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East Africa in prime position to join global gas business

As recent M&A activity suggests, Mozambique and Tanzania are in prime position to join the global gas business, write Brian Cassidy and Steven Fox

When Anadarko Petroleum signed its exploration and production concession contract (EPCC) for Offshore Area 1 in the deep-water Rovuma basin with the government of Mozambique in December 2006, no one could have expected the drilling successes that would follow. More than seven years and 12 successful wells later, however, Anadarko and its partners are now sitting on up to 65 trillion cubic feet (tcf) of recoverable gas reserves.

In the adjacent Offshore Area 4, east of Area 1, Italy’s Eni and its partners have had similar success – most recently in Q3 last year with the Agulha well, the 10th well in Area 4, where exploration has achieved a 100% rate of success. Paolo Scaroni, Eni’s chief executive, described the latest find as a “play opener for the south of the block”.

In the adjoining Tanzanian portion of the Rovuma Basin, BG Group (and its partner, Ophir Energy) have drilled nine consecutive successful gas wells, following its farm-in to Ophir’s interests in Blocks 1, 3 and 4 in June 2010. Statoil and its partner, ExxonMobil, have also found success in Block 2 in the same basin in Tanzania.

This remarkable success rate in Rovuma has caught the industry’s attention. A bonanza of deal-making has followed. The first of the big transactions in Mozambique came when PTTEP, the Thai firm, trumped Shell’s offer for UK-listed Cove Energy in 2012. PTTEP eventually shelled out $1.9 billion for the East African-focused explorer that held a 8.5% interest in Area 1. A year later, two further deals in the same area were signed in close succession. Indian firms ONGC Videsh and Oil India agreed in June 2013 jointly to acquire the 10% stake held by the Indian conglomerate Videocon for a price of $2.475bn. In September 2013, Anadarko agreed an all-cash deal to sell a 10% interest in the same EPCC to ONGC Videsh for $2.64bn. Following completion of these deals, Anadarko retains operatorship of the asset with a 26.5% interest, while Mitsui of Japan has a 20% interest, ONGC Videsh 16%, Bharat Petroleum of India 10%, PTTEP 8.5% and Oil India 4%. State-owned Empresa Nacional de Hidrocarbonetos of Mozambique (ENH) has a 15% interest, carried through the exploration phase.

Meanwhile in Area 4, Eni completed a large deal with China National Petroleum Corporation (CNPC) in July 2013, selling 28.57% of its shares in Eni East Africa, giving CNPC an indirect 20% stake in the asset. The purchase price was $4.21bn and included certain other assets. This leaves operator Eni with a 50% stake and each of the remaining partners, Korea Gas Corporation, Galp Energia of Portugal and ENH, with a 10% stake. Eni is reported to be willing to sell down another 10%-15% of its stake if the right buyer comes along; such a buyer, it is presumed, also being a purchaser of the liquefied natural gas (LNG) to be produced in the area.

Back in Tanzania, at the end of last year Ophir Energy sold 20% of its 40% interest in Blocks 1, 3 and 4 to Pavilion Energy (a subsidiary of Temasek of Singapore) for a price of up to $1.288bn.

Given the limited local gas demand in the region, the respective new gas discoveries will be targeted for export as LNG. In December 2012, Anadarko and Eni signed a preliminary agreement establishing principles for the coordinated development of the Prosperidade-Mamba field spanning Area 1 and Area 4 in Mozambique. This agreement is designed to facilitate a work programme for the two operators to conduct separate, but coordinated, offshore development activities, while jointly constructing an LNG park in the Cabo Delgado province of northern Mozambique – Afungi LNG. The final investment decision could come later this year, with first LNG cargoes being exported as early as 2018. There are, however, reported concerns of the relationship between the two operators amid Eni’s plans to move ahead with an additional separate facility at Quionga for gas that lies exclusively within Area 4.  Anadarko and its partners in Area 1 have also made steady progress on the marketing of their gas, having signed non-binding heads of agreement for long term LNG sales for about two-thirds of their proposed first LNG train.

The big picture

How will these developments in East Africa fit in with the global LNG picture?
In the relatively near term the LNG industry faces a supply challenge as the gap between forecasted demand and supply from existing projects and projects under construction continues to widen. By 2025, global LNG consumption is predicted to reach around 440 million tonnes per year (t/y), compared with supply a supply capacity of around 270m t/y, leaving a supply-demand gap of around 170m t/y.

On the demand side, the major established buyers of LNG (Japan, South Korea and Taiwan) will continue to be a major force in the market. The two emerging powerhouses of China and India will naturally require greatly increased volumes but growth in demand is also forecast for Europe, the Middle East and South America, albeit at lower growth rates than in Asia.

On the supply side, we have seen growth from two countries in particular, Qatar and Australia, which has filled the recent gap between demand and supply. Between them they are expected to account for about 50% of total global capacity by 2020, by which time the original “big” producers of LNG (Algeria, Malaysia and Indonesia) will hold only around 20% market share. There are many other proposed but unsanctioned LNG projects in Australia, however due to a combination of high labour costs, a strong Australian dollar, spiralling construction costs and increased upstream development complexity, these projects may never take off. The consequence is either an increased supply-demand gap or potential increase in long-term off-take pricing. Does this not therefore play into the hands of the North American and East African supply options?

According to analysts at Credit Suisse, the proposed East African, Canadian and US projects are potentially well positioned against the greenfield Australian projects, with unit costs (total cost to first LNG supply) averaging less than $2,000 per tonne compared with the Australian average of more than $3,000. Taken together with the proximity of East Africa to a number of key markets including India, Singapore and North Asia (and thus reduced shipping costs) and as evidenced by Anadarko’s recent marketing announcements, the projects in Mozambique and Tanzania should have a good chance of being able to market their LNG on a long-term basis and at a price attractive to Asian buyers. As with many other LNG developments around the globe, the fact that a number of Asian LNG buyers hold equity stakes in the upstream is no coincidence and adds to the viability of the developments.

On the other hand, such developments are never without challenges and there remain doubts about whether the various stakeholders in Mozambique are adequately aligned or whether a more experienced LNG operator is required to bring the project to first gas and beyond. In Tanzania, albeit with smaller reserves, BG Group, Statoil and ExxonMobil all have vast experience in LNG developments and may therefore be seen as a safer bet.

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