Quo Vadis East African Gas?

The shores of East Africa have become the frontiers of the latest methane-powered scramble for Africa. Gas majors Anadarko Petroleum, ENI and BG Group have discovered over 100 trillion cubic feet (tcf) of natural gas reserves off the coasts of Mozambique and Tanzania, the biggest global offshore find in decades¹. These discoveries make East Africa as potentially prodigious a producer as Nigeria, currently the current fifth largest liquefied natural gas exporter in the world².

Talk of natural gas reserves has infiltrated pop-culture in a post-Fukushima world in which industrial giants such as Japan have begun to wean themselves off nuclear power to rely more heavily on LNG and are ready to pay up to $17/MMBTU for these imports³.  

Today there are over 20 countries exporting LNG and twenty-five importing countries globally⁴. Over the last 10 years alone the global LNG trade has had a compound annual growth rate of 8.5% with the Asia Pacific LNG market making up nearly 60% of total world LNG demand in 2010⁵.  From 2006 to 2011, the volume of LNG traded has increased 52% from 159 million tones per annum (mtpa) to 241.5 mtpa⁶.

Into this promising world of natural gas trade step Tanzania and Mozambique, two young African countries with little prior experience in oil and gas. How efficiently will they be able to adopt legal and policy instruments to handle gas production sharing contracts and put in place physical infrastructure to exploit such close gas reserves for local industry? And, what will the global market be like when LNG finally comes online in 5-7 years?

Both nations are less than 50 years old with tender democratic and institutional frameworks. Since independence in 1975, Mozambique has seen almost 2 decades of bitter internal armed struggle but has managed to find its feet and rejuvenate its economy, and most recently entered the world scene as an exporter of coal in 2011⁷. It has even attracted investment by South African energy and chemicals giant Sasol, which began a $220 million gas-processing plant expansion in 2012⁸. Tanzania, after a socialist phase in the cold war era, has liberalized its economy and become the fourth largest exporter of gold in the world. However, over-reliance on hydroelectric power combined with the ongoing Horn of Africa Drought has resulted in power shortages and frequent blackouts in recent years. Like two teenagers faced with a big potential jackpot, these countries must now quickly mature in pursuit of the best path forward to maximize the LNG opportunity and avoid the resource curse and dysfunctional corruption that has plagued other African fossil fuel producers.

Currently, discovery and development is furthest along in Mozambique. According to research firm Wood Mackenzie, Anadarko Petroleum has already selected a site and is about to enter the Front End Engineering & Design (FEED) phase, expecting the first LNG to be pumped in 2018⁹. A commercialization agreement between the Mozambican government and the gas majors still needs to be put in place which will regulate taxation and determine whether a single or multiple LNG facilities will make more economic sense. In Tanzania, progress has been more erratic. After a flurry of discoveries it has now frozen bidding on a fourth round of licensing until Parliament ratifies a new gas policy and reviews all previous awards¹⁰. Predictably this has not pleased companies like BG Group which have threatened to delay any further investment¹¹.

While real hurdles remain, we can expect capitalistic incentives to eventually overcome bureaucratic inertia so that construction of LNG facilities begins. Then, let us fast-forward to 2020 and try to get a sense of what the world could look like.

Some analysts warn that the East African LNG could face seriously depressed prices when it comes online in 2018-2020 as it will coincide with Australia tripling its LNG export, making it potentially the world’s number one or two producer by 2020¹². Further pricing pressure will also come as the US and Canada, flush with shale gas finds, expect to begin LNG export into Asia as well. 

However there are enough upward trends that ought to deflate fears depressed prices are a foregone conclusion. Japan and South Korea currently import almost 50% of the world’s demand. Rapidly-growing India is currently the sixth largest importer of LNG, right behind China at about 12.5 mtpa. In 2012 Indonesia and Malaysia became importers of LNGand Singapore and Israel are building re-gasification facilities and thereby preparing to import LNG¹³. These markets, easily accessible by East African LNG carriers, hold the majority of the world’s population and will likely see continued GDP growth over at least the next 15-20 years, creating a probable surge in the demand for LNG. Not only that, but East African LNG could also compete for supply of European markets as LNG carriers can traverse the Suez Canal to relieve pressure on major importers such as Spain and the UK.

Furthermore, there is no single “global gas market”. Pricing is determined by micro rather than macro patterns. The International Gas Union Report reveals that there are gas markets with multiple supply contracts and flexibility within these. Instead of long-term contracts that shut out competition, spot markets now account for over 25% of global trade, up from 10% in 2005¹⁴.

