GPSOG: Changes in the gas market and implications for Senegal

The complex energy context, accentuated by climate issues and societal pressure to limit greenhouse gas emissions, has led most industry players to implement strategies to achieve carbon neutrality by 2050.

However, achieving carbon neutrality requires huge investments and disruptive innovations both technically and economically, thus requiring a transition solution. In our first contribution (www.gposg.net), we highlighted how liquefied natural gas (LNG) could be a solution to accompany this transition. The increase in its production and consumption are factual indicators of the interest it is arousing, especially in Asian countries where 70% of world production is absorbed by just three countries, namely China, Japan and South Korea.

The second part of this paper presents a prospective analysis of the global gas market. It then focuses on Africa's place in the current and future market configuration. Finally, it discusses the environmental benefits of using LNG in all sectors of energy production.

Remember that natural gas, by its nature and physical properties, emits about 20% less CO2 than oil and coal. In addition, its sulfur dioxide (SOx) and nitrogen (NOx) emissions are virtually zero.

It therefore has a crucial role to play because in reality in the short and medium term, the scenario of the "Green deal" (consisting of carbon neutrality by 2050), to the "Gas deal" (energy transition strategy focused on the development of natural gas) seems the most likely and most realistic for developed countries and those under development.

Developing states and their industries should also opt for traditional low greenhouse gas emission fossil resources such as natural gas, as this type of resource would allow us to maintain the high level of electricity production we are used to without directly impacting the economy of these countries.

Soaring gas prices and outlook
World natural gas prices have reached record highs in recent months. The strong recovery in consumption and the post-CVID economy is one of the reasons for this, but not the only one. It also reflects the interest in natural gas to accompany this strong recovery of the global economy. In addition, this surge in prices and the overall dynamism of the LNG market can also be explained by the strategy of countries such as China to drastically reduce CO2 and fine-particle emissions in the near future. Finally, the increased liberalization of the LNG market could explain this price surge.

LNG purchase and sale contracts are traditionally based on the principle of a "long term contract", i.e. a supply contract between operators and buyers established over the long term (15 to 20 years) on the basis of a more or less fixed selling price over the duration of the contract. This type of contract ensures a certain visibility for all players in the value chain (production, transport, consumers).

However, in recent years we have seen the development of other types of contracts such as "spot" and "short term" contracts.

 The "short term" is like the long term contract, a purchase and sale contract but over a very short period (on average 5 years). It allows us to meet a supply need over a short period of time.

Spot trading is very liberal in nature. It concerns the trading of loaded LNG cargoes that do not have a specific destination. These cargoes are put up for sale on the financial market to be sold at the highest price to the highest bidders.

Asia is now the epicenter of the spot market and the share of this type of trading is increasing year by year in the global LNG trade. In 2020, spot and short term trading accounted for 40% of global LNG trade. It is expected that their share will exceed that of long-term contracts in the coming years and even become the norm.

The analysis of gas prices on the European and American markets shows that their trends are strongly linked to the evolution of spot prices in the Asian zone. This shows that today it is Asia that dictates gas prices as illustrated in the figure below. Europe and the USA unfortunately have no control over the evolution of these prices, given their low impact on LNG imports.

Indeed, China, with an energy mix of more than 80% coal and oil, and only 7% gas, has set itself the goal of carbon neutrality by 2060. To achieve this, it has decided to increase its LNG imports exponentially by multiplying its partnerships with major LNG producing countries such as Australia and Qatar, which are respectively the first and second largest LNG producing countries. This prospect belies the predictions made a few years ago that the LNG market would decline slowly and steadily after 2030, in line with the ambitious decarbonization plan to which the European Union is committed to achieve carbon neutrality in its energy mix by 2050.

An analysis of the current market gives a very different outlook. According to Morgan Stanley, the increase in LNG imports over the next decade is expected to be the fastest in the history of oil and gas, and we will eventually see the construction of more LNG tankers (vessels carrying LNG) than oil tankers.

Forecasters expect LNG production to double by 2030 compared to 2020 to meet the strong demand from the trio of China, Japan and South Korea, but also from powers such as India, Pakistan and all the countries of South Asia that are in the process of transitioning from coal to a less polluting energy.

Also in this perspective of decarbonization, LNG operators and producers intend to appropriate CO2 capture technologies in order to produce and transport carbon neutral LNG cargoes. We are probably witnessing the golden age of LNG.

