Mozambique and Tanzania may soon join the likes of Qatar and Australia as major global suppliers of LNG thanks to impressive recent finds off the East African coast. But companies operating in the region will have to overcome some formidable obstacles in terms of infrastructure, financing and politics, writes Paige McClanahan.
Analysts say that East Africa’s liquefied natural gas (LNG) projects will face their biggest challenges over the next 18 months.
“It’s a huge discovery,” says Simon Ashby-Rudd, global head of oil and gas and renewables at South Africa’s Standard Bank. “In the 36 months since [Anadarko] started drilling, they have essentially put Mozambique into the top 10 in terms of gas resources in the world.” With what has been found so far, the region could be “bigger potentially than Indonesia and Australia,” he adds.
The consulting firm Wood Mackenzie estimates that a total of more than 100 trillion cubic feet (tcf) of gas has been discovered in the Rovuma Basin off the coast of East Africa. The majority of that gas – about 85tcf – lies in Mozambican waters, while a smaller portion – roughly 14tcf – falls within Tanzania’s offshore territory. All of the gas has been found in the last three years.
“That’s pretty exceptional exploration success,” says Martin Kelly, lead analyst for Sub-Saharan Africa upstream at Wood Mackenzie. The government of Mozambique is expected to auction off another set of exploration blocks in the Rovuma Basin in 2013, and companies are already preparing their bids.
“The level of interest is unprecedented. Everybody wants a piece of the pie,” says Rolake Akinkugbe, head of energy research at Ecobank, adding that the exploration interest is coming from a wide variety of sources. “I can see real competition for those particular blocks,” she says.
There is a very good reason why investor interest is so high. LNG, which is primarily used as a fuel for electricity generation, is a rapidly growing part of the global economy. In just five years – from 2005 to 2010 – global LNG production grew by more than 60%. Total production in 2011 reached more than 240 million tonnes, 8% higher than the previous year.
In its Energy Outlook 2030, the British oil and gas giant BP predicts that natural gas will be the world’s fastest-growing fossil fuel over the next two decades, with LNG accounting for an increasing proportion of the total gas supply. Demand for LNG will see the most growth in non-OECD countries, BP’s report says, particularly non-OECD countries in Asia. The demand will be driven primarily by an increasing need for fuel for power generation.
Middle Eastern countries – particularly Qatar – are currently an important source of global supply of LNG. But growing tensions in the Middle East, specifically in Iran, have caused some concern among major LNG buyers. Qatar is currently the world’s biggest supplier of LNG, and all of that has to come through the Strait of Hormuz, the narrow waterway that lies at the bottom of the Persian Gulf, between Iran and the United Arab Emirates. Having material gas outside of that region is very attractive to buyers.
Ashby-Rudd of Standard Bank says that East African LNG producers are in fact very well positioned. Sitting so close to the southern tip of Africa, the region’s LNG can easily be shipped to buyers in either the Atlantic or the Pacific.
“The offtakers want to diversify their sources of supply,” says Ashby-Rudd. “They don’t want to have one individual source of supply and so are actively encouraging the development of East African LNG as well.”
The price of LNG is expected to trend upwards, but perhaps not as sharply as it has in recent years. Gas prices are currently much lower in North America than in Asia and Europe, but over time that gap is expected to close, says Akinkugbe of Ecobank. That makes for a more promising outlook for East African LNG.
Currently only two Sub-Saharan African countries – Nigeria and Equatorial Guinea – have LNG plants in production. The six-train Nigerian plant churned out roughly 22 million tonnes last year, which represents about 8% of global supply. Meanwhile, the single-train facility in Equatorial Guinea has the capacity to produce 3.4 million tonnes a year. Operators of both facilities have ambitious plans to expand.
A third Sub-Saharan African country, Angola, should begin LNG production soon, although that project has already faced numerous delays. Elsewhere in Africa, US-based Apache Corp has drilled one deep-water exploration well off the coast of Kenya, but the gas finds there were less significant than the discoveries in the waters off of Mozambique and Tanzania.
Analysts say that Mozambique and Tanzania have the potential to become major players in the LNG market, but there is still a long way to go before production can begin. And the process is not without risk.
“There isn’t up-to-date legislation governing those countries’ hydrocarbon sectors,”says Ecobank’s Akinkugbe. “That’s something that’s keeping investors a bit uncertain.”
“The political risk is usually the big one,” she adds. “It’s the legislation, it’s the sanctity of contracts, and it’s the guarantees around pricing and tariffs, which can often be a politically sensitive issue.”
