East Africa eyes the race for LNG exports
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Release Date:
May 27, 2014
By: Jeannette Lee
Researcher/Writer, Office of the Federal Coordinator
Researcher/Writer, Office of the Federal Coordinator
Sixth part in an occasional series on gas projects that could compete for Asian customers with a proposed Alaska LNG export project
Two East African nations are serious contenders in the global contest to sell liquefied natural gas to Asia, but like other high-stakes projects proposed in Alaska and elsewhere there are big obstacles and no guarantees.
On the upside, the region's proven natural gas reserves are enormous and growing. Foreign investment is boosting exploration and development. Top leaders from the largest LNG-consuming nations are jetting across the Indian Ocean to talk resource diplomacy and investment.
Most of the gas lies off the coast of Mozambique, a former Portuguese colony whose population of 25 million is among the world's most impoverished. Smaller, but still substantial, reserves have been found in the waters off Tanzania, a country of 47 million that is only slightly better off economically than its neighbor to the south.
The prospective LNG export business has support from both governments, which envision a lucrative new industry to buoy their economies and living standards. New investments and jobs could help many East Africans escape chronic and widespread poverty. Taxes on the industry could pay for improved transportation, education and health care. Access to domestic gas could bring electricity to millions.
All this optimism springs from the sheer immensity of the natural gas finds and East Africa's proximity to the big LNG consumers in Asia, particularly India. Mozambique's recoverable offshore discoveries total more than 150 trillion cubic feet, with more expected. Tanzania has at least 30 tcf of recoverable gas offshore, according to companies exploring there.
In comparison, the Alaska LNG project is looking to produce the 33 tcf of proven gas reserves at Prudhoe Bay and Point Thomson, with the potential of finding much more gas on the North Slope should a pipeline be built to move it to market.
Projects in Mozambique and Tanzania are similar to Alaska LNG in that getting the gas to market won't be cheap or easy, and sponsors working in the two countries have only recently begun the early studies that will tell them whether their projects are feasible. Like other proposed LNG projects around the world, those in East Africa will need buyers, stable fiscal terms with host governments, and risk-taking investors and lenders.
The difficulties are daunting and numerous. East Africa's governments are still familiarizing themselves with the industry and haven't yet passed all the laws needed to regulate and tax it. Roads, utilities and other basic structures are rudimentary or simply don't exist in areas of interest to oil and gas firms. Qualified local labor is scarce. Many potential investors in the multibillion-dollar projects worry about the uncertain business and political climate. But LNG buyers are interested, and project developers are looking for enough customers willing to sign long-term contracts to move the projects forward.
And as with all proposed LNG export projects, those in East Africa face unforeseeable changes in the gas markets.
GAS AT LAST
It's long been known that Mozambique was home to oil and gas reserves, although a combination of civil strife and low prices stifled the country's development potential for decades.
Petroleum explorers in 1904 discovered that Mozambique's geology was ripe for oil and gas, but it wasn't until the early 1960s that a major company, Gulf Oil, found significant gas onshore. Gulf's discoveries, however, coincided with a war of independence from Portugal spanning 1964 to 1974, followed by a civil war from 1977 to 1992 that quashed further exploration and development. Sluggish oil and gas prices followed, keeping explorers in check until the early 2000s.
South African energy and chemical company Sasol found onshore gas reserves of 2.6 tcf in 2003, then built a 538-mile overland pipeline the following year to send the gas to South Africa. Of the 135 billion cubic feet Mozambique produced in 2011, 87 percent was exported through the pipeline. The rest was consumed domestically.
By 2006, deep-water technology had advanced, the political situation had improved and prices had rebounded enough for Western petroleum companies to begin signing offshore exploration and production agreements with the Mozambique government.
Four years later, huge discoveries off Mozambique's northern coast elevated East Africa from a "non-story" to "the new promised land" for natural gas, the global accounting and advisory firm Ernst & Young wrote in a 2012 report.
Houston-based independent Anadarko made the first big finds with a string of world-class gas plays at water depths of roughly 4,000 to 5,000 feet in the Rovuma basin off northern Mozambique. First came the Windjammer prospect, announced in February 2010, followed by Barquentine in October and Lagosta in November.
"It was true wildcat exploration. The industry as a whole recognized the potential of the area, I think. But it appeared to the industry to be very small gas. And so commercializing it was going to be a challenge," Frank Patterson, Anadarko's vice president of international exploration, told Offshore magazine in 2013. "We saw that there might be some larger opportunities there."
Anadarko led the way with several Mozambique offshore discoveries in 2010, followed by Eni. The companies are considering an onshore plant to liquefy and export the gas. (Click to enlarge.)
