Africa: Natural Gas and Fertilizer Sector Outlook

Feb 27, 2017

Introduction

Africa’s burgeoning population, economic growth potential, and rich endowment with energy resources combine to render the region a hotspot for significant global gas supply and demand growth.  Just 17 percent of the world’ s population lived in Africa as of 2015, but according to United Nations projections, more than half of global population growth between now and 2050 is expected to occur in Africa.  To feed, clothe, and transport the additional 1.3 billion people that will be added in Africa through 2050 will take vast amounts of energy; to increase their standard of living to the levels currently enjoyed by developed Western economies will require more yet.  Today, the region’s energy use – particularly natural gas – is fairly modest relative to the size of its population.  Uneven wealth distribution, a lack of creditworthy offtakers to support large-scale gas-based projects, limited infrastructure, political instability, and the uneven distribution of indigenous energy resources are just some of the factors that have hampered the uptake of natural gas in the region’s energy supply mix.  Improved gas supply availability  is essential for Africa to develop economically and produce a higher standard of living for its inhabitants, but political and regulatory stability are critical for the development of additional gas supply outlets in the region, including fertilizer projects, wherever such projects are economically viable.

Africa’s Natural Gas Production

Figure 1 – Africa’s Gas Production*

*Figures to 2015 are final; 2016 figures are projected.  Source: Nexant’s World Gas Model

Africa’s gas production, illustrated in Figure 1, is quite small in light of its proven reserves base.  Despite having more than 14 trillion cubic meters of proved reserves as of end-2015 (almost 500 trillion cubic feet; eight percent of the global total), output in 2015 was just over 210 billion cubic meters (bcm), or less than six percent of world output that year.  The bulk of regional output originates in North Africa (70 percent), thanks largely to Algeria and to a lesser extent, Egypt.  West Africa is the next-largest regional producing province, with the credit going largely to Nigeria.  In recent years, Africa’s gas producers have experienced marked supply fluctuations owing to a myriad of factors: a lack of investment partly attributable to an uncompetitive commercial/regulatory environment (Algeria, Egypt, and Nigeria), and security concerns (Algeria, Libya, and Nigeria, although the risk profiles of each country are very different); and technical issues (Angola, albeit related to its LNG plant).

Regional output is projected to grow by 60 bcm through 2025, as new production centers emerge in West Africa and East Africa.  Capacity additions are expected in parts of North Africa, but even with forecast Algerian and Egyptian production increases, North Africa’s share of regional output falls on the back of gains elsewhere on the continent. Algeria keeps its position as Africa’s premier producer, but Egypt, Mozambique and Nigeria have the most buoyant prospects over the forecast period. 

  • In Egypt’s case, some of these gains are “spent” on recovering the footing lost between 2010 and 2014. 
  • For Nigeria’s part, forecast production gains will require the establishment of a of a more enabling regulatory\commercial structure for Nigeria’s gas sector.  Price reforms, improvements in regulatory arrangements, a redefinition of the role of public companies in the gas sector and an alternative to the current Nigerian National Petroleum Corporation (NNPC) joint venture financing model are urgently needed. Failure on this front will adversely affect the supply outlook. 
  • Mozambique’s outlook is predicated on the startup of at least two individual LNG export projects in the 2020s.  In the longer term, East African production rises further as export capacity is planned to be commissioned in Tanzania, but this occurs beyond the scope of the forecast period.

Africa’s Natural Gas Consumption

Natural gas accounted for just 28 percent of the region’s primary energy mix in 2015, coming in a distant second to oil.  North Africa dominates regional gas use, with Egypt and Algeria accounting for over two-thirds of regional consumption in 2014, followed by West Africa.  This is, of course, attributable to these countries’ access to gas: although Algeria and Nigeria are large gas exporters, they used their export sectors as springboards for domestic gas sector development and growth.  In recent years, however, domestic needs have superseded export commitments in countries like Egypt, whereas terrorist activity in Nigeria has disrupted gas deliveries to the Bonny liquefaction plant.    The governments of these key regional gas producing centers face the dual challenge of ensuring affordable energy for their populations while offering sufficient incentives for upstream investment, which in the past have been sorely lacking.

