africa

Africa at a Fork in the Road: Taking Off or Disappointment Once Again?
by around 50 percent over the next decade, partly through income effects but more
powerfully through substitution effects as a result of gas-for-oil and gas-for-coal
substitution in power generation. Moreover, much of this demand is likely to emanate
from Asia which, given the high costs of transporting natural gas, is Tanzania’s
“local” export market. Other things equal, therefore, this would suggest that gas
prices are indeed likely to rise over time, making the investment more attractive
and therefore more likely.
There are, however, a number of countervailing forces.
The shale gas revolution in the US: The scaling-up of fracking technologies for oil
and gas in the US has radically changed the global supply and demand balance in
natural gas (and in energy markets more generally). US spot prices for gas—the
so-called “Henry Hub” price—have fallen sharply over the last five years. Industry
forecasts suggest the US price will rise but, given the relatively high elasticity of
supply in the US, not by very much. 7 Unlike the oil market, the gas market remains
highly segmented because of the high costs of transport. Hence, historically, regional
markets have been relatively insulated from developments in the US. But this too
is beginning to change: the increased price differentials between the US and Asia
in particular are opening up arbitrage opportunities for export to Asia from US west
coast producers. 8
The erosion of oil-linked pricing contracts: Traditionally, natural gas prices were
linked to oil prices and these oil-linked contracts were of extremely long duration.
The contracts served to stabilize relative energy prices at a time when gas markets
were thin. They provided much-needed long-run incentives to develop new fields
in the face of very high up-front capital expenditures. But as global gas markets
have expanded an increasing share of total gas supply is priced on spot markets,
usually at prices well below the oil-linked level. This change is particularly marked
in Europe, where low levels of demand associated with the prolonged recession
in the region have put downward pressure on prices, but it is spreading to other
markets, including those in China and Japan, that have long been the stalwarts of
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