Energy Special Report: African governments scramble for gas
Amid the flash of cameras and the bustle of an excitable Maputo press pack, Mozambican President Filipe Nyusi and ENI chief executive Claudio Descalzi announced the completion of a deal which they believe will overhaul the economy of the Southern African nation.
Flanked by government functionaries and gas executives, the leaders unveiled an $8bn, multi-partner joint venture to exploit vast undersea gas deposits off the Mozambique coastline. Comprising a new LNG plant intended to process 3.4m tonnes per year and supported by a 20-year sales agreement with BP, the deal brings the prospect of vast windfalls a step closer to realisation.
As global demand for gas is projected to increase over the coming decades and the industry asserts its claim as a cleaner, cheaper alternative to oil, several other gas-rich African countries are also dreaming of establishing flourishing export industries.
“I think it’s a pretty exciting time for the gas market, particularly in Africa… It’s always difficult to really predict demand growth but there’s a clear consensus that in certain geographical areas there will be increased energy demand – including in China, India and Africa. There’s an increase in demand generally and a decarbonisation push that is going to be solved by greater reliance on gas as a cleaner fossil fuel,” explains Ben Sulaiman, senior associate at law firm Hogan Lovells.
Uncertainty in Tanzania
But while Mozambique motors ahead, neighbouring Tanzania shows the difficulties of getting a complex, capital-intensive industry off the ground. From debates over financial viability to discussions over the benefits that should accrue to local communities, a consortium including Shell and Statoil are involved in lengthy discussions with the government.
At stake is the future of an LNG facility and regulations governing offshore deposits estimated at over 50 trillion cubic feet. Yet while talk of vast government revenues has sparked palpable excitement among ordinary citizens – 12m of whom live in extreme poverty – the future of the industry remains very much in the balance.
“I think the process has been a lot slower and taken a lot longer than they’d like,” says Thomas Scurfield, Tanzania analyst at the National Resources Governance Institute.
“I think that’s partly because the government has been reasonably slow at securing land for the proposed LNG plant but also in the setting up of a negotiating team and negotiations around the Host Government Agreement… the slow decision making is more about being