Anadarko and its partners have since found even more. The parcel of ocean they licensed from the Mozambique government, known as Block 1, holds an estimated 50 tcf to 70 tcf of recoverable gas.
Italy's Eni also has logged big finds. The confirmation of 75 tcf of gas in place at its Mamba complex in offshore Block 4 was the largest discovery in the company's history.
"Africa is our first great frontier," Eni said in its 2012annual report. "The geology of the discovered reservoirs is excellent."
Tanzania's gas resources are smaller, but still significant. Norway's Statoil had found 20 tcf of recoverable reserves as of February 2014. BG Group and partner Ophir Energy, both based in the United Kingdom, reported a combined 15 tcf of recoverable reserves as of April 2014.
TO MARKET, TO MARKET
The speedy pace of East African gas discoveries contrasts starkly with the slow unfolding of plans for LNG exports. The Mozambique and Tanzania projects are in the early design stages, and neither has come to a final investment decision.
The target markets lie in East and South Asia, where demand for natural gas has been growing fast and prices over the past few years have tended to be the highest in the world because they're linked to the currently high price of oil.
Distance matters for costly LNG tanker voyages. While Australia and Papua New Guinea hold the distance advantage for shipping gas to Japan and South Korea, East Africa is closer to the growing LNG market of India.
In Mozambique, Anadarko and Eni signed a heads of agreement in 2012 to unitize, or jointly produce, their reservoirs and bring the gas to a shared onshore liquefaction plant in the northern province of Cabo Delgado. By encouraging Anadarko and Eni to consolidate into a single liquefaction facility, the government is minimizing the number of permits it will have to issue and ensuring the development of only one export port.
Source: The Oxford Institute for Energy Studies
India is the closest market for Mozambique and Tanzania LNG deliveries. (Click to enlarge.)
The initial LNG development, including offshore wells, an undersea pipeline, housing, a dock, airstrip and two liquefaction trains, each with a capacity of 5 million tons per annum, will cost $25 billion to $30 billion. The project's price tag could very well exceed Mozambique's entire $28 billion gross domestic product in 2013.
Anadarko expects to make a final investment decision later in 2014. The official timeline pegs 2018 as the year of the first LNG delivery, though some analysts believe the early 2020s is more likely.
Anadarko holds a working interest of 26.5 percent. Its next-largest partner is Japan's Mitsui with a 20 percent stake. Reflecting Mozambique's proximity to India, three of India's state-run energy companies own a combined 30 percent: oil marketing firm Bharat Petroleum and India's two largest national oil companies, ONGC and OINL. Other partners are Thailand's national oil company, PTTEP, and Mozambique's national oil company, Empresa Nacional de Hidrocarbonetos.
Over in Block 4, operator Eni and its partners are considering up to three smaller-volume floating LNG plants in addition to the joint onshore plant with Anadarko. Eni holds a 50 percent stake in the Block 4 license and China National Petroleum Corp. holds 20 percent.
Completion of the onshore plant by 2018 will be "very challenging," as "there's no infrastructure, no logistics, so it will take a bit of time," Luca Bertelli, Eni's executive vice president of exploration, said in a November 2013 interview with Bloomberg. Project proponents, Bertelli said, are working hard to reach a final investment decision "as soon as we can."
An ExxonMobil executive offered a similar warning at the Gastech conference March 2014 in South Korea. East Africa has potential but little infrastructure, said Rob S. Franklin, ExxonMobil vice president and president of ExxonMobil Gas & Power Marketing. "This infrastructure will have to be built from scratch under regulatory frameworks that have yet to be implemented."
In Tanzania, Statoil, BG Group, Ophir Energy and ExxonMobil are teaming up to look at building that country's first LNG export terminal in the southeastern town of Lindi. Like Mozambique, the Tanzanian government has insisted it wants only one LNG project associated with the more than 30 tcf of reserves found in BG-operated Block 1 and Statoil-operated Block 2.
Political turmoil is slowing the project, however. Tanzania's leaders are hashing out a new constitution. New regulations for the natural gas sector remain unclear.
"The constitutional review is forcing interest groups to take a stand on all the most divisive political issues at once. ... In this climate, introducing new terms to govern the nascent natural gas sector will be politically difficult," Clare Allenson, Africa analyst at Eurasia Group, told the business intelligence firm Zawya.
Tanzania project sponsors are considering the possibility of three 5-mtpa trains and aim to make a final investment decision by the end of 2016. Production could start in 2021 or 2022. Project investment could rise to $30 billion.
