Home Energy Cross-border LNG project in Djibouti sees signs of life

Cross-border LNG project in Djibouti sees signs of life

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A PIPELINE agreement signed between Ethiopia and Chinese partners in February marks a key step forward in Djibouti’s efforts to develop a delayed liquefied natural gas (LNG) export terminal, and carve a niche for itself as a regional energy hub.

Under the agreement, Djibouti will import gas feedstock from its landlocked neighbour via a 700-km pipeline, to be processed and exported from an LNG terminal under development in Damerjog, near the border with Somalia. The project is slated to receive a reported $4bn worth of investment, $3bn of which will be carried out in Djibouti.

The area is already being targeted for development as a maritime hub, with work currently under way on a $70 million terminal for livestock.

Renewed focus on LNG project, cancellation of Horn of Africa pipeline

Both the LNG terminal and gas pipeline will be built by Poly-GCL Petroleum Group Holdings, a joint venture between state-owned China Poly Group Corporation and Golden Concord Group, a private energy services provider based in Hong Kong.

The joint venture inked a memorandum of understanding to construct the terminal in November of last year, though the project was originally scheduled to launch three years ago.

Renewed interest in the development follows the cancellation in January of another landmark energy infrastructure project, the Horn of Africa pipeline.

According to media reports in Ethiopia, the development was cancelled by the Ethiopian government, which is seeking to transport refined energy products via the newly completed, 750-km railway link, developed at a cost of $3.4bn with Chinese funding.

Financed by the African arm of US-based equity group Blackstone, the $1.6bn project, announced in 2015, included a 950,000-barrel storage facility in Damerjog, and a 550-km pipeline to carry processed oil products to Awash in central Ethiopia.

However, rail is not seen as a competing mode of transport for the LNG project, as liquefaction will take place at the Damerjog terminal on the Djibouti side of the pipeline.

Upstream development to provide feedstock for pipeline

Poly-GCL is also developing the Hilala and Calub fields, located in the Ogaden Basin in south-east Ethiopia, which will be the initial source of gas for the new pipeline. The group entered into an agreement with Ethiopia’s Ministry of Mines in 2013, and finished drilling appraisal wells and conducting exploratory work in 2016.

Poly-GCL had hoped to begin production at its Ogaden blocks in 2017. However, delays in finalising the facilitating infrastructure led the launch date to be pushed back.

Ethiopian officials said in February they now expected exports to begin flowing in 2020, with the pipeline’s annual throughput to reach around 12bn cu metres.

Recent company estimates suggest the blocks contain as much as 5trn cu feet of gas and the equivalent of 14m barrels of associated liquids, higher than previously thought.

These reserves should help secure the long-term viability of the LNG facility and export terminal, with any further finds serving to bolster the commercial potential of the project.

Demand growth in China drives LNG projects

China’s involvement in the Djibouti gas project and ongoing exploration in Ethiopia’s gas fields are motivated by rising domestic demand for gas.

Last year the country overtook South Korea to become the second-largest importer of LNG, behind Japan. LNG imports more than doubled to 38m tonnes, according to Thomson Reuters.

In addition to providing impetus for projects such as the Damerjog terminal, Chinese demand growth represents an important shift in the global LNG market.

Whereas established LNG importers like Japan and South Korea rely on long-term purchase agreements, which provide a fixed monthly quantity of gas at prices indexed to crude oil, China has consistently tapped spot markets to shore up supply during periods of peak demand.

This has been cited as a key factor behind rising Asian spot prices, which doubled between June and December of last year to reach their highest level since 2014, at $11.20 per million British thermal units.

The primary contributor to increased Chinese demand is a government-led pollution mitigation programme, which switched close to 4m homes from coal- to gas-powered heating last year. In February China’s Ministry of Environmental Protection announced plans to convert a further 4m households and industrial plants from coal to gas or electricity over the course of 2018.

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