Supply & Demand

Emerging gas markets – Challenges for investors

Emerging gas markets will be key to future gas demand growth. While there are many players ready to invest in these markets, many projects get stuck at the pre-feasibility stage Emerging gas markets will be key to future gas demand growth. While there are many players ready to invest in these markets, many projects get stuck at the pre-feasibility stage.
By Mitun Patel 26 July 2018 0 31900
Traffic in New Delhi, India The expansion in emerging gas markets will be driven largely by increasing demands for power as populations and economies grow rapidly. (unsplash.com)

Significant gas demand growth is expected from new and emerging markets. BP’s 2018 Energy Outlook estimates that emerging markets – including Latin/South America, the Middle East & Africa, India and elsewhere in Asia – are forecast to account for around half of global gas demand growth between now and 2040. This expansion will be driven largely by demand for power generation as populations and economies grow rapidly. These less mature gas markets will raise challenges for investors and companies across the value chain. Issues will include typical project development challenges – such as securing supply, offtake and finance – as well as difficulties specific to these markets, governments and SOEs – such as creditworthiness, problems of scale, governmental stability, legislative frameworks and pricing.

Project development

Key area Challenges Comments
Role of domestic incumbents
  • Role in gas value chain
  • Partnerships/JVs with investors
  • Constraints on commercial structure
The roles of the key players and the requirement for partners to bring technological and operational expertise to projects in addition to access to markets and finance. How to apportion the risks and rewards through the commercial structure then remains a challenge.
Regulations
  • Pricing and subsidies
  • Infrastructure TPA
  • Regulatory framework
  • Restructuring/unbundling
Gas price subsidies eventually become unsustainable leading to large gas supply and/or budget deficits. Reducing monopoly share and encouraging new entrants are also difficult where subsidisation has been the norm.
Operating regime
  • Plant dispatch
  • Impact of renewables
  • LNG/gas storage needs
  • Linking infrastructure
Significant investment in lower-cost renewables leading to a mid-merit or peaking role for gas-fired power, requiring flexibility in supply and higher costs along the chain, impacting on the overall economics.
Finance
  • Project affordability
  • Buyer creditworthiness
  • Country risk
  • Taxation framework
All of the above factors lead to even greater challenges for project financing, but ones that international lenders are increasingly willing to find ways to manage as they look for more opportunities in developing markets.

Government and SOE

Key area Challenges Comments
Markets
  • Gas competitiveness in mix
  • Build up of demand over time
  • Robust demand scenarios (power)
  • Demand centres (pipeline routing)
Developing anchor projects that will provide the economies of scale to facilitate gas supply to smaller industrial users. Over time, industrial use can grow to be quite significant, as seen in developed gas markets.
Political
  • Role of gas in energy mix
  • Change in government
  • Change in law or energy policy
The short-term outlook of many governments with a lack of clear energy policies and gas’s role within this, and changing views as new governments take office.
Funding
  • Government funding for equity share
  • Sovereign guarantees
  • Repatriation of money
  • Lack of development capital
NOCs and national power companies are also likely to require a large role in any project. Funding is often a challenge requiring sovereign guarantees, which in many cases may be insufficient.
Credibility
  • Competitive international tenders
  • Transparency for investors
  • Process delays
The lack of fully transparent procurement processes is also a hindrance, especially if significant expenditure is required before FID or even bid preparation.

Overcoming the challenges

1. Providing the right advice to governments
It is important to help educate governments on all the short-, medium- and long-term options they have for their respective energy mixes. Countries such a Nigeria have tended to maintain only a short term outlook so that the gas-rich nation currently has around 12 GW of capacity provided by imported diesel-fired generators. Multilaterals such as the World Bank, DFID, USAID and the EBRD have played a key role in many countries working closely with industry consultants to help educate governments and state-owned enterprises. Long-term studies such as master planning have proven to be helpful, providing key capability development, and may even offer continuation through changes in governments, laws and resource positions. Educating governments would not only help with planning but also with providing more transparent and credible ways to procure the development of projects with better results. Keeping a capable team within state entities is another challenge, with most employees preferring to move into the higher-paying private sector.

2. Being competitive in generation
There are now many examples where the cost of renewable power generation has dropped, in some cases below $0.05/kWh, and many of these projects are in emerging gas markets. The cost of coal-fired power is also falling to compete with gas-fired generation. The importance of environmental drivers in developing countries – given the competing priorities – is open to question. Gas-fired power has the flexibility to be better-positioned than coal in markets with high levels of renewables, but greater spare capacity means higher average costs. Small-scale LNG projects could help manage costs during the early stages of developing gas markets, but markets typically need in excess of 1 GW demand before LNG-to-power can be considered be economic. LPG could also play a role in kickstarting gas markets in smaller countries. It often already has a well-established infrastructure in place and adding LPG-fired power generation to boost demand (which can be easily replaced by natural gas when scale allows) is possible.

3. Lessons can be learned from more developed gas markets – e.g., Egypt, India and Pakistan
In the above-mentioned countries, it took major power blackouts for governments to consider the benefits of building LNG import infrastructure and gas-fired power projects, with speed of development and reliability of such projects being key to the selection of gas. Other countries may also choose (or be forced) to wait until such time as the lack of available power becomes critical and politicians have to then act. But the power sector is not the only potential key driver. If the right incentives are provided, then gas supply to the industrial sector can bring many more benefits to countries. Simple changes in policy – perhaps reflecting the environmental properties of gas against coal – can have a big impact on markets such as seen in India and China, and may be needed to help kickstart gas market development.

Global gas demand

Conclusions

Implementation difficulties may be manageable if the challenges related to governments and state-owned enterprises can be overcome. Some key areas where challenges can be better managed include:

  • Scale – rather than trying to force large infrastructure on developing markets, why not build more robust demand through small-scale or modular projects or even LPG, which can be switched to larger scale or more economic gas supply when scale allows?
  • Full and transparent costing – gas can displace more expensive oil products, but the true costs include the likes of add-on benefits of growth beyond anchor demand projects, low environmental impact compared with coal, and flexibility versus renewables.
  • Policy – policies can be put in place that will promote the use of gas in the industrial sector and can be taken into account when developing larger power projects. Rapid changes in technology will not then have to wait for the necessary policies to be in place before being implemented.

Detailed planning and wider cross-energy sector studies will continue to be helpful on the above aspects. But the traditional 'cookie-cutter' approach will not work and there is more that all players can do in considering the particular issues affecting each of these emerging markets that will help to develop and grow their gas economies.

QED Consulting provides a comprehensive consultancy service to the international gas and LNG industry specialising in strategy implementation, project realisation and negotiating commercial agreements: www.qedgas.com; consult@qedgas.com