The place of Africa in LNG and what strategies have been adopted?
In addition to Australia, Qatar and the United States, which are the top three producers and exporters of LNG in the world, new players such as Malaysia and Algeria have also become leading producers in this sector. Also since 2017 and the start of operations of the Yamal LNG project by Novatek, Russia has shown significant ambitions in this sector. Nevertheless, the high gas prices of the early 2010s have favored the emergence of new players that may challenge the traditional hierarchy in the LNG market.

Among these new competitors, the African continent is undoubtedly the one with the greatest potential for growth in the years to come. Thus, the African gas sector is characterized by a considerable amount of reserves that are not recorded because they are associated with oil fields and are generally flared. Officially accounting for only 2% of the world's reserves, Africa therefore possesses untapped potential located mainly offshore. For years, only Nigeria and, to a lesser extent, Cameroon have exploited their associated gas reserves. Recently, two large gas fields have been discovered, one in East Africa straddling Tanzania and Mozambique, the other on the Atlantic coast in Senegalese and Mauritanian waters. These discoveries have highlighted the potential of the African continent to become a major LNG player. Investors are all the more interested as the projects are extremely competitive in terms of costs and also benefit from favourable geographical proximity to the European and Asian markets.

However, the new African LNG producing countries are facing huge challenges. Indeed, the majority of operators operating on the continent are often European and are fully committed to the European "green deal" strategy consisting of carbon neutrality in 2050 with a drastic reduction of investments in the hydrocarbon sector. This lack of interest by European majors in new gas projects, and even in those underway, is due to the additional costs that the energy transition will impose and which could jeopardize the profitability of projects. We are already witnessing several withdrawals and disposals of oil and gas fields in Africa by certain operators. Projects such as GTA present a strong risk of demobilization
on the part of the operator. This raises the question of the gas strategy of countries like Senegal and Mauritania.

It is obvious that African gas producing countries have no interest in aligning their strategies with those of European countries which are in a carbon neutrality logic. Africa is not ready to go down this road.

The strategy adopted by some Asian countries would seem to be more in line with our realities. The solution to the development of the gas sector on the African continent could, for example, be a strong and strategic partnership with Asia, whose LNG needs are enormous and whose prices would allow producing countries to maximize their gas revenues.

Another strategic parameter that gas-producing countries must master is the trading of gas resources and the development of a strong and dynamic gas ecosystem that would be able to absorb part of the country's gas production for industrial development and the transformation of other raw materials.

Versatility of LNG and its interest in the growing energy demand
While LNG is mainly used in power generation, residential heating and as a feedstock in industry, its use has gradually expanded to include shipping and road transport. Today, although LNG is still marginal, there are more than 170 commercial ships using liquefied gas as fuel. There are two reasons for this recent surge in LNG use.

Firstly, LNG has become considerably more competitive in recent years. The introduction of non-conventional gas production in the United States has led to a significant drop in world prices. As a result, heavy fuel oils and diesel have lost a large part of their advantage over LNG, especially since the latter is supported by the government through an accommodating tax system.

Secondly, liquefied gas is much more environmentally friendly than conventional fuels, while shipping and road transport is a sector where carbon dioxide (CO2) emissions are extremely difficult to reduce. In an effort to preserve air quality (especially on the coast) by reducing air pollutant emissions from ships, the International Maritime Organization (IMO) has mandated a reduction in the sulfur content of ship fuels from 3.5% to 0.5% by January 1, 2020. This change in environmental standards makes LNG particularly attractive because it emits almost no sulfur (SOx), little nitrogen oxides (NOx) and nearly 20% less CO2 than heavy fuel oil. This also explains
the recent popularity of this fuel, particularly on the part of cruise lines whose ships, which operate near the coast, are directly targeted by reductions in emission standards.

Nevertheless, infrastructure must be built in parallel with fleet development to ensure the physical availability of LNG in supply chains. In road transport, the lack of infrastructure is also a barrier to the growth of this fuel. Although, thanks to government support (especially in China, Europe and North America), infrastructure is developing rapidly. At present, LNG remains marginal in the transport sector, but could experience strong growth in the years to come.

Our third and final contribution will address the challenges Senegal will face and recommendations will be proposed to address them.
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The Group of Senegalese Professionals of the Diaspora on Oil and Gas (GPSOG) gathers Senegalese professionals of the hydrocarbon sector who work in the Diaspora (America, Europe, Asia, Africa) and who work in the private sector, think-tanks and in international organizations. GPSOG's ambition is to put this Senegalese expertise of the Diaspora at the service of the country for an optimal management of natural resources for the benefit of present and future generations.