About two years ago I was deeply involved in some LPG project concepts for Africa. Already then I pointed out to my clients that I would go for LNG straight. But they had their reasons to stick with LPG so I made sure they understood my reservations and I went to work.
At the time, the world was already well into LPG oversupply mode due to the massive US shale revolution. Africa was to be one of the places where new LPG supply was – in principle at least- in high demand. Plus, there was a sense among Africans that there would be no easy alternative to LPG if an energy solution for their continent was to be clean and quick.
Yet, the problem, as so very often in Africa, was and still is infrastructure. On top goes a certain attitude when it comes to strategic thinking. Compared to their “Rest-of-the-world” brethren, African LPG terminals are paltry. Their harbors are shallow and their markets are underdeveloped. Not to forget, supply lines into the hinterland are patchy. The only thing that’s big there is a hunger for more of what they know- LPG, Kerosene, and diesel.
But what they really want is heating, light, cooking, and power. All things not only LPG provides with only a modicum of air pollution. In fact, LPG has always been something of an exotic side product in the history of hydrocarbons. It’s a leftover from either oil or Natural Gas production. It’s in use in regions or countries where Natural Gas has not gone – for whatever reason.
Africa is big in this with its underdeveloped infrastructure. It’s the only big region where LPG still plays a fundamental role. It does so in any country below the Sahara desert and wherever you go.
Natural Gas would be a much more potent option if only it were accessible to those people. For decades, all kinds of LNG and pipeline proposals have aimed at bringing Natural Gas to the African customer. Only in the rarest of cases, any such project has been realized at all. One of those notable exceptions is the gas supply pipeline from Mozambique to South Africa. It’s a puny line but its there and it works. Hard to say the same about the West African Gas Pipeline.
Up until a few years ago, the problem (and the excuse) was the lack of supply. But already in 2012, it became obvious to the informed observer that the scarcity will give way to oversupply eventually.
In 2014 this did result in the hardest oversupply situation in Natural Gas and most notably LNG the world has ever experienced. Speculation on the continuation of the bubble was rampant before the bubble burst. Everyone thought LNG would be hard to get and very expensive for the next decades. So, Africans did not even try.
Now, it’s the suppliers that are in horrible pain as they cannot get rid of their wares anymore. The supply of LNG is going to grow for the next couple of years. No prospect for an easing on the horizon.
LNG producers have come to the realization that they will have to develop new markets to ease the pressure on them. Now you have some of them spending time and money trying to get some of those regasification projects in the farther-flung places of the planet off the drawing board and onto a firm Project Schedule. Plus they are also looking for ways to make their economic existence worth the investors while. They develop power plants. That’s business development.
There were always LNG projects for African countries. Look at the South African regasification plant proposals. Yet, nobody expected any of these to get realized quick enough. This is Africa in the end and there is a good reason why the continent is so dark at night pictures. Things take an awfully long time there if they ever get realized at all.
One thing I learned early on was that it helps if an outside player takes things into his hands. The African market is usually not worth that level of involvement to non-Africans.
Not anymore. LNG players are starting to fall over themselves in their quest to open as many new African LNG markets as quickly as they can. They are facing huge volumes of uncommitted LNG and must create more absorption capacity to manage that. The hitch is that exactly those LNG projects might provide the death knell to any hopes the LPG producers might have had in the continent.
Ghana is the first sub-Saharan African country to have realized LNG – now there are plans for more. South Africa looks very much like a front runner. Let’s imagine one or two LNG projects going operational in the country. They would bring an awful lot of new gas into the country. This would immediately ease that power shortage. And it might be precisely the thing that takes the commercial edge off and new LPG project in the country. LNG is usually only a precursor for even more gas.
So, LNG finally does the right thing for themselves. When is LPG going to start?
Make no mistake. This is a replacement war as the cheaper LNG will eventually try to squeeze everything more expensive out. And LPG is more expensive on a USD/MMBtu basis than LNG is. Easy target then.
One of the few remedies is concentrating on markets where LPG still has an edge. Namely on the markets where people still want to be able to bring their gas-bottle home to cook and heat. That’s hard to do with gas as it needs distribution networks and those need a lot of time to build. But make no mistake. When the pressure on LNG markets gets bigger, LNG distribution and small-scale LNG use will crank up into creative. The technology is there – it needs someone to make it happen.
And as I said, those players exist in Natural Gas. Not so in LPG, it seems, as this industry still runs on business as usual and as if the oversupply did not exist at all.
If LPG producers don’t take initiative, LNG developers will snatch away their last big hope for a new market. And they will have only themselves to blame.