East Africa must avoid LNG delays to compete with rivals

July 18, 2014 | Field Case Studies

By Jacinta Moran | –

Mozambique and Tanzania are locked in a race to be first to export gas from East Africa, so much so that the region may emerge as a strong competitor to Qatar and Australia in the battle to capture key export markets in Asia.

Geographically, East Africa is ideally placed to supply LNG to Japan, China, India and South-East Asia all of whom rely heavily on LNG imports.

LNG from East Africa should be cheaper than from Australia but such an advantage may be wiped out if Mozambique and Tanzania are unable to develop their potential before a glut of other new supplies depress prices.

It took Angola 11 years of preparation and $10 billion to launch LNG exports which began this year, but the plant has been plagued by technical faults and has yet to reach its full capacity.

Australia should bring on stream Queensland-Curtis, Gladstone and Australia Pacific LNG in 2015 and Gorgon and Wheatsone thereafter, according to energy consultancy Wood MacKenzie.

The US is expected to begin exports of LNG in 2015, with Bernstein Research estimating that annual volumes could reach around 70 billion cubic meters by 2020. Adding to the mix is Russia, the world leader in piped gas but which also has set its sights on LNG, aiming to ramp up exports targeting Asia’s markets later this decade.

Given their different political and regulatory environments, Mozambique is expected to export its first LNG cargo by 2019, while Tanzania will need to wait until 2021.

The UK’s BG Group and Ophir Energy have been at the forefront of exploration in Tanzania, while ExxonMobil and Statoil have also found gas. BG and Statoil have plans to build a $10 billion LNG terminal.

Tanzania, which is sitting on natural gas reserves estimated at 40 trillion cubic feet, hopes gas will relieve the country from its heavy reliance on non-performing hydropower, which constitutes 70% of total electricity generation.

However, it has yet to finalize its natural gas policy, and debate rumbles on over how much gas should be sold to foreign oil companies and what safeguards should be put in place to ensure development of the country’s own power industry.

Political bickering ahead of next year’s elections risks delaying the implementation of laws regulating its fast-growing energy sector. The political distractions mean windfall revenues from gas exports will have to wait.

In neighbouring Mozambique, operators Anadarko and Eni have found a hefty 100 trillion cubic feet of gas in the Rovuma basin since February 2010. The companies plan to build four LNG trains with a total capacity of 20 million metric tons a year, making it the world’s largest LNG export plant after Ras Laffan in Qatar.

Anadarko already has signed long-term supply agreements with Asian buyers for two-thirds of the capacity of the first train of the LNG project, and hopes to sign similar agreements for the rest in the immediate future.

The big questions confronting investors are whether Mozambique has the political foundations to provide a stable investment climate that guards against the typical political risks such as nationalization of oil and gas assets, and unforeseen punitive taxation to investments.

Securing capital to build huge LNG projects is a big challenge. The development of offshore fields, the construction of LNG trains and infrastructure such a pipelines and onshore processing facilities requires significant investments.

Anadarko estimates the gross cost of building the first two LNG trains in Mozambique along with the supporting infrastructure to be around $15 billion.

East Africa has been touted as the next major theme in global LNG supply, given the size of its resources and lack of local gas demand. The region’s attractiveness could also be aided by the tendency of buyers to continually look to diversify supply risks.

Asia will continue to be the target market for sellers, but top importer Japan and its neighbours are pushing back on LNG prices and searching for cheaper energy substitutes. China plans to develop its substantial shale gas reserves in an effort to meet a portion of its ever-growing energy demands.  Competition from the top three LNG importers, China, South Korean and Taiwan, may force India to seek out more competitively-priced LNG supplies.

Mozambique and Tanzania’s projects will face significant commercial challenges. Competition for those nations’ supply will be intense, and delays to start-up targets need to be avoided if the region is to compete internationally.