New offshore discoveries in East Africa showing promise
New discoveries offshore could put East African LNG on the map. Can Mozambique eke out a cost advantage?
The discovery of vast gas reserves off East Africa has prompted speculation that potentially cheap liquefied natural gas (LNG) projects there could undercut export facilities in Australia and the US, where costs for greenfield plants are soaring. But with plans barely off the drawing board and numerous variables to take into account, the economics of LNG in the new province remain unclear.
Anadarko and Eni have proposed building a four-train LNG facility near Palma on the northern Mozambique coast, producing a total of around 20 million tonnes a year (t/y) of LNG, on a site that that could be expanded to 50m t/y if gas supply permits.
Anadarko suggested recently the development of the first two 5m t/y trains, including offshore development and the terminal, would cost around $15 billion.
That appears roughly in line with the findings of a report for the Mozambique government by ICF International, updated in February 2013, which suggested the capital cost of a plant in Mozambique would be among the cheapest of the list of potential LNG projects around the world, costing somewhere between $1,500-2,000 a tonne.
That compares to well over $3,000/t for upcoming Australian projects, such as Arrow and Ichthys. In Australia, tight labour and materials markets together with the need to implement costly measures to meet stringent environment regulations are among factors that have helped push costs up dramatically since the first wave of LNG plants were built.
Figure 1: Capital costs for potential LNG plants
This comparison is significant as both Australia and East Africa share price advantages over other producing areas, such as the US eastern seaboard and western Africa, in terms of shipping costs to the areas of highest demand in Asia. So if East African projects can be built more cheaply, then investment may go there rather than Australia in the future.
However, some analysts have suggested the figure for the Mozambique plant could well be much closer to $3,000/t and possibly higher, noting that it was likely to be affected by several of the same cost-inflating factors at work elsewhere.
Others say it is just too soon to make accurate forecasts. “The developers probably need to finalise the front-end engineering and design, nail down the regulatory regime with the government of Mozambique and understand how cost recovery will work in order to get a firm grasp of the cost model. Any forecasts at this stage are likely to be premature and therefore not very accurate,” says Elias Pungong, Africa oil and gas sector leader at Ernst and Young, a firm of accountants and consultants.
While Mozambique can offer cheap labour in areas such as construction – and the government will be keen to ensure local employment benefits from the project – skilled engineers and technicians will need to be brought in from further afield.
The capital cost of a plant in Mozambique would be among the cheapest of the list of potential LNG projects around the world
In a competitive global market where skills are in already high demand on similar ventures elsewhere, those workers will not come cheap. Nor is it clear yet what demands will be placed on the developers in terms of environmental regulations, or other factors such as use of local content, which could be subject to change depending on the whim of local politicians.
Developers also need to consider the cost of developing wider gas production and transport infrastructure.
While the modest ocean depth of most of the gas discoveries made off Mozambique so far might make drilling cheaper than in some ultra-deep offshore gas provinces, Anadarko and Eni would be starting from scratch as they build both onshore and offshore infrastructure in an under-developed region.
Not only will wells, subsea equipment and pipelines and the plant itself need to be built, but big improvements to maritime and land-based transport facilities and connections will also need to be made. Eni has suggested its side of the wider project, including gas production, could cost around $50bn.
On the plus side, future trains on this site and potentially elsewhere in Mozambique, of which there could be many, will gain big cost benefits from the establishment of this initial infrastructure.