Demand During Crisis

The last article we published titled “Crisis Presents Opportunities”, outlined that the current low gas price environment, brought about by oversupply and weak demand, presented an opportunity for price sensitive buyers to enter the LNG market.

Furthermore, the main limitation for these buyers is infrastructure. Hence, there is an opportunity to use spare capacity in the market to help stoke demand from these buyers. At the Solomon Peter Group, we work with clients in Latin America, the Caribbean and Africa who are extremely price sensitive, but have ambitions to use LNG to both save money and provide supply security.

However, the big question is, if demand globally has taken a downturn, then demand in these countries would have been adversely impacted as well?

Fast Moving Consumer Goods

The answer is yes; demand as a whole has declined, however some individual sectors have not. Globally, demand from sectors like Fast Moving Consumer Goods (FMCG) has been growing as consumers line up, 2 meters apart, to buy, and in some cases over-buy, groceries and supplies.

To service this demand, stores are consuming more power due to increased refrigeration, lighting and longer opening hours, which in turn increases energy intensity.

Furthermore, in certain developing nations, reduced public services such as transportation has resulted in people flocking to local stores for goods, increasing off-grid energy usage.

Internal Infrastructure

In places with limited internal gas and/or electricity grid connectivity, diverting fuel and power from one sector to the next or one region to the next is not always possible. Hence the switch in demand must be addressed as organic, incremental demand.

Admittedly, one could increase domestic gas output where possible. Yet, in some cases the domestic gas network doesn’t have the necessary infrastructure to service these demand centers. Moreover, in this low oil price environment, where producers are seeking to manage their finances, supply from associated gas fields are likely to be reduced because of lower oil production.

For example, in sub-Saharan Africa, thermal generation is the secondary source of electricity generation, second to hydro. Despite available generation capacity within some countries in the African sub-continent who solely rely on gas fired thermal generation for their energy needs, growth is being stymied. The main reason for this under-utilisation is a lack of feedstock due to insufficient gas-processing and pipeline infrastructure. Adding to this challenge is low domestic gas prices, which result in new investments in gas infrastructure being uneconomical.

However, on a micro, intra-country level, depending on the location of the power plants and transmission lines, some power plants could be used promptly to generate additional electricity if they had access to additional gas.

Solution

In the short term, LNG could be utilised to supply incremental demand in the FMCG and power sectors via utilising excess pipeline capacity, where possible, and small-scale LNG trucking to supply off-grid demand. 

Similarly, in the mid-term post-Covid-19 pandemic, LNG could be used to supply more power plants with excess capacity; however, this would depend how much gas prices adjust upwards.

Conclusion

To conclude, the opportunities outlined above will not apply to every country in the sub-Saharan African block; rather that some countries possess mutually beneficial fundamentals that could be capitalized on immediately. Excess power capacity and growing demand both on- and off-grid present an opportunity not only for LNG suppliers, but also for Floating Storage Regasification Unit (FSRU) and distribution infrastructure providers.

As mentioned in our previous article, flexibility will be key to unlocking these markets. Flexibility in terms of duration, charter rate, payment terms and send out capacity. More specifically, suppliers with existing FSRU or distribution capacity would be most suitable.

In general, when growing a gas market, it is essential to reliably meet existing demand in order to instill confidence in gas as a secure, economical source of supply. In turn, this will incentivize domestic market participants to switch to gas in the short-mid-term or prompt governments to commence discussions about developing their domestic gas markets.

At Solomon Peter Investments we are engaging with interested parties to further discuss the opportunities. To find out more, reach out to [email protected]

1 Comment

  1. Matt Norman on May 19, 2020 at 1:23 pm

    Zavier, interesting article as usual. Fully agree regarding demand. As with many emerging economy projects, financial cguarantees are a challenge because LNG infrastructure is so much more costly than some other fuels.

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