Emerging gas markets – Challenges for investors

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.

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.

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.