Taken together, these trends mean that gas majors should be able to find sufficient eager demand to see considerable returns on the investments that will be made.

For Tanzania and Mozambique then, these gas reserves represent an unrivalled opportunity to develop physical infrastructure that maximizes national returns. Mozambique, a net electric power exporter, has the added benefit of large coal reserves¹⁵ and, with the guidance of chemicals-expert Sasol, could build a world-class chemicals industry in polymer and liquid fuel production, rivaling South Africa in scale. For Tanzania this is first of all a chance to seal its electrical power deficit by using dedicated amounts of gas for thermal generation. Along with its recent moderate coal discoveries, it also stands to develop a vibrant industrial economy and a competitive chemicals manufacturing industry. 

These are heady times for young Tanzanians and Mozambicans alike. Even before LNG production becomes a reality, it will feel like boom times. New companies will stream into the country buying and renting offices and pricey residential apartments. Real estate prices will shoot up. It will be a good time to be in construction. There will be a flurried influx of oil and gas service companies, consulting companies and investment firms. Brand new 4-wheel drives and American pickup trucks will be appear on the roads and educated middle classes will begin to stream back into the country, reversing a brain-drain that has been happening for decades. Initially, the gap between rich and poor will show up more starkly as the elites find ways to get in on the action and unskilled labor will be wholly unprepared to participate in the boom. In Tanzania local tensions already erupted into violence in January 2013 when politicians announced plans to pipe gas directly to Dar es Salaam instead of building a power plant in Mtwara (the closest onshore landing point), a region with high unemployment rates. Eight people have died in protests, senior politicians’ houses have been torched and dozens arrested. The Prime Minster has had to directly intervene in efforts to try and calm the situation¹⁶.

The discovery of these gas reserves is clearly the most exhilarating phase but marks new territory for all the stakeholders. International gas companies and governments must negotiate contracts that satisfy their Boards and citizens respectively, then raise the billions that will be required to develop LNG terminals. National leaders must manage expectations among their populace and establish training and infrastructure plans to avoid falling into the resource curse trap. Finally there are global factors beyond the individual control of any stakeholder, which will ultimately determine commercial returns. And so in East Africa, the scramble is furious and the prospects are bright, but the road must travelled carefully and soberly by all the players involved to in order to arrive at a natural gas-powered El Dorado.

Sources

(1) Wood Mackenzie Research - http://www.woodmacresearch.com/cgi-bin/wmprod/portal/energy/highlightsDetail.jsp?oid=10730411

(2) Nigerian LNG exports - http://www.eia.gov/countries/cab.cfm?fips=NI

(3) Japan LNG import price - http://ycharts.com/indicators/japan_liquefied_natural_gas_import_price

(4) 2012 Core Energy Report on Eastern & Southern Australia Projections of gas Demand

(5) Global LNG growth rates - http://www.aemo.com.au/Gas/Planning/Gas-Statement-of-Opportunities/Liquid-Natural-Gas-Projections

(6) Growth in global LNG markets - International Gas Union 2011 Report -http://www.igu.org/igu-publications/LNG%20Report%202011.pdf

(7) Sasol investing in Mozambique - http://www.ogj.com/articles/2012/05/sasol-starts-up-mozambique-gas-plant...

(8) Reuters – Power shortage in TZ - http://www.reuters.com/article/2012/05/22/ozabs-tanzania-economy-idAFJOE84L0BN20120522

(9) Wood Mackenzie, Offshore Magazine - http://www.offshore-mag.com/articles/print/volume-72/issue-11/frontier-plays/transforming-east-africas-explor-success-value.html

(10) Tanzania delays new licensing - Global Race for African oil - http://puntlandobserver.com/wp-content/uploads/2012/12/GlobalRaceforAfricanOilSR-2.pdf

(11) BG Group unhappy about Tanzania - http://www.arcticgas.gov/2013/bg-group-slows-down-tanzania-gas-project

(12) Australia’s plans for LNG growth  - http://www.appea.com.au/oil-a-gas-in-australia/lng.html

(13) New entrants to LNG importation - International Gas Union Report - http://www.igu.org/igu-publications/LNG%20Report%202011.pdf

(14) Growth of spot markets in LNG trade - International Gas Union Report - http://www.igu.org/igu-publications/LNG%20Report%202011.pdf

(15) Mozambique AFDB Report - http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Mozambique%20Full%20PDF%20Country%20Note.pdf

(16) Gas pipeline from MTwara to Dar es Salaam - http://www.africareview.com/News/-Tanzania-fights-to-calm-deadly-protests/-/979180/1677534/-/cdni4yz/-/index.html