Figure 2: Historic African Gas Consumption*

*Figures to 2015 are final; 2016 figures are projected.  Source: Nexant’s World Gas Model

Looking ahead, Nigeria and Algeria have the most robust consumption outlooks, followed by Egypt, as shown in Figure 2.  However, the pace and trajectory of Nigerian demand growth is hostage to the formation of a coherent government policy regarding upstream and downstream energy investment, whereas Egypt’s growth is predicated, among other things, on the maintenance of political stability.   To that end, Egypt’s priority will be focused on procuring sufficient gas to feed the domestic sector, utilizing existing gas-based projects more fully and supporting the establishment of new projects, in the hope that doing so will bring growth and stability. 

Today, Africa’s power sector dominates regional gas consumption at over 50 percent, with the energy sector coming a distant second.  By 2025, power generation’s share of regional gas use rises to about 55 percent.  The power sector provides a solid foundation for the “gasification” of African countries where gas plays little to no current role in the primary energy mix, especially in Sub-Saharan Africa: as a large consumption base, the power sector is the favored mechanism for initial African “gasification” initiatives, but the right regulation and prices are essential for success.  Throughout Africa, robust economic and population growth outlook are key driver, as well as growing access to gas in areas with no or limited previous prospects (e.g., East Africa and South Africa). Despite demand gains by the energy industry on the back of rising regional hydrocarbon output, the industrial sector supplants it as the region’s second-largest end-use sector by the end of the forecast period.   This is shown in Figure 3. 

Figure 3: African Sectoral Gas Demand, 2015 and 2025

Source: Nexant’s World Gas Model

Looking ahead, countries that will be primarily dependent on the export sector to realize their ambitious production plans will further benefit economically from the influx of competitively-priced gas to their domestic sectors.  Meanwhile, African countries with little to no resources of their own will be in a position to benefit from the development of new upstream gas reserves in neighboring countries, by exploring opportunities for cross-border pipeline gas or even LNG deliveries (where distance is too large to justify pipeline construction).  The “gasification” of more African countries is a driving force behind increased employment and infrastructure development.  For countries with undeveloped upstream resources as a supply base, it is also the means to achieve higher state revenues.

Nitrogen Fertilizer Outlook

The fertilizer sector consumes less than ten percent of Africa’s natural gas.  Africa uses relatively small amounts of ammonia, especially considering the size and population of the region, consuming an estimated 5.8 million tons in 2016. Urea demand in Africa is estimated to be close to 4.6 million tons in 2016, with around 90 percent utilized in direct fertilizer use for food production. Compared to other global developing regions, fertilizer consumption in Africa has increased only marginally over the past four decades.  The low use of fertilizer results in low crop productivity and, in turn, widespread food shortages and the rapid conversion of natural habitats to farming. 

In order to address this challenge, African leaders adopted the Abuja Declaration in 2006, calling for increasing average fertilizer use in Sub Saharan Africa (SSA) from less than 10 kilograms per hectare (kg/ha) to at least 50 kg/ha by 2015.  However, this goal was missed by a considerable margin: by 2014, the application rate was less than 20 kg/ha in Africa.  Fertilizer application rates per hectare in SSA are the lowest in the world at an equivalent of three percent of Asia’s and nine percent of North America’s application rates.

The consumption of fertilizers is two to three times lower than required in order to meet the needs of the agricultural sector in Africa, resulting in soil nutrient depletion, low agricultural productivity, increasing population and declining arable land per capita and climate change.  However, Nexant believes that fertilizer demand growth is inevitable in light of forecast population increases and higher gross domestic product (GDP) growth rates, which translate to higher crop demand.  The vast availability of potential farming land also bodes well for an increase in domestic crop production.  Africa’s urea requirements are expected to grow at an average annual rate of 2.5 percent during the next decade. 

Ammonia capacity in Africa stands at about nine million tons while urea capacity stands at about 8.5 million tons, with Egypt alone hosting more than 50 percent of regional capacity.  Despite being self-sufficient in urea, as shown in Figure 4, Africa is likely to add new capacity in countries with access to plentiful sources of gas supply, most likely in North Africa and West Africa.   On Africa’s east coast, which is a frontier hydrocarbon province, there is growing interest in monetizing new gas finds and increasing the continent’s fertilizer consumption.  

