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East African oil and gas reserves show promise

Drilling has shown East Africa to be rich in oil and gas. Now the region and its investors must do the hard part, and turn the reserves into production and income

A new oil and gas province with world-class reserves and shipping proximity to the burgeoning demand centres of Asia is emerging. From Uganda’s onshore to the Rovuma Basin off the coasts of Mozambique and Tanzania, a region long ignored by international oil companies is now bursting with opportunity.

Uganda’s prospective upstream is leading this. Thanks to scores of wells drilled by the UK’s Tullow Oil in the Lake Albert region, the country’s recoverable reserves could amount to more than 2.5 billion barrels.

This is oil that should make a profound difference to a region strangled by inefficient imports and energy poverty.

It will make a difference to the world, too. Between them, South Sudan, Uganda and Kenya could be producing more than 800,000 barrels a day (b/d) by the end of the decade. Kenya, where exciting discoveries have been made recently, will be the transit hub for much of this oil, which will be exported through a pipeline from Lake Albert to Lamu, about 200 miles up the coast from Mombasa.

It was conceived as a route to allow South Sudanese oil to bypass Sudan, presently the only outlet. But developing the line into a regional export system for fields in Uganda and northern Kenya, as well as South Sudan, makes economic sense.    

In natural gas, ambitions are just as bold. Three years after Anadarko Petroleum launched a frenzy of drilling with its break-through Windjammer discovery offshore Mozambique, plans are afoot for a liquefied natural gas (LNG) complex.

Optimists think Mozambique’s exports could reach 50m tonnes a year (t/y), making it one of the world’s biggest producers. No one doubts that the reserves would support such ambitions.

Oil and gas infrastructure in east Africa

Wood Mackenzie, an energy consultancy, says 120 trillion cubic feet (cf) of recoverable gas has been found in the country so far. Another 100 trillion cf or so is thought to be within reach.

Just up the coastline, in Tanzania’s part of the Rovuma Basin, exploration is a few steps behind Mozambique, but the wells have been equally prolific. BG and Statoil, the main offshore operators, have firmed up more than 25 trillion cf since 2010.

Wood Mackenzie says another 30 trillion to 40 trillion remains to be found. BG and Statoil talk of building a 10m t/y LNG plant based on their reserves.

International investors have been circling both countries. A raft of deals in Mozambique has brought Indian, Chinese, Italian, Thai, American, Japanese and other foreign companies to the upstream in the past 18 months, and no one thinks the deal-making is done.

In Tanzania, the presence of major LNG developers, now including ExxonMobil, too, has brought hopes for swift progress in turning the country into a major energy exporter.

But managing expectations – investors’, governments’ and those of the local people – will be difficult. Uganda, Mozambique and Tanzania will all become major producers of oil or gas; but the income from big projects will not be felt in their economies for some time, because investors will first recover their costs.

That fact hasn’t stopped politicians promising their people the earth. Tanzania’s energy and mines minister, for example, says gas supplies in his country can “banish poverty”. It will not happen as quickly as some people think.  

As Petroleum Economist’s special report this month makes clear, development and production is happening far more slowly than exploration – and will for some time. Seven years after Uganda’s first major Lake Albert discovery, notes our article on the country, production is still five years away, at least. Key aspects of the development remain only in early planning stages.

Search for buyers

In Mozambique, Anadarko and Eni, which plan to build the LNG plant together but develop their upstream projects separately, have set aside land and begun engineering work.

Anadarko has toured Asia in search of buyers for the gas. But the project probably won’t be sanctioned until later next year, at the earliest. In Tanzania, BG and Statoil are even further away from launching their LNG plant. The UK firm says a final investment decision will come no earlier than late 2016, with hopes that a four-year construction phase could see exports start early in the next decade.

In both countries, however, the governments haven’t said clearly how they wish to develop their gas. In Tanzania, a boisterous public debate is now underway about how to handle a future energy bonanza. The politics could string out a much-needed revamp of the country’s dated oil and gas legislation. Elections in 2014 in Mozambique and 2015 in Tanzania will also affect the timetable.

None of these new producers wants to waste its oil and gas endowment or repeat mistakes made elsewhere in Africa.

Legions of foreign advisors and inter-governmental bodies are offering their (not always welcome) advice to these governments. And there is consensus that development plans and rules be equitable and transparent while at the same time offer encouragement to the investors.

East Africa now has much to lose. Fast growth and tamer inflation is buoying the region’s economy and, notwithstanding the recent terrorist attack in Kenya and the festering problems of Somalia, the politics are relatively stable.

Recent oil and natural gas estimates in Africa
Offshore interests transferred to Mozambique and Tanzania

But, after the excitement of the discoveries, the slow progress in bringing all the oil and gas into production will be frustrating. “We’re at the point of maximum bullishness right now,” says one senior oil executive with interests in the region. He predicts a choppy few years as investors are forced to wait on decisions beyond their control.

Government interference, rather than revolution or upheaval, will be the biggest drag. In Uganda, for example, the role of President Yoweri Museveni in his country’s oil sector has become decisive.

The result, says Control Risks, a security firm that offers advice to investors, “is a highly opaque industry, where decisions are made at the whim of the president and his inner circle”.

Museveni personally negotiated many of Uganda’s initial production-sharing agreements, and it is he who has insisted on the construction of an inland refinery, against the wishes of the companies. He seems likely to run yet again for his country’s presidency in 2016.

In Tanzania, red tape and the government’s instinct to meddle are threats, too. Relations between the foreign investors and the ministry of energy and mines are said to be uncomfortable.

Tanzania’s laws and institutions were not created with serious oil and gas production in mind. Unlike Uganda and Kenya, Mozambique and Tanzania are now members of the Extractive Industries Transparency Initiative. But none of East Africa’s countries fares well on corruption indexes.

Local content

For investors, a source of contention will inevitably be host governments’ demands that developers employ local workers and build local infrastructure. The principle is sound – and some desperately poor parts of East Africa should eventually see significant inward investment when construction of the LNG plants begins.

But the practice is difficult, because of a shortage of skilled workers. It will be an increasingly charged issue.

In Tanzania, violent protests have already broken out against a pipeline being built to Dar es Salaam from gasfields near the southern city of Mtwara, where locals think the energy should be used to build the economy instead of supporting the much-wealthier north. Investors will have to plan for local opposition – and work hard on the ground to diffuse it.

Provided the investors are patient, however, these hurdles are not great enough to stop East Africa’s emergence as a world-class hydrocarbons producer.

Oil and gas will help transform a region that is already surging economically. Wood Mackenzie says upstream capital investment in East Africa has amounted to about $1bn since 2010, excluding exploration investment.

As the projects are developed, this will rise by around 60% a year until 2018. Throw in developments like the $25bn Lamu port project in Kenya, and the region looks primed for sustained economic growth.

Total energy production in the same period will rise from 500,000 barrels of oil equivalent a day to 1.5m. It will all take time. But for the oil and gas industry, a once-neglected region is ready to blossom. 

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