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Hopeful prospects for East African gas development

Mozambique and Tanzania’s offshore is shaping up as a prolific – and easily developed – gas play

Since Anadarko spudded the Windjammer-1 well offshore Mozambique in 2009, East Africa has quickly become one of the world’s most exciting new gas plays. Gas reserves offshore Mozambique have been estimated to be approximately 150 trillion cubic feet (cf) - a volume suffiecient to supply Japan, the world’s number one liquefied natural gas (LNG) importer for 35 years. Consortia led by Anadarko and Eni in the Ruvuma basin are planning a jointly developed LNG project.

Offshore Tanzania, Statoil and BG Group have been planning further LNG developments. It has been estimated by Ophir Energy, which partners with BG, that its development will encompass a minimum of 13.6 trillion cf of contingent recoverable resources with a potential upside of 50 trillion cf. Statoil has reported estimates of recoverable reserves in offshore Block 2 of approximately 10 trillion to 13 trillion cf. To bring this into perspective,  the Groningen field, offshore the Netherlands, is Europe’s largest gasfield, and held initial recoverable reserves of 103 trillion cf.

The largest project encompasses the giant discoveries offshore Mozambique; consisting of the Prosperidade, Golfinho-Atum, Orca and Espadarte discoveries in Anadarko’s Area 1, and the Mamba Complex, Coral and Agulha discoveries in Eni’s Area 4. The Prosperidade and Mamba complex are reported to be in pressure communication, prompting the need for a joint development between the two consortia. Eni and Anadarko have come to an agreement to develop the fields and to jointly construct an LNG liquefaction facility in Mozambique’s northern province of Cabo Delgado. It was also reported that front end engineering and design (FEED) contracts have been awarded for the facility.

Anadarko’s plan for the facility is to include four LNG liquefaction trains, with a longer outlook to expand the plant to 10 trains with an overall capacity of 50 million tonnes per year (t/y), equivalent to 244 billion cf per year. First cargoes are planned for 2018. Expanding the plant to 10 trains would see Mozambique become one of the world’s largest LNG exporters, alongside Qatar, which exports 77m t/y at present.

Meanwhile offshore Tanzania, Statoil and BG are looking to jointly develop their discoveries with an additional East African LNG facility. Initial plans are for a two-train liquefaction plant, with an estimated capital expenditure of around $15bn. A final investment decision is expected in 2016, which would see first LNG cargoes in 2020.

Up until the recent large discoveries, East African gas potential was thought to be very limited. The Tanzanian Songo Songo and Mnazi Bay discoveries (1974 and 1982 respectively), with initial combined P50 reserves of about 2 trillion cf, have been developed to serve domestic demand. In southern Mozambique, the Pande and Temane fields (discovered in 1961 and 1967 respectively), with an estimated 3.4 trillion cf of combined P50 reserves, were developed to export gas via pipeline to South Africa. After the recent discoveries, acreage in East Africa has become highly desirable, with some of the largest deals in Africa being undertaken over blocks in Tanzania and Mozambique.

In January 2012, the board of Cove Energy, holder of an 8.5% stake in Area 1 offshore Mozambique, announced its intention to sell the company. This prompted a bidding war which became one of the largest upstream stories of the year. Shell initially proposed an offer of 195 pence per share, with Thai state-owned PTTEP counter offering 220 pence. After Shell matched this offer, PTTEP made another bid of 240 pence and acquired Cove. This put a value of £1.22bn ($1.9bn) on Cove Energy. This is particularly interesting when one considers that Cove was valued at 24 pence per share at the start of 2010.

In August 2013, it was announced that Indian state-owned companies Oil & Natural Gas Corporation (ONGC) and Oil India had signed a definitive agreement to purchase Videocon’s 10% stake in Offshore Area 1, together with a 10% interest in the same area from Anadarko for a total of $2.64bn. This amount is approximately in line with the Cove transaction.

In July 2013, Eni concluded the sale of a stake in Eni East Africa, its wholly owned subsidiary operating Area 4, to China National Petroleum Corporation (CNPC) for $4.21bn. The stake amounts to a 20% interest in the Mamba and Coral discoveries.
In addition to these deals, in 2012, Total farmed into Petrobras’ Area 6 offshore Mozambique, taking a 40% interest. Tullow took a 25% interest in Area 2 from Statoil in 2012. Subsequently, Inpex took a 25% in the licence area from Statoil in 2013.

East Africa’s first LNG exports are expected shortly after a number of significant LNG projects come on line. These include Australia’s  Queensland-Curtis, Gladstone and Australia Pacific LNG projects, due to start up by the end of 2015, which will have a total capacity of 25.3m t/y, and the Gorgon and Wheatstone developments, also in Australia, which will have an eventual combined capacity of 40.6m t/y.  First LNG exports from the US could come to market by 2015. Four export facilities have been approved by the US Department of Energy and there are a further 22 applications pending.

These projects, alongside others in development such as Ichthys LNG in Australia and Papua New Guinea LNG, have clear implications for Mozambique and Tanzania’s LNG plans. Due to the positions of East Africa and Australia, exports from both regions are planned to be destined for Asia’s thirsty  gas market. However, reported estimates indicate that the break-even price of LNG from Tanzania and Mozambique will, for example, be lower than volumes from Queensland-Curtis, Gorgon and Wheatstone LNG projects which may make East African LNG projects more competitive in certain pricing environments. Asian LNG prices remain buoyant, with monthly average spot prices reaching $15.46 per million British thermal units (Btu) for delivery in August 2013. In comparison, UK National Balancing Point pricing for delivery in August 2013 was at a value of $9.89/m Btu.

The gas discoveries offshore Mozambique and Tanzania are undoubtedly world class and will make a significant contribution to the world LNG market. Whether LNG prices in Asia will remain buoyant is unclear, especially due to the number of other LNG projects targeting the Asian market due to come on stream within the next decade. However, break-even prices may ensure that East African gas will be competitive.

What is clear, however, considering the size of the recent deals in East Africa, is that East Africa is a highly desirable place for natural gas exploration, which may increase the volumes available for export in the long term. If we take into account the large capital expenditures required for LNG exports, this should be a significant driver for the continuing economic development of Tanzania and Mozambique.

Alex Elliott is an assistant manager in Deloitte’s Petroleum Services Advisory team, based in London

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