Tanzania: East Africa Forecast Built On Gas But Risks Remain
BMI View : Excitement is building with regard to the growing gas resources of Mozambique and Tanzania - countries we believe to have the potential to become key players in the global liquefied natural gas ( LNG ) market . Given Mozambique has seen discoveries of a greater scale to date and is closer to an investment decision on an LNG export terminal - currently set for 2014 - we are more bullish on Mozambique than Tanzania. Yet for now we are taking a cautious and conservative view with regard to LNG from the region as a number of above - ground risks pose downside to the time at which first gas comes online.
In line with their new- found fortunes and status as presumptive heavyweight players in the global energy market, both Mozambique and Tanzania are in the midst of overhauls of existing hydrocarbons law s . Officials in both countries have seen delays in the introduction of new terms, but continue to press for overhauls in 2013 that would clear the way for licensing rounds before the end of the year.
Mozambique is further ahead of Tanzania in its bid to overhaul existing regulation. In April, the country's cabinet approv ed a new petroleum law , which is now on course to be sent to the current parliament , which end s in May, for further debate and approval.
Gas Powered Future
Both Tanzania and Mozambique currently produce small volumes of gas, and while we have seen increased output from existing and small fields, more dramatic growth in production is unlikely to occur until the nearer the end of the decade as gas fields come online to supply liquefied natural gas ( LNG ) projects .
In Mozambique, gas is currently produced from the onshore Temane and Pande fields, which are due for expansion in a bid to increase exports to South Africa. There is some upside to production in the region from smaller discoveries, particularly as Mozambique looks to boost gas- fired power generation to address chronic shortfalls, but funding challenges and infrastructure deficits have tempered our expectations for growth in gas demand. Therefore , while see some near- term upside, we view the largest gains in gas production to come with the development of offshore deepwater production to fuel LNG plants. We assume, in line with stated policy commitments, some volumes from offshore will be direct ed to local market s where they will feed not only power and residential customers but also industrial users , with officials aim ing to capitalise on increasingly abundant feedstock gas .
|Gas Already Flows But On Track To Grow|
|Mozambique Natural Gas Production, Consumption & Net Exports (bcm)|
A similar story is emerging in our outlook for gas production in Tanzania, with some near- term growth likely ahead of a larger boom from the end of the decade as offshore gas fields are developed in line with export projects. For now , further development of fields in the Songa Songa area, the site of existing production , will support some more- immediate gains in output. One key project in the region will be the Mnazi Bay to Dar Es Salaam Pipeline which will connect gas fields in the south to population centres in the north . This should help unlock new demand for gas in the domestic market, but the project has encountered unplanned delays as communities near to production in the south protest against investment in the north while electricity shortfalls continue locally .
|Gas Set To Rise|
|Tanzania Natural Gas Production, Consumption & Net Exports (bcm)|
Looking Out For LNG
East Africa's LNG market is seen as one with immense potential, bolstered not only by the size of the discoveries to date, but also possible discoveries in the still - underexplored waters. The region is strategically located to supply the Asian market, where the majority of demand growth is expected. Current break-even cost estimates cite figures of US$7-10/mnBTU for East African LNG. These estimates compare favourably to Eastern Mediterranean projects - a commonly cited new source of LNG supply - where costs are in a similar band , but even more so to Australian and Russian projects. Indeed , cost overruns in Australia have seen capital costs explode , with breakeven costs for Prelude FLNG, a trimmed down cost- saving version , at US$12/mnBTU according to Ernst & Young in 2012 , with Russia's Shtokman approaching US$13/mnBTU.
Mozambique Looks Set to Move First
According to statement released by Anadarko in December 2012, a h eads of a greement (HOA) was reached with Eni to coordinate their independent offshore development activities in support of a shared LNG project. The preliminary location calls for a project to be located at a site near Palma in the Cabo Delgado Province, northern Mozambique. A field located between areas 1 and 4, called Prosperidade by Anadarko and Mamba by Eni, is set to provide feedstock for the initial trains. A final investment decision (FID) is now set for 2014 according the most recent comments from Galp 's chief executive Manuel Ferreira de Oliveira at an April 2013 CWC event in Maputo. The 2014 target is a pushback from the 2013 date, but in their comments at the event project representatives reiterated a commitment to the 2018 date for completion .
