What role for East African hydrocarbons in the global economy post-Paris COP21?


Over the past decade significant hydrocarbon discoveries have been made across East Africa.

Unsurprisingly, the respective governments countries have been excited about these discoveries, expecting revenue and local economic opportunities to follow suit. However, concerns about the macroeconomic, political, social and environmental risks associated with developing these resources have also been raised. Countries have been advised to avoid common pitfalls and seek guidance on how best to manage the sector.

The questions asked here are what role will these discoveries play in the global economy, and how are host countries preparing for this role?

International climate policy and the role of natural gas

The agreement on international climate policy reached at the Paris COP21 in November 2015 had initially suggested that new hydrocarbon producers would increasingly face the risks of 'unburnable carbon' and 'stranded assets'.

Possibly, these risks are dampened by President Trump pulling the United States out of the Agreement, and other countries thought to spearhead the transition towards renewable energy not progressing towards a low-carbon economy as smoothly and successfully as perhaps expected.

In addition, in the run-up to COP21 natural gas was promoted as the fuel of transition that could mitigate climate change--because of its lower C[O.sub.2] emissions compared to oil and coal.

Changing the natural gas market

Yet, increased investments in natural gas exploration and production, including from US shale gas resources, have led to a structural change in the market. Traditionally, natural gas has been traded on long-term contracts with so-called 'destination clauses' that have supported operators to bank these terminals. With US shale gas and Australian liquefied natural gas (LNG) flooding the market, the power of buyers has increased. These buyers include Japan's Jera, the world's biggest buyer of LNG.

Its head, Yuji Kakimi, told the FT that the changing LNG market was not only eliminating the price differential that previously existed between Europe and Asia, but that it also gives buyers the power to demand more flexible contracts and, thus, is putting downward pressure on prices more generally.

Some believe this development is undermining future investments in greenfield multibillion-dollar terminals. Others hope that LNG prices will not stay low for long because demand for natural gas may rise further due to its relatively better...

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