Figure 4: Africa Urea Supply Demand Balance

However, new projects in Africa develop slowly due to political and security uncertainties, an onerous bureaucracy, limited access to finance, and in some cases, concerns about access to competitively-priced feedstock.  For example, several fertilizer ventures have been announced in Egypt and Equatorial Guinea over the past year, but the timing and success of these endeavors is predicated on access to competitively-priced natural gas.  In countries like Egypt, which has resorted to importing liquefied natural gas (LNG) to augment supply until new fields enter service, project development is ultimately contingent on the resolution of ongoing supply issues.  Looking ahead, Nexant expects Africa will add about one to two million tons of ammonia capacity and urea capacity over the next ten years.  The bulk of Africa’s new capacity (over 70 percent) will be located in Egypt, whose current gas supply issues will be mitigated by the startup of the Zohr gas field.  Recent African fertilizer project activity (based on publicly available information) is listed in Table 1.

Table 1: New Ammonia/Urea Projects in Africa

Company

Location

Capacity

Status

Start-up/
Expected Start-Up

Comments

Misr Oil Processing Company

Damietta, Egypt

650 kton urea, 400 kton ammonia (MOPCO-2)

Operating

December 2016

 

 

 

650 kton urea, 400 kton ammonia (MOPCO-1)

Operating

June 2015

 

Indorama Eleme Fertilizers & Chemicals

Port Harcourt, Nigeria

1.4 million tons per year urea, and 820,000 tons per year ammonia

Operating

March 2016

 

Brass Fertilizer & Petrochemical Company

Brass Island, Nigeria

1.3 million tons per year urea, 790 000 tons per year ammonia

Construction

Post 2020

 

Riaba Fertilizers

Riaba, Equatorial Guinea

1.5 million tons ammonia/urea complex

FEED completed; Technology not selected yet

Post 2021

Likelihood of materialization is low due to gas issues

Chemical Industries Holding (Kima)

Aswan, Egypt

430,000 tons per year ammonia plant, 576,000 tons per year urea

Feasibility stage

Post 2021

Likelihood of materialization is low due to gas issues

Egypt Basic Industries (EBIC)

Sokhna, Egypt

720,000 tons per year ammonia plant

KBR ammonia technology selected

Post 2021

Gas shortages in Egypt may delay project

While new gas supplies for Egypt could be used to develop new ammonia/urea plants, existing end-users will most likely have priority for the allocation of incremental volumes.  Given the growing volume of urea available for global trade, it will remain a challenge to secure financing for new ammonia/urea projects in Egypt until the market and prices recover.  Hence, Nexant maintains a conservative outlook towards ammonia/urea capacity additions in Africa over the next decade.

Egypt serves as an interesting case study for Africa’s fertilizer sector.  Like many countries in the region, it is endowed with rich gas resources, but a historic lack of economic incentives for producers, coupled with political instability and surging domestic demand bolstered by subsidized prices, resulted in a growing mismatch between indigenous supply and consumption over the last decade or so.  A lack of incentives for upstream producers affected the scope of exploration in the country, whereas the political instability engendered by the Arab Spring acted as a further deterrent for upstream investment. 

The resultant gas shortages induced the cessation of Egyptian pipeline gas and LNG exports; indeed, Egypt was forced to start importing LNG in 2015 to bridge the gap between supply and demand.  However, the outlook for Egyptian gas supply is fairly robust, thanks to the re-establishment of political stability and greater investor confidence.  The 2015 discovery of the 30 trillion cubic feet Zohr gas field provided a much-needed boost for the country’s upstream sector; undoubtedly, it is hoped that additional discoveries will provide further security of gas supply.  The possibility also exists for Egypt to augment domestic production with imports from neighboring Israel and even Cyprus, thereby diversifying and broadening the country’s supply base. 

Prepared by:

Nelly Mikhaiel, Senior Consultant, Nexant, nmikhaiel@nexant.com, 914-609-0315

Priyanka Khemka, Consultant, Nexant, pkhemka@nexant.com, 914-609-0320