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Oxford Business Group

Oxford Business Group

Oxford Business Group (OBG) is a global publishing, research and consultancy firm, which publishes economic intelligence on the markets of the Middle East, Africa, Asia…

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Djibouti Bets Big On Chinese Energy Demand

Pipeline

Construction work is set to begin on a $4 billion liquefied natural gas (LNG) pipeline project, underscoring Djibouti’s efforts to strengthen its status as an energy trans-shipment hub for East Africa.

Officially inaugurated in March, the project – which includes a 700-km pipeline from Ethiopia to Djibouti, an LNG plant and an export terminal at Damerjog, on the country’s eastern coastline – is set to take three years to complete, according to developer POLY-GCL, a joint venture between China Poly Group and the Hong Kong-based Golden Concord Holdings.

The pipeline will have the capacity to transport up to 12 billion cubic metres of natural gas per year.

Tapping Ethiopia’s gas deposits

The gas stems from Ethiopia’s Hilala and Calub fields, located in the Ogaden basin in the south-east of the country. Together, the fields have deposits of 4.7 trillion standard cubic feet of gas and 13.6 million barrels of associated liquids, according to officials from the Ministry of Mines of Ethiopia, and despite having been discovered in the 1970s, they have yet to be exploited.

POLY-GCL acquired production-sharing contracts to develop the fields in late 2013, and now expects to reach commercial production by 2019. Phase one should see 3 million tonnes of LNG output per year, according to the company, along with 300,000 tonnes of condensate oil, scalable up to about 10m tonnes of LNG per annum.

The shipments of LNG, which will be regasified at terminals to be built in the Yangtze River Delta and Pearl River Delta, will be used for gas-fired power stations in China, distributed wholesale or sent to LNG filling stations in the interior of the country.

Anticipating Chinese demand

The project reflects the push by Ethiopia and Djibouti to cater to long-term demand for LNG in China. Despite the current global supply glut and the associated decline in prices – Asian spot prices for October delivery were trading at around $5.30 per million British thermal units in early September, down more than 70 percent from their 2014 highs – Chinese consumption is expected to increase towards 2020 and beyond. Related: Alberta Greenlights Oilsands Projects Worth $3 Billion

Natural gas is the country’s fastest-growing major fuel, with demand having quadrupled in the decade to 2016 to reach 6-7 percent of the total. The government aims to increase its share of the energy mix to 10 percent by 2020, in part by replacing the use of coal in non-power sectors with either natural gas or electricity, according to China’s 13th Five-Year Plan.

In an effort to encourage conversion, China’s government decreased wholesale natural gas prices for non-residential users by an average of 28 percent late last year, which suggests that domestic consumption – and therefore imports – are likely to continue to rise.

And while the country has sizeable shale gas potential, with some 1115trn standard cu feet of technically recoverable resources, according to the US Energy Information Administration, low gas prices and infrastructure shortfalls suggest imports will continue to dominate for the medium to long term.

Imports already account for about 35 percent of the country’s gas consumption, but this could rise as high as 55 percent by 2025, according to press reports.

Existing energy cooperation

The LNG pipeline is the second major joint energy project between Djibouti and Ethiopia in recent years. In late September 2015 the two sides inked a $1.55bn agreement for a refined petroleum products pipeline, known as the Horn of Africa Pipeline, connecting the Awash storage terminal in central Ethiopia to Djibouti’s Damerjog port. Related: Despite Criticism, Prime Minister May Gives Go-Ahead To Hinkley Point

The pipeline, which is being built as a joint venture between two South Africa-based companies, Black Rhino Group and Mining, Oil & Gas Services, is scheduled for completion in 2018 and will transport petrol, diesel and jet fuel to landlocked Ethiopia.

Ethiopia currently imports around 3m tonnes of refined petroleum products per year – much of which arrives through the Port of Djibouti before being transported by road – at a cost of around $2.8bn, according to press reports.

The pipeline, which will have capacity to transport some 240,000 barrels per day, should provide Ethiopia with a less costly and time-consuming alternative to the current supply chain, while still allowing Djibouti to maintain its position as energy hub for East Africa.

By Oxford Business Group

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