NEW TO THE GAS WORLD
Neither Mozambique nor Tanzania has ever exported LNG. Their oil and gas sectors overall are small to nonexistent. In 2012, Mozambique was the world's 52nd-largest natural gas producer with 153 billion cubic feet, most of which went to South Africa through the Sasol pipeline. Tanzania, ranked 65th, produced 32.8 bcf, all of it for domestic use only. Neither country produced crude oil or had any proven oil reserves as of 2013.
With so little history and experience, both governments are working on new laws and regulations for an industry that may one day be the main driver of their economies.
Mozambique is updating its 2001 Petroleum Law and fiscal terms on royalty percentages and tax rates that have been in place since 2007, Amida Mussa, an environmental consultant in Mozambique, wrote in an April 2014 e-mail interview. The government is also working on a mineral resources strategy, a gas master plan, pipeline tariffs and a new corporate social responsibility policy.
"The government understands the stable legal framework needed, but laws need to be finalized before the project can move forward," John Peffer, president of Anadarko Mozambique, told Rigzone in May 2013.
Source: BP Statistical Review of World Energy June 2013
Tanzania is working on legislation for regulating and taxing the natural gas industry. Eliachim Maswi, the energy ministry's permanent secretary, told Reuters in November 2013 that the government aims to have the legislation in place in 2014.
In general, Tanzania plans to impose existing tax laws on the LNG industry (corporate income tax, value-added and excise taxes), according to its draft natural gas policy published in November 2013. In addition, it is considering levying windfall profits taxes and royalties on gas production, President Jakaya Kikwete said in an April 2014 interview with Bloomberg News.
"We have not taken a final decision yet," Kikwete said. "It's something we are aware of that may create a lot of concerns and jitters and may probably have negative effects. We'll look into that carefully."
The state also plans to take an unspecified share in gas production projects, according to the draft gas policy.
Given their inexperience and status as developing countries, the World Bank and others have been advising the two governments on policy planning, regulatory oversight, and how to make sure they reap the maximum job, tax and other benefits of opening their gas reserves to development.
"Flanked by their highly-paid advisers, the international companies that visit Africa looking for minerals deals sit across the negotiating table from government officials who may be less well-versed in contracts, unsure about the true extent of their new mineral finds, or may be eager to strike a deal because their country has too much poverty and too few jobs," Makhtar Diop, the World Bank's Africa Region vice president, wrote in a blog post in October 2013.
"In many cases, the commercial playing field is not level, and African countries quickly find themselves on the back foot. Deals are made and contracts signed, and it is not a surprise that they are neither equitable nor transparent; and that the benefits often do not reach the population."
Equatorial Guinea, a tiny nation on Africa's Atlantic coast, is ruing a deal it made with BG Group. The company agreed in 2004 to buy Equatorial Guinea's gas at a price linked to U.S. Henry Hub prices with the intent of liquefying and selling it to U.S. customers. After the LNG demand market shifted to Asia, BG Group started selling the gas there for about three or four times U.S. prices. The deal generates nearly $1 billion a year for BG, and lets it keep almost all the profit, according to a 2013 report from Reuters.
The deal is a lesson to other nations new to the gas game.
"If Equatorial Guinea knew this gas was going to be sent to Asia, it would have been a different negotiation. This was not welcomed by the Equatorial Guinea government," said NJ Ayuk, managing partner at Centurion, an Equatorial Guinea law firm that advises the government on oil and gas contracts, in a July 2013 interview with Reuters.
The World Bank in 2012 launched a new trust fund intended to help African governments get the best possible deals for their mineral discoveries. The fund will pay for countries to hire their own experienced international lawyers and "negotiate deals with big companies that are fair, environmentally responsible, likely to create jobs, and create inclusive and lasting growth," Jamal Saghir, director of the sustainable development department for Africa at the World Bank, said in an interview in the October 2012 issue of Oil Magazine.
East Africa's governments have other concerns aside from securing good deals: How can they make sure the industry is viable over the long term? What's the best way to collect and manage revenue? How can they secure enough gas for domestic use? How can they avoid what's known as the "resource curse," when a country rich in natural resources, usually oil, gas or minerals, paradoxically suffers more from stunted economic growth and poorer overall living standards than countries with fewer of these resources?
The World Bank and the U.K.'s Department for International Development are providing technical assistance loans worth $50 million to Mozambique for a project designed to help the government address these questions. An additional $15 million loan is coming from the African Development Bank for a separate, but similar, project.
Tanzania is getting about $21 million from the World Bank for a project also dealing with these issues.
