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The problem for the industry is a structural change that may lead to even lower natural gas prices in the future. In a new analysis Navigating the transformation of the gas market, Strategy&, PwC’s strategy consulting business, predicts four forces that will weigh heavily on gas prices going forward making the market much more volatile and risky:
The analysis also offers some strategic options and practical considerations for natural gas players – on the buy and sell sides – to take into account.
“LNG is a buyer’s market right now, especially with a glut of natural gas on the market. Buyers must negotiate the best deal possible and take advantage of lower prices to get gas into South Africa at the lowest prices seen in many years. The South African Department of Energy recently issued a request for information (RFI) regarding possible developments in a proposed gas-to-power programme.”
“It is expected that this initiative will not only establish the delivery of the 3,726MW of electricity capacity set out in the ministerial determinations but will also act as a catalyst to developing a natural gas industry in South Africa and provide the gas infrastructure which will be required when we have our own gas,” says Chris Bredenhann, PwC Africa oil and gas industry leader.
For many LNG providers, this is a particularly difficult time. The collapse in natural gas prices has been painful; even some of the larger international oil companies counted on gas and LNG for a large portion of their profits.
Most importantly, companies will need to consider reducing costs. The natural gas sector has already commenced focusing on capital expenditure reduction. Global investment levels in upstream gas are down by almost 40% from 2013 to 2016, according to the analysis.
“In Africa, if the Mozambique LNG developments are to go ahead, the players in that sector will have to carefully look at the costs and defend their positions with buyers of their gas and renegotiations could have a detrimental impact,” adds Bredenhann.
There have been significant natural gas discoveries in Mozambique’s northern offshore Rovuma basin since 2010 that have the ability to radically transform the country into one of the world’s largest LNG exporters. However, the slump in crude prices had caused a number of energy giants to delay projects, and this had given rise to concerns that Mozambique’s LNG developments could be held back.
“Given the pivotal role gas will play in the transition to a low-carbon world, combined with the tide of commoditisation that is sweeping the sector, companies must prepare for change. In a future where risk levels, liquidity, and price volatility will increase, the certainties underpinning long-term supply contracts will ebb away. Lower margins and uncertain trading outcomes will replace them,” concludes Bredenhann.