Stuart Carter and Mark Davies, oil and gas partner at Bond Dickinson, discuss the opportunities in investing in the East African LNG market
How much gas?
Vast amounts. Mozambique alone is estimated to have gas reserves exceeding 170 trillion cubic feet (TCF) in the Rovuma Basin alone whilst Tanzania has potentially as much as 50 TCF. But in a global economy where commodity prices, consumer demand and ‘timing to market’ are crucial, there is no guarantee that even these amounts can be commercialised in the foreseeable future, particularly when one considers the recent fall in the price of gas. However, for both countries the prize is great. In an article written by Nadja Kogdenko - East Africa: The Newest LNG Frontier - according to the Mozambique Natural Gas Master Plan the country could potentially earn up to US$5.2bn per annum by 2026 from LNG exports, creating more than 70,000 jobs in the gas sector. If fully monetised Tanzania could also expect a large inflow of revenue into its treasury.
Where’s the demand?
Although both Tanzania and Mozambique are forecast strong economic growth, there is no possibility that either could hope to consume such quantities of gas if produced at the maximum economic rate, which is the business model that investors and oil companies alike will use.
Globally the picture is positive. The US Energy Information Administration (USEIA), in their International Energy Outlook for 2014, give the reference case for World GDP increasing on average by 3.5 per cent per annum between 2011–2040. It predicts that over the same period the global annual demand for gas will rise from 113 TCF to 185 TCF. Much of this demand will come from Japan (its nuclear industry unlikely ever to recover fully from the shock of Fukushima), India, China and southeast Asia, all of whom rely heavily on LNG imports. Geographically East Africa is ideally placed to supply LNG to these markets.
What and where is the competition?
Unfortunately for Tanzania and Mozambique there is a lot and it comes in all shapes and sizes. Although according to Wood MacKenzie, LNG from East Africa should be cheaper than that from Australia (US$7 per million British Thermal Unit BtuU [MMBtu] compared with US$11 MMBtu), such advantage is wiped out by not having the first mover advantage. Australia has already brought on stream LNG from Queensland-Curtis, whilst Gladstone and Australia Pacific should come on stream later this year, with Gorgon and Wheatstone following on behind. Mozambique couldn't hope to bring LNG on stream before 2018 and Tanzania before 2020. Competition from unconventionals also exists. The US had planned to export LNG produced from shale gas as early as this year, though this has been delayed due to the current downturn in fracking on account of the lower gas prices. So it is a case of when, and not if. Canada and Russia equally have plans in the pipeline to export LNG. And finally, closer to home, there are a number of LNG projects planned in Africa itself, which if they all succeeded, will add 84.1 mn tonnes per annum of LNG to the world, though in reality the figure is likely to be much smaller as some projects will inevitably not get away.
Another consideration for investors is the effort that many countries are now displaying to diversify the source of their energy supply. India and China’s demand for LNG may plateau or even diminish as their own shale gas projects come on stream and renewable technology brings down the cost of green energy, making it an attractive alternative. China’s hunger will have been in part satiated by its agreement to buy 38 bn cu/m (BCM) per year starting in 2018 from Gazprom at a price reputed in an April 2014 report by Reuters to be in a range between US$10-$11 MMBtu. This would be delivered by the as yet-to-be-built ESPO pipeline where deliveries could rise to 60bn cu/m per year.
What is clear is that at the time of writing, and not withstanding what the USEIA predicts, there is a global oversupply of gas and this has driven the price down. Producers have to react and Indonesia for example is forecasted to cut exports of LNG by as much as 25 per cent this year in response to Japan’s consumption levelling off. They are now busily looking for new markets. This will be disquieting news for companies that have already invested in projects around the world where the economics is based upon projected sales volumes and prices that no longer seem realistic.
What’s the outlook for Mozambique and Tanzania?
Mozambique and Tanzania are described as being locked in a race to get the first LNG plant up and running on Africa’s east coast. Between the two Mozambique is generally viewed as being more politically stable than Tanzania and has recently enacted the Petroleum Law (No. 21/2014) and the Petroleum Tax Law (No. 27/2014), both of which seek to modernise and make fit for purpose the laws relating to the exploration, development and production of hydrocarbons. Specific provisions now apply to LNG whereas before there were none. However, not all changes have been universally welcomed such as the requirement for companies to list on the Mozambican Stock Exchange by way of an initial public offering; the requirement for companies to allocate at least 25 per cent of production to the domestic market; and of the insistence that any foreign legal person with an interest in a concession contract must be from a ‘transparent jurisdiction’. At least the last of these should play well for many established western oil companies whose measure of 'transparency' is not clear. But for all that, there appears to be general acknowledgement among the international petroleum industry that considers Mozambique an interesting prospect that has taken a positive step in the right direction with these new statutes.
In contrast Tanzania has so far been much less dynamic. It has focused its immediate attention on making deep-water exploration more attractive to foreign companies by reducing the headline royalty rate from 12.5 per cent to 7.5 per cent. The government has also been active in other areas. For example, it recently entered into a heads of agreement with both Statoil and BG Group relating to the construction of an LNG plant in country. However, the general view is that any further agreement beyond this is likely to be delayed pending the outcome of national elections scheduled for October this year. But whatever the outcome of the elections, observers say that the investment community will most likely need to see more progress and more reform by the government if it is to succeed in attracting meaningful quantities of foreign capital. Reforms such as introducing a unified investment legislative code and improvements in transparency and fiscal accountability have been suggested.
And yet, notwithstanding how the odds are stacked, LNG from East Africa does make political sense, even if the commercial case still has to be proven. At a macro-political level it could be the key to solving the region’s recent problems of political instability and poverty. Massive inward investment, the creation of local jobs and the availability of cheaper energy to aid industrial development for a region hard pressed for too long could be the shot in the arm, and not down the barrel, that both countries need, provided always that the resource curse can be avoided. And therein lies the challenge.