FACING LONG 'TO-DO' LISTS
Successful LNG export projects will also require building roads and other infrastructure, training a local labor force and attracting foreign investors who may be leery of East Africa's business climate and potential for political instability.
"If the enormous gas reserves in Tanzania and Mozambique are to be developed, then there is a need for massive investment and transport infrastructures that simply do not exist," Davide Tabarelli, former chairman of energy research company Nomisma Energia, wrote in the October 2012 edition of Oil magazine.
Real estate investors are already converging on Palma, the future "gas capital" of Mozambique, according to the Wall Street Journal. The first hotel opened there this year in anticipation of the estimated 10,000 workers and executives who could be arriving soon.
The Journal account from April 2014 describes Palma as a fishing village of just a few thousand people, where goats and chickens fill the dusty streets. The first paved road to the nearest large city, about 225 miles away, was just completed in December.
Source: Anadarko Petroleum
Anadarko in 2013 produced a video about its proposed LNG project in Mozambique.
The government is advancing the build-out. National airline LAM is constructing airports and establishing new air routes. Mozambique's newly created Cabo Delgado Port Society is drafting a plan for a port that would support LNG exports and the government is making an initial port investment of $150 million "on infrastructures to guarantee the development of logistics for natural gas," Minister of the Environment John Kachamila said in a January 2014 interview with allafrica.com.
Despite all the interest from international energy companies, Mozambique and Tanzania themselves may have trouble attracting favorable financing for the projects, some analysts say. Competing LNG ventures in places with greater political stability and where businesses can operate more efficiently, such as Australia, Canada and the United States may draw capital away from East Africa.
Leading rating agencies Standard & Poor's, Fitch and Moody's all class Mozambique's credit rating as highly speculative. Tanzania is not ranked by the agencies, but is in the process of obtaining a rating.
Political stability is another unknown for investors. A recent spate of small-scale attacks by the Renamo opposition movement, the old adversary of current Mozambique President Guebuza's Frelimo party in the civil war, has already affected some resource operations. The country is holding a presidential election in October 2014.
BUYERS HOMING IN
Top leaders from the world's biggest LNG-consuming countries have stepped up diplomatic outreach to East Africa in hopes of encouraging natural gas (and coal) exports to their nations.
Heads of state in China, Japan and South Korea all welcomed Mozambican President Armando Guebuza during visits to their capitals in 2013. In May, Guebuza met with President Xi Jinping in Beijing and Prime Minister Shinzo Abe in Tokyo. Then in June, he met with South Korean President Park Geun-hye on a visit that included a tour of a Korea Gas LNG import terminal.
Guebuza and other African leaders are welcoming aid and economic development from Asian nations, most notably China, that are hungry for their gas and other natural resources.
Xi flew to Tanzania in March 2013 on his first foreign tour after assuming office. In the capital of Dar es Salaam, he and Tanzanian President Jakaya Kikwete signed agreements for development projects that would bring in $800 million of aid from China.
China already has strong trade and aid ties with Mozambique, having built and paid (or provided soft loans) for its foreign ministry building, parliament building and presidential palace.
"China is fast emerging as the most important economic and diplomatic player in Mozambique, bringing billions of dollars in investments and asking no questions," Loro Horta, an expert on China's relationship with Portuguese-speaking African nations, wrote in 2011 for China Brief, published by the Jamestown Foundation, an international affairs and security think tank based in Washington, D.C.
But Japan is moving to keep pace in the region. Prime Minister Abe in January 2014 visited Mozambique during his first-ever trip to Africa. He pledged to invest more than $670 million in Mozambican natural resource development and environmental projects during the next five years.
During Abe's visit, the Japan International Cooperation Agency and Mozambique government signed a loan agreement of up to $169 million for a gas-fired power plant in the capital city of Maputo. The 110-megawatt plant will use domestic gas to power the national grid.
Japan is the world's largest LNG consumer and Abe is working to secure energy supplies for the resource-poor nation. Japanese companies have interests in multiple parts of the Mozambique LNG chain. Mitsui, one of Japan's largest energy traders, holds a 20 percent stake in the project. Japanese engineering company Chiyoda is in a joint venture with Netherlands-based CB&I to perform early design work for the onshore liquefaction facility.
Abe arranged for representatives of Japanese corporations, who accompanied him to Mozambique, to meet with President Guebuza. They included trading firms, as well as companies in natural resources, manufacturing, education and medicine.
Whether these overtures will lead to contracts is uncertain.
"Mozambique and Tanzania need to move fast to become major exporters," shipping research group Lloyd's List Intelligence said in a 2013 report. "The clock is ticking for both nations."
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