The parliaments of both Mozambique and Tanzania are still considering the legislation that will ultimately set the terms for the development of LNG in their respective countries. Mozambique issued a draft ‘master plan’ for the country’s natural gas sector in August, but the document – and the related legislation – has yet to be finalised. In Tanzania, lawmakers were set to discuss the country’s natural gas policy in a parliamentary session in October 2012, as this supplement went to press.
“I think any time a company enters a region that doesn’t have much history or much background in oil and gas, there’s always an element of risk,” says Kelly of Wood Mackenzie.
Kelly adds, however, that government officials in Mozambique and Tanzania have expressed their fully-fledged support for LNG development in their respective countries, and that they have proven willing to co-operate. In Kelly’s estimation, the most significant obstacle to LNG production in the region is much less abstract.
“There’s very little civil infrastructure in this part of the world,” he says. “Roads, ports, airports – the kind of things that are required to support major industries… That’s the biggest challenge for East Africa LNG in our view.”
Shoring up support
Indeed, the infrastructure needs for LNG production are enormous. In addition to the standard roads, power supply, and seaport that you would need with any type of extraction project, LNG also requires the construction of expensive liquefaction plants. It is at those plants that the natural gas (in its gaseous form) is treated and then condensed into liquid form, a process that requires pressurising the gas and cooling it to a temperature of -162 degrees Celsius. That kind of equipment isn’t cheap.
“We’re talking about huge amounts of capital investment here,” says Akinkugbe of Ecobank. Mozambique will likely see US$40bn-worth of investment between now and the end of the decade to build a four-train LNG facility on its shores, says Standard Bank’s Ashby-Rudd. That represents more than three times the country’s 2011 GDP. Houston-based Anadarko and the Italian energy company ENI are the two major companies operating in the country.
But how to raise that US$40bn? The first step, says Ashby-Rudd, is to line up a long-term buyer of the LNG. “You’ve got to find a credit-worthy counterparty looking for a long-term gas sales contract,” says Ashby-Rudd, “because you’re going to need long-term funding to build a project of this kind of magnitude.” He adds that the most likely buyers are in places like Japan, Korea, India and perhaps China.
Once a gas-sales contract has been secured, the next step is to find lenders who are willing to help cover the rest of the capital costs. A number of lenders might get involved at this stage, including export credit agencies, sovereign wealth funds and international financial institutions, as well as global banks.
Analysts from Ecobank and Standard Bank agree that, during the development phase of an LNG project, 70% of the financing should come from equity, while the remaining 30% should come from debt. However, debt should account for a larger proportion of financing when LNG production actually begins and the projects prove that they can deliver, says Akinkugbe.
Once the financing has been secured, it will take five or six years to build the necessary infrastructure. That means that East African LNG probably won’t hit the global market until 2018 at the earliest.
Faced with such huge infrastructure challenges, several companies operating in the region are looking to co-operate in order to save on both money and time.
“One site with multiple LNG trains is a likely route that the companies will go down,” says Kelly of Wood Mackenzie regarding the situation in Mozambique.
“We do think that the Mozambican government would like [the companies] to co-operate, purely because it means that there’s less duplication of effort, there’s less capital being spent, and so the government receives its revenues a little bit more quickly.”
Here’s how it would work: Anadarko and ENI, the two big investors in Mozambican LNG, would work together to build one plant, which would process gas coming in from both companies’ gas fields. Whether such a collaboration works out in practice remainsto be seen.
“We are in talks with ENI about combining efforts both on the offshore development and on building a liquefaction facility onshore,” Scott Moore, vice-president of marketing at Andarko, told journalists in September. The companies hope to finish these discussions before the end of 2012.
Oil and gas companies operating in Tanzania are thinking the same thing. BG Group, the British multinational, announced on October 2 that it had begun talks with Statoil of Norway on the building of a joint LNG plant in Tanzania.
There have even been discussions about the possibility of building a regional LNG facility, says Akinkugbe of Ecobank, which would process LNG coming from both Tanzania and Mozambique. “It would make sense from a scale perspective,” she says. “The challenge with that is that you then face the issue of cross-border regulatory structures.”
Working out the logistics of infrastructure, financing, and regulation could take a lot of time, and any delays could make it difficult for companies to secure the all-important funding up front, warns Standard Bank’s Ashby-Rudd. If the companies operating in Mozambique cannot guarantee delivery of their LNG by 2020, then potential buyers might start signing their purchase contracts with tried-and-tested suppliers in places like Qatar and Australia. That could be a major setback to the East African projects.
“If you don’t get the long-term [gas purchase] contracts, then you won’t get the financing,” says Ashby-Rudd. “And without material domestic demand, the gas could remain undeveloped for a long time.”
“To deliver into the potential market in the latter part of the decade, the project needs to break ground in 2014-15,” he adds, “and therefore the next 18 months will be critical for all stakeholders.”