Developing an African regional market for natural gas

The key to extensive international trade in natural gas lies in developing global integrated/substantial pipeline grids, and increasing Liquefied Natural Gas (LNG) fleet, where navigable water access is available.

Integrated pipeline facilities do not presently exist in much of the world, but are being built rapidly. By 1991, international gas trade was focused in North America, Europe and the Former Soviet Union (FSU).

By 1997, around 54% of world’s natural gas production was exported to world markets in the form of LNG, whereas only 19% of the world’s natural gas production was exported across any international border. However, there are new pipelines that are operating and some under construction in South-East Asia, South America and Africa. Also, there is a growing list of potential new transportation projects using natural gas.

Presently, the international gas markets are made up of three grids and seven isolated markets. The three grids are found in the NAFTA Zone (North American Free Trade Agreement) made up of US, Canada, and Mexico; Western Europe; and the FSU / Central Europe.

The seven isolated markets are found in: Brazil / Central South America (made up of Bolivia, Peru, and Argentina); the South American (Southern Cone) made up of Chile, Uruguay, etc; the Eastern Mediterranean; the Indian Subcontinent ; South-East Asia; North-East Asia; and the Coastal Trio (made up of Japan, South Korea, and Taiwan).

The foregoing would suggest the absence of an international gas market, and also the absence of an isolated African gas market. The absence of an international gas market is largely influenced by the fundamental factors that drive natural gas economics.

The most critical of these factors is the high cost and relative inflexibility of the transport systems required to get gas to market. High transportation costs and inflexible delivery systems have tended to isolate regional gas markets from one another, thereby making it difficult to create a ‘world gas market’.

The second major factor is that gas transportation costs also exhibit strong economies of scale. The higher the volumes, the lower the average unit cost of production. Consequently, in international gas trade, large gas discoveries and large markets enjoy substantial economies of scale over small gas discoveries and small markets.

Therefore, the critical drivers of natural gas economics are principally high cost of gas transport systems and scale requirements. Consequently, natural gas markets have historically developed first in countries with substantial natural gas reserves of their own, and later in countries with insignificant or no gas reserves but with large energy demands to justify importation of natural gas through international pipeline grid systems or through the LNG transaction, e.g. Japan, South Korea, Taiwan, etc.

The second observation relates to a lack of African regional gas market. The presence of substantial gas reserves in Nigeria, Libya, Angola, Mozambique, etc is enough stimuli for the development of an isolated regional gas market in Africa. Of all the African countries with gas reserves, Nigeria has far more natural gas reserves than all of the other countries combined. Therefore, the initiative to construct a regional gas market in Africa falls squarely on the court of the Nigerian Government.

There have been two initiatives from the Nigerian Government in this regard: the West African Gas Pipeline (WAGP), and the TransSaharan Gas Pipeline (TSGP) Projects. Both projects have experienced severe bottlenecks, not unconnected with funding problems, poor gas availability, and politicking. The priority for Nigeria at the moment would be to develop strong internal gas pipeline grids and harness the huge natural gas reserves to achieve the all-important goal of electricity generation.

However, it is also useful for the major gas nations in Africa to meet under the aegis of the African Petroleum Producers Organization (APPO) to establish modalities for constructing a functional African regional market for gas.

To achieve the desired objective, natural gas pipeline grids in Africa must be developed internally; within and between nations; and grids should be linked to target markets (electricity generators and industrial users, particularly those that use natural gas as a feedstock).

Achieving a regional natural gas market for Africa will thus alleviate the problem of electricity generation, reduce the demand for petroleum products, boost industrialization and increase Africa’s GDP, and minimize environmental pollution.