Africa Sitting On Gas Fortune

Huge gas discoveries off the coasts of Mozambique and Tanzania look set to turn Eastern Africa in the world’s most important new source of liquefied natural gas (LNG) production. The local market for gas is limited, so investors are keen to oversee the development of LNG plants, (which turn gas into liquid for transportation by LNG tankers to other parts of the world) where it can be regasified for distribution via networks of gas pipelines.

While such schemes sound fairly simple and will not create large numbers of new jobs but investment and profits range in the tens of billions of dollars and so LNG could provide a massive boost for the regional economy.

The recent success rate for offshore hydrocarbon exploration in Eastern Africa has been very high. In June, Anadarko announced that it had discovered another gas field – the Golfinho/Atum complex – in Offshore Area 1 of the Rovuma Basin. Its successful Golfinho well was drilled just 16.5km northwest of the existing Prosperidade Field. Offshore Area 1 is operated by Anadarko alongside partners Mitsui, Bharat Petroleum, Videocon, PTT Exploration and Production, and state-owned Empresa Nacional de Hidrocarbonetos.

A total of 12 wells had discovered commercial volumes of gas offshore Mozambique by the time African Business went to press. Other successful exploration companies in the country include Eni of Italy but there is plenty of scope for new discoveries. Petronas is exploring blocks 3 and 6, while Statoil is targeting blocks 2 and 5. In its new Natural Gas Master Plan, the government estimates gas reserves on explored acreage at 130 trillion cu ft and predicts that this figure could rise to 280 trillion cu ft, although such forecasts are educated guesses rather than concrete estimates. Independent analysts put the country’s proven reserves at anything between 80 and 110 trillion cu ft at present, by far the biggest in Sub-Saharan Africa after Nigeria and a massive figure given that proven reserves stood at just 4.6 trillion cu ft at the start of last year.

The discoveries in neighbouring Tanzania have not been on the same scale but are still sufficient to give the country the third biggest reserves in sub-Saharan Africa. Statoil and ExxonMobil estimates proven reserves at 9 trillion cu ft on Block 2; while BG and Ophir Energy have identified 13.5 trillion cu ft on blocks 1, 3 and 4 in the Mafia Deep Basin. Much of Tanzania’s reserves are located offshore in the south of the country, close to the Mozambican fields, so there is plenty of scope for joint development if required. However, most of the country’s offshore acreage remains totally unexplored and further discoveries seem likely. Existing investors are currently drilling appraisal wells to establish the size of their finds.

In Mozambique too, the Anadarko consortium is seeking to gain more information on the size and structure of its existing finds, rather than attempting to identify new fields.

Natural gas master plan

A total of 10 LNG liquefaction trains, or production lines, are scheduled for development under Maputo’s long-term gas development plan. The Minister of Minerals, Esperanca Bias, says of the plan: “It is a tool that will guide us as a government … enabling the elaboration of the use and development of natural gas resources so that the benefits can be maximised for Mozambique’s society.”

The Anadarko consortium is currently drawing up plans for the first two LNG trains and will make a final investment decision on the venture next year, with first shipments due in 2018. However, in September, Anadarko’s vice president of marketing Scott Moore revealed: “We are in talks with Eni about combining efforts both on the offshore development and on building a liquefaction facility onshore.” He estimated the combined cost of a two-train LNG plant and offshore infrastructure at $15bn, while a deepwater port would also be required. Similarly, in Tanzania, BG of the UK is now in talks with Statoil of Norway over a joint LNG project in the country. Based on the experience of other countries in Africa, about 5 trillion cu ft of reserves are required to provide sufficient feedstock to justify the construction of an LNG train, which would be required to operate for at least 20 years to support construction costs.

Liquefaction trains generally cost at least $1bn for every 1m tonnes a year of production capacity, while a single train typically has production capacity of at least 4m tonnes a year. The development of 10 trains would therefore require capital investment of at least $40bn and probably substantially more.

Given the ongoing global economic crisis and the large amount of LNG production capacity that is expected to come on stream over the next five years, one of the main stumbling blocks will be to secure sufficient funding to construct the required LNG plants. In addition, rising capacity in the industry is likely to drive down LNG prices from 2020 onwards, with East African LNG forced to compete with new capacity in Australia, Qatar and perhaps even North America.

However, projects in both countries benefit from several factors. Firstly, Tanzania and Mozambique have enjoyed political stability over the past 20 years. Secondly, all of the East African discoveries to date have been made fairly close to shore, reducing the scale of the pipeline infrastructure that will be needed to transport the gas onshore. Finally, Tokyo’s decision to phase out nuclear power should provide a steady increase in Japanese demand for gas imports.

Wider benefits

The benefits to the two countries involved could be massive. Maputo estimates that the country could earn $5.2bn a year from natural gas by 2026, creating more than 70,000 jobs in the process. It is considering setting up a sovereign wealth fund to ensure that the population as a whole benefits from its hydrocarbon windfall over many years. Such a fund could also help to avoid the high inflation that has plagued other African nations that have experienced a sudden jump in income from natural resource projects.

It is hoped that some gas can also be marketed domestically in order to encourage industrial development. Fertiliser and methanol production are possible options but the most obvious outlet is gas fired power generation. Given the remote location of the proven reserves, most domestic projects would require the construction of high capacity gas pipelines.

The north of Mozambique and south of Tanzania are lightly populated and there is very little industrial capacity in the region. LNG could be produced in situ for export but any other projects would require at least one long distance pipeline, most likely down the coast of Mozambique, to the capital Maputo. It is also possible that the pipeline could be extended into neighbouring South Africa. Bias says: “Our intention is that the use of the gas can be felt all over the country regardless of where it is extracted.”

Tanzania has made more headway on its domestic pipeline plans. In early September, the government signed a memorandum of understanding (MoU) with the government of China regarding the construction of a 532km gas pipeline from Mnazi Bay, near the border with Mozambique, to Dar es Salaam. China’s Export Import Bank has agreed to fund the project.

Mizengo Pinda, the Prime Minister of Tanzania, said: “All procedures were already in place … it was only this memorandum of understanding which remained among formalities before the commencement of construction. The laying of the pipeline will now start immediately.”

Despite the focus on tapping existing reserves, further gas and also oil fields could be uncovered over the next few years. The results of a licensing round for new acreage in Mozambique are due to be announced next year covering more blocks in the productive Rovuma Basin and also the Zambezi Delta.

Speaking at a conference in London, Tavares Martinho, the exploration director of Mozambique’s state-owned Empresa Nacional de Hidrocarbonetos (ENH) suggested that the oil majors are now seeking to invest in the country. He said: “We are starting to see Shell in Mozambique, yes, not only Shell, all companies, even ExxonMobil, Chevron are willing to come to Mozambique and they will be welcome.”