Current development plans call for a two - train facility, with each train having a capacity of 5mn tonnes per annum (mtpa), or 6.9bn cubic metr e s per year (bcm/y). According to a press release from Mitsui , a partner alongside Eni, two additional trains are also likely to be constructed shortly after , raising capacity to 20mtpa (27.6bcm). However, the most ambitious proposals would see the addition of a further eight trains, raising capacity to some 50mtpa (69bcm) - a figure that, if realised, would be the largest single LNG facility outside of Qatar.
Reportedly, Eni and its partners in Area 5 have already submitted a plan to regulators for a floating LNG ( FLNG ) project supplied fully by gas from the Coral and Mamba Northeast discoveries in Area 4. The Italian international oil company ( IOC ) is moving quickly to exploit gas, betting that the government is eager to begin reap ing awards. While offering a quicker and lower cost development option, FLNG fails to offer many of the onshore benefits of infrastructure investments that politicians are eager to see. Yet , as onshore projects will be prioritised, we view the proposed 2017 start date for an FLNG plant as highly uncertain . With greater details available and more impetus for the onshore projects which are due to come online around the same time, we have chosen to hold off from factoring FLNG volumes into our current forecast as we await further information.
|On The Way To Export Powerhouse|
|Mozambique Gas Exports (bcm)|
But Tanzania Follows Neighbour To Global Market
Statoil 's recent exploration success - which has boosted estimates of recoverable gas to above 280bcm - is an important benchmark for the company according to exploration vice president Tim Dodson , who noted that the latest discoveries in March 2013 would further support a decision on an LNG export project. The Statoil executive also told Reuters that the Norwegian national oil company ( NOC ) is moving forward with plans to build an LNG terminal in partnership with BG Group , the operator of blocks 1, 3 and 4.
However , although operators are now confident they have 'enough gas to move forward' , an investment decision is 'at least three years away.' Although 2016 is now the target date for FID, Statoil officials have said an assessment from Tanzanian officials that exports could begin within seven years - around 2020 - was 'not unreasonable.' A recommendation for a landing site is due to be delivered to the Tanzanian government in the first half of 2013.
Considering the pressures to lower development costs in order to maximise profits , and given the challenges operators are likely to face as they confront poor infrastructure, workforce constraints and possible supply chain woes , a jointly developed LNG project represents the most likely and arguably most- effective outcome for the monetisation of offshore gas deposits.
However with FID not planned until 2016, Tanzania is further behind Mozambique in progress on LNG development, and thus could see more delays - particularly given recent protests. Violent demonstrations that occurred at the end of January have created some concerns about the prospects of a gas-fuelled boom. The unrest started in the southern region of Mtwara in opposition to the government's decision to build a pipeline that would drive the nascent gas flows to Dar es Salaam, the former capital and largest city in Tanzania. Local citizens claimed that gas should be used locally to generate power and then be transmitted to the rest of the country, thus creating more jobs in the impoverished region.
While LNG production could begin at the end of our forecast period in 2022, there are risks to this date on both sides. Pressure from officials to generate revenues , or from operators to gain a first mover advantage in a changing LNG market , could see plans accelerate with first gas possibly as early as 2020. Yet, obstacles to beginning production from what still remain untested waters could push first gas back even beyond 2022.
|First Gas Due At End of Forecast Period With Risks On Either Side|
|Tanzania LNG Net Exports (bcm)|
Political Risks Ahead
Discontent among ordinary Mozambicans is widespread , stemming largely from concerns that strong headline growth (annual real GDP expansion averaged 8.0% in the 1993-2012 period) has not meaningfully translated into improved living conditions. As local expectations rise with regard to the impact of gas and its monetisation, we believe regional tensions are only likely to grow. With a labour force unprepared for the demand s of the industry - anecdotal reports indicated that Mozambique was graduating just 20 geology students per year - social demands for gains from gas may exceed realities. With concerns about corruption and charges that resource wealth has to-date only benefitted the politically well - connected, managing the changing social dynamics of the coming gas boom in the region will be critical to the country's success.
Tanzania's historically benign political climate continues to face uncertainties. Over the last few months there have been several incidents which, although unrelated, stem from a general sense that average Tanzanians are missing out on the benefits derived from the country's natural resources. African Barrick Gold 's North Mara gold mine was the target of raids in November 2012 and January 2013. The raids, which were carried out by members of the local community angered by endemic poverty and a sense of disenfranchisement, left several people dead as police guarding the mines attempted to resist the raiders.
The problem for the Tanzanian authorities is that they will have to balance their attempts to assuage domestic discontent against the need to continue attracting investment. Indeed, it may be tempting for the authorities to adopt a populist line , especially in light of the fact that the ruling party appears to have been losing ground s ince the last election in 2009.