from commodity and currency risks, risks associated with state participation, sovereign risks and risks associated with the project's social impact, with particular focus on the treatment of unforeseeable events or conduct, changes in law, force majeure and grid and gas system events • Tariff structures which are cost effective and manage foreign exchange risk with costs passes through under the Power Purchase Agreement • State support, both financial and political • A robust financial framework, suitable for and appropriate to the project structure (whether integrated, incorporating upstream gas extraction, midstream gas transport and downstream gas delivery/regasification and power generation components, non-integrated, incorporating only some of the functions or a hybrid approach) • Fuel management techniques, which reduce fuel supply risk, allow for effective storage management and despatch and back up and which allocate liability appropriately 12

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