Mozambique, Tanzania lead African charge

LNG pros and cons

LNG projects will only succeed if there are sufficiently high prices and adequate currently stands at an interesting crossroads in its history but there are real signs of hope for Eastern Africa.

By 2015, Indian and Chinese LNG import capacity will double to 23m tonnes a year and 30m tonnes a year respectively, as new terminals are completed. In addition, Japanese and South Korean imports are set to increase sharply as a result of public mistrust over the nuclear power plants that provide such a large proportion of their generation mixes.

Gas has become an increasingly important part of the hydrocarbon industry over the past few years, partly because of growing concern over global warming. Gas-fired power plants generally produce about half of the carbon emissions of oil or coal fired plants. While gas is by no means the environmentally friendly fuel that many in the industry would have the public believe, it is more environmentally friendly than oil or coal and so can play a role in a rebalanced generation mix, with greater renewable energy capacity. In addition, more gas than oil has been discovered worldwide over the past four years.

The cost of developing LNG production facilities has rocketed over the past decade but East Africa should benefit from the economic slump in Europe and North America, at least in terms of lower steel prices. It should also benefit from its geographical location. The shipping routes between Eastern Africa and Asian economies across the Indian Ocean are unlikely to be affected by military conflict and even the Somali pirate threat is receding. Given the prospects of war in the Middle East over Iran’s nuclear programme, gas importers are keen to avoid overreliance on suppliers based inside the Strait of Hormuz.

On a more negative note, North America is set to become a gas net exporting region, thanks to the boom in shale gas production on the continent. While LNG import terminals were being planned in the US just four years ago, now a string of export terminals have been proposed. These could help to drive down the price of LNG over the next decade. It should also be noted that – even with the involvement of the majors – Nigeria took about 12 years to achieve LNG production capacity of 25m tonnes year. As a result, expectations of first gas from East Africa by 2018 are optimistic.

Previous development timetables for oil projects in landlocked Uganda have also proved to be overly optimistic. As discussed later, regulatory and contract difficulties are holding up the development of Uganda’s emerging oil sector but here too geography plays an important role. Most African oil production is located in countries with coastlines, with production located in either offshore or onshore coastal areas. Chad was the notable exception and even here it took many years to bring about field development and the construction of an export pipeline to the port of Kribi in neighbouring Cameroon. Uganda’s oil finds have been made in the Lake Albert Basin, on the border with the Democratic Republic of Congo, in an area that is about as far from the sea as it is possible to be in Africa. This requires the construction of a long-distance oil pipeline and the conclusion of a transit agreement with neighbouring Kenya. In contrast, Ghana produces oil via a floating production storage and offloading (FPSO) vessel and so requires neither a transmission pipeline nor even an oil terminal.