01 POWER ISLAND / 01 CCPP / DOE__Understanding Natural Gas and Lng Options October 11 2017_1

INTRODUCTION

LNG exports are poised to be an important catalyst for economic growth in African countries. Natural gas and LNG development can enable economic development and stimulate further investment in national infrastructure.

The recent large offshore natural gas discoveries in Africa have focused the attention of the international oil and gas industry on large LNG export projects that are essential to monetize these resources. Large offshore resources are expensive to develop and projects may not be able to clear investment hurdles if dedicated solely to the domestic gas market. Developing an LNG export project and reserving a portion of the gas production for the domestic market - with the full support of the host government - can make natural gas available for local use in addition to earning revenue through export. This can enable the development of a diverse market for gas including power generation, local and regional industrial and commercial enterprises, transport, feedstock for petrochemical manufacturing, and other domestic uses of gas for the local population. LNG imports could also enable the development of domestic

gas markets. . Floating Storage and Regasification Units (FSRU’s) are increasingly being used to provide a flexible, effective way to receive and

process shipments of LNG to meet gas demand in onshore markets or as a temporary solution until domestic gas is developed or onshore facilities are built.

This handbook attempts to cover a broad spectrum of topics involved with developing and financing an LNG project, covering in depth the considerations for an LNG export project and development of a diverse domestic market. The book also addresses LNG import projects for intraAfrica LNG sales as an alternative to country-to-country pipelines. We discuss the decisions that need to be made and the lenses through which to view the factors leading to these decisions. Each country will need to make its own decisions based on its specific national priorities, trade agreements, GDP goals, and assessments of changing political and market dynamics.

In the following chapters, the reader will find overviews of the global gas market, LNG and domestic gas value chains, and domestic and interconnected regional markets for LNG and natural gas. We discuss project structure, government roles, capacity building, LNG export project development, environment, social impact, and safety.

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INTRODUCTION

We also review pricing, contracts, financing, risk management, local content, LNG import projects, and new and emerging markets and technologies for natural gas and LNG - touching on successes from other markets such as the EU, Asia and the U.S. that might inform future natural gas and policy decisions in Africa

This reference is not intended to be comprehensive and African governments would also likely need to employ the services of experienced advisors in legal, contractual, financial, technical and strategic areas. This advice should be directed at rapidly promoting the training of governmental staff, using all means available, including well-established academic institutions that focus on the oil and gas or LNG sectors.

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GLOBAL GAS MARKET

Introduction

Global gas demand has increased over the past decade and is expected to grow rapidly into the future with increased interest by governments in clean energy to fuel economic growth. Historically, most natural gas has been sold locally or by gas pipeline to adjacent markets. Liquefaction of natural gas into LNG allows the gas to be transported from

LNG History

In 1959, the world's first LNG carrier, the Methane Pioneer, set sail from Lake Charles, Louisiana with a cargo of LNG destined for Canvey Island, UK. This first ever U.S.-UK shipment of LNG demonstrated that large quantities of LNG could be transported safely across the ocean, opening the door for what would become the global LNG industry.

As the LNG markets evolved over the decades, they tended to develop in regional isolation from each other, primarily due to the high cost of natural gas transportation. Historically, two distinct LNG trade regions developed - the Asia-Pacific region, and the Atlantic Basin region which included North America, South America and most of Europe. Until Qatar began to export LNG to both regions in the mid-1990s, the two regions were largely separate, with unique suppliers, pricing arrangements, project structures and terms. In recent years, the increase in inter-regional trade, as well as the development of a more active spot market, has tended to blur the distinction between the two main regions.

There are three main global gas markets: the Asia-Pacific region, the European region, and the North American/Atlantic Basin region which includes North America, South America, and Latin America. The Asia-

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GLOBAL GAS MARKET

Pacific region has historically been the largest market for LNG. Japan is the world's largest LNG importer, followed by South Korea and Taiwan. China and India have recently emerged as LNG importers and could become more significant buyers of LNG over time.

The growth of LNG in Europe has been more gradual than that in the AsiaPacific, primarily because LNG has had to compete with pipeline gas, both domestically produced and imported from Russia. The traditional European importing countries include the UK, France, Spain, Italy, Belgium, Turkey, Greece and Portugal. A growing number of European countries have constructed, or are planning, LNG import terminals, including Poland, Lithuania, and Croatia.

In North America, the United States, Canada and Mexico have strong pipeline connections and abundant supplies of natural gas. Historically, this region had been able to supply virtually all of its natural gas requirements from within the region. During the supply-constrained 1970s, however, the U.S. began importing LNG from Algeria and four LNG import terminals were built between 1971 and 1980. The 1980s was a period of oversupply and U.S. LNG import terminals were either mothballed or underutilized.

In the late 1990s, the United States was forecasting a shortage of natural gas, which led to the reactivation of the mothballed terminals and the building of additional import terminals, including Cheniere Energy's Sabine Pass. But by 2010, it became apparent that the U.S. would be a major shale gas producer, making LNG imports unnecessary. The cargoes that were to be sold in the U.S. were then available to be sold on global markets. Many of the existing U.S. import terminals are now being repurposed as LNG liquefaction and export terminals.

In February 2016, Cheniere Energy's Train 1 came online, thus heralding a new wave of LNG supply. As of early October 2016, DOE had issued final authorizations to export 15.22 billion cubic feet per day (Bcf/d) of U.S.

Lower-48 States domestically sourced natural gas to non-FTA countries.

The following table shows the U.S. large-scale projects that have received regulatory approvals and are under construction or operating as of August 2017.

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GLOBAL GAS MARKET

Supply and Demand Balance

In 2016, global LNG trade accounted for258 million metric tonnes perannum (MTPA). Also in 2016, there were 34 countries importing LNG and19 countries that export LNG. In terms of the global supply balance for LNG,the key features of the last few years have been: 1) the emergence of theU.S.

as a major LNG exporter, potentially adding more than 60 MTPA toglobal supplies; 2) the completion of a number of major LNG exportfacilities in Australia, which will soon achieve a nameplate capacity of about85 MTPA; 3) slower than expected demand increase from Asian markets, and 4) new gas discoveries, particularly large discoveries in frontier regionsThe. confluence of these four factors, which continue to evolve, has createda short-to-medium term situation of material LNG oversupply. Oversupply is depressing spot and medium term prices for gas that has not already been contracted. In addition, a major portion of the LNG market has long-term contracts indexed to oil pricesand oil priceshave also dropped significantly. All these factors have created a difficult environment to develop greenfield LNG export facilities.but has increased demand for LNG.

For excess LNG that has not been contracted on a long term or destinationspecific basis, prices in most key consuming markets, such as Europe or Asia, have fallen from a high of $10-$15 per million British thermal units (MMBtu) to below $5/MMBtu at times for certain destinations, and while this remains above the marginal cost of production for some projects, it typically falls well short of the whole-life costing of an LNG project, once amortization of capital and loan repayments are taken into account.

For a gas/LNG project developer/investor or host government, one of the main challenges is to determine when a rebalancing of gas markets might take place, as this would have implications on LNG price projections and a project's economic viability. Opinions vary on when, and in what manner LNG global markets will rebalance. Even if a number of the existing LNG liquefaction terminals, either in production or under construction, take steps

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GLOBAL GAS MARKET

to re-phase their output or delay completion to realign with market demand, it appears likely that the market will continue to be oversupplied at least into the early 2020s. If development plans proceed, based on the completion dates and FID decisions currently quoted in investor's and press materials, the oversupply could continue through the next decade. While commercial and financial pressures suggest that some kind of shorter term realignment will result, it is not yet apparent how this realignment will happen, and what the implications are for African gas and LNG projects.

The charts below indicate two possible realignment scenarios, based on a prompt (short term) market realignment, or a longer term oversupply. The red bars represent the amount of global LNG oversupply in MTPA.

Source: Gaffney, Cline & Associates

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GLOBAL GAS MARKET

Opportunities for Africa Natural Gas

Several countries in Sub-Saharan Africa are on the cusp of emerging as major natural gas producers. Mozambique and Tanzania recently have discovered more than 250 trillion cubic feet (TCF) of gas reserves. Nigeria and Angola are also important gas producers. The huge shortfall in power supply in Africa, coupled with the relatively high cost of electricity based on the high cost of available fuel in many African countries, presents a new opportunity for natural gas and LNG imports to fuel the projected growth of African economies.

In September 2016, the U.S. Power Africa Roadmap report outlined a goal to increase power generation in sub-Saharan Africa by more than 30,000 megawatts (MW) by 2030. This translates to about 5.5 bcfd of additional natural gas consumption or about 42 MTPA of LNG, assuming natural gas is the fuel of choice. This is equivalent to the growth of LNG observed in China and India during a similar timeframe in the recent past. Similarly, the African Development Bank Group has set an aspirational vision to achieve universal access to electricity by 2025. This vision is encapsulated in the New Deal on Energy for Africa.

The domestic natural gas prices in many African countries are quite competitive. The prices are mostly established by bilateral negotiation between buyers and sellers and are usually indexed on alternative fuels such as crude oil or petroleum products, as in the case in Ghana, Mozambique, and Nigeria. The natural gas prices range from about $1.21/MMBtu in Mozambique for industrial customers to around $8.4/MMBtu for power generation in Ghana, with gas prices in Nigeria falling within the range.

The emerging African natural gas markets will attract pipeline gas and LNG in the near-to-medium term.

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