Oil and Gas: East Africa’s Race to Get Ready

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East Africa Oil gas photo

East Africa has seen a flurry of exploration activity

The reserves already discovered will make East Africa one of the next gas frontiers. Companies are waiting for policymakers to determine priorities and incentives before they can settle on investment plans.

Fast forward to 2020. The deep waters off the coasts of Tanzania and Mozambique are teeming with rigs: drilling, extracting and transporting gas from the Mafia and Rovuma basins. Shiny new liquefied natural gas (LNG) plants, where the gas is cooled before being shipped to markets in Asia, are dotted up and down the coast.

But just as oil majors such as Royal Dutch Shell, BG Group and Petrobras are looking to buy stakes in the gas fields, the region’s governments are still un- decided about the policy regimes they want. Nothing is set in stone. Final investment decisions, even for the most advanced of the new developments – such as US firm Anadarko’s planned LNG plant in Mozambique – are due next year. Political wrangles could derail those plans at any time.

The scale of the finds so far – and their position close to gas- hungry Asian markets – is attracting big money. In July, Thailand’s state-owned PTT Eploration and Production beat back a bid from Shell to buy Cove Energy – an Irish company with an 8.5% stake in Mozambique’s Rovuma area 1 block – for $1.9bn in August. Looking to cash in, Indian telecoms tycoon Venugopal Dhoot, whose Videocon Industries owns 10% of the same block, is now eagerly searching for a buyer.

Frontier Zone Spreads

Since March, Italy’s Eni has been trying to bring in a partner to take 20% of its 70% stake in Rovuma Basin’s Area 4. In August, Eni upped its estimates for the size of the field to 2trn m3 of gas. Although Shell and BP are reported to be sniffing around, an analyst close to the matter said that Eni is now looking for an emerging market partner. Early September also brought the first signs that the gas boom could stretch into Kenyan waters. Tullow and Australia’s Pancontinental announced they had encounters gas, though not the oil they sought.

Inaugurating a new 107.5MW power station in July at Ressano Garcia, Mozambique’s President Armando Guebuza said coal and gas finds would become “preponderant factors” in the country’s industrialisation. He has also called for patience. In its medium-term gas market report, the International Energy Agency (IEA) says gas production from Africa, excluding Algeria and Egypt, will increase from 62bn m3 per year in 2011 to 94bn m3 by 2017. Little of this growth is likely to come from East Africa, where even the most optimistic estimates do not predict production starting before 2018.

Companies with stakes in the new gas finds are doing feasibility studies and working out the cost of constructing liquefied natural gas (LNG) plants, known as trains. A recent surge in the cost of several ambitious Australian LNG projects is pushing analysts to talk up East Africa as a cheaper alternative. Companies are also scouting around for offtake agreements. Anne-Sophie Corbeau, a senior gas analyst at the IEA, believes final investment decisions will not be reached “without some longterm contracts attached, at least covering half or two-thirds of production”. So far,there are none.

35% Expansion of domestic gas use in Africa from 2011 to 2017, according to the IEA’s projections

At this stage, timing is everything, says Nicolas Bonnefoy, a partner at law firm Ashurst who specialises in gas policy. “If the underlying governing regime were not to be ready in time, it may work as a deterrent for investment in a particular country,” he says.

In Tanzania, there is already confusion over a fourth licensing round for nine offshore blocks that was scheduled to begin in September. The energy ministry instructed the Tanzania Petroleum Development Corporation (TPDC) to cancel it and wait until parliament can ratify a new gas policy in October.

If Tanzanian politicians succeed in their plans, power plants will be prioritised. In July, mines minister Sospeter Muhongo said the government would invest $598m in gas-powered electricity plants in 2012-2013 to alleviate power shortages. Marné Beukes, energy analyst for Africa at IHS Energy, thinks Tanzania is “definitely going to increase its royalties”, which currently stand at 5% for deepwater finds, and establish signature bonuses for future contracts.

In the current environment, producers and public entities are already in conflict. Orca Exploration, the first company to operate a gas-to-electricity operation from the Songo Songo fields, is mired in a dispute with the government over arrears and the destination of gas supplies.

The Chama cha Demokrasia na Maendeleo party has voiced concerns that the lack of gas legislation will mean that Tanzania’s age of gas could bring a new wave of corruption. Deputy leader Zitto Kabwe told parliament in June that he has evidence that money from the sale of gas licences between 2004 and 2006 ended up in Swiss bank accounts. He is calling on a moratorium on new licences until the gas masterplan is finalised.

Political Pauses

Politics has already intruded into offshore exploration. Shell is still waiting to begin exploration on four offshore blocks it won in 2002 off the coast of Zanzibar. A dispute between the island and the mainland over revenue sharing has led to a stalemate. A Shell spokesman said there was no progress on negotiations over the blocks.

There is also uncertainty about whether the Tanzanian government will invest in the construction of an LNG plant. Charles Mwijage, a parliamentarian from the ruling Chama cha Mapinduzi party, says that the government’s contribu- tion to an LNG plant “depends on the economic quantity of the gas discovery”.

Some promising policy ideas are emerging, including signs the TPDC wants to persuade gas explorers – notably BG Group and Statoil – to team up to build a single LNG train. A spokesman from Statoil, which found 253bn m3 of gas with part- ners ExxonMobil in Tanzania’s off- shore block 2, said it had a “sound dialogue” on this possibility and was “currently in the early phase of evaluating the concept selection for a possible LNG plant.”

$175m Tax received by Mozambique government after sale of Cove Energy to Thailand’s PTTEP

In Mozambique, the government held a public discussion in early September on the Norwegian government and World Bank-funded Petroleum Governance Initiative’s recommendations for a natural gas masterplan. The study indicated that the government could earn $5.2bn per year from gas by 2026, with enough gas to support 10 LNG trains.

The gas finds in Mozambique – of some 2.8trn m3 – are already yielding rewards for the state, which announced it received $175m by applying a 12.8% tax on profits on the Cove sale. Beukes says the government is keeping its thinking “close to its chest” and suggests that state-owned Empresa Nacional de Hidrocarbonetos (ENH), could look to increase its stakes to as much as 40% in new gas finds. ENH currently has 10-15% stakes that are carried through the exploration phase by the developers.

Without state-owned gas monoliths like those of Algeria and Qatar driving the pace of development, coordination will be key to East Africa’s gas policy regimes. Domestically, question marks remain over whether governments will incentivise companies to team up or to build pipelines. The mechanics of local gas markets will also determine investment decisions. Internationally, gas prices are still a big unknown. The South African cabinet’s decision in early September to lift a moratorium on fracking for shale gas in the Karoo could also alter plans to target South Africa for exports.

However, perhaps the biggest test for the region will be meeting the needs for qualified gas engineers and technicians come 2018. With Uganda’s oil finds and exploration heating up along the Rift Valley into Kenya and Ethiopia, East Africa must act fast to provide the companies with a well-trained cohort – or miss out on employment opportunities.

 

By: Gemma Ware and Pietro Musilli