Europe’s gas demand is expected to rise by around 20 percent to 580 billion cubic meters (bcm) per year in the next 10 years as economic growth returns and governments plan to switch from coal to gas for power generation.
During the same time, supplies to Europe from the North Sea, its most reliable supply source, are expected to fall by at least 20 percent as reserves dwindle, while established suppliers such as Russia and Norway will not be able to increase exports by much and Qatar focuses more on lucrative Asia markets.
Africa is expected to fill the vacuum, but supplies from the region are considered to be the most unreliable, which according to analysts, would increase the likelihood of supply disruptions and result in a risk premium that will be priced into European gas markets.
European economies are on edge as analysts say they will have to contend with gas supply shortfalls and rising costs from producing nations in Africa in the near future.
A report on African natural gas from consultancy, Ernst & Young, flagged high security risks in Algeria, Angola, Libya and Nigeria, and said that overall risk levels in all African countries with major natural gas export potential were either moderate or high.
Gas supplies to Europe will become less reliable as much of its new demand in the coming decade will have to be met with gas from politically unstable countries in Africa, Reuters reports.
It will also make Europe’s gas market more like oil, which often sees price spikes due to security problems in Africa and the Middle East.
“Political violence could hit production or transit routes. Should Europe be reliant on these African gas producers, there is a potential risk that wholesale prices will rise,” said Amy Gibbs at political risk insurer Jardine Lloyd Thompson.
Research shows that Europe will need to meet around 20 percent of its annual gas demand, equivalent to 125 bcm, from sources in Africa, many of which have yet to be developed.
High production costs and a lack of expertise in many countries that are planning to export gas means that new supplies will be expensive and are likely to be delayed.
Africa currently has around 85 bcm a year of gas available for export, a figure exploration companies say could rise to 130 bcm by 2020.
This means that Europe will want almost all of Africa’s future gas exports, something analysts say is unlikely given Asian buyers pay more than Europe.
Most of East Africa’s expected production of 40 bcm a year is already earmarked for Asian buyers.
The rising demand also means that almost all planned African gas projects need to be built and become operational without delay, something analysts say is unlikely.
Angola, Africa’s newest producer of liquefied natural gas (LNG), began exports at a modest annual capacity of 7 bcm this year after being delayed by 18 months, which pushed the overall development time to 11 years.
Adding to the rising supply tightness are political instability as well as high production costs.
Violent uprisings have already toppled governments in Libya and Egypt and reduced supplies, while a deadly attack on Algeria’s In Amenas gas facility run by BP and Statoil in January highlighted the risk there.
One of the biggest concerns is Algeria, Africa’s biggest contributor to European gas supplies.
The North African country supplies around a third of the gas used by Italy and Spain but is considered so unstable that Rome and Madrid are seeking ways to reduce their dependence on Algerian gas.
Information from Business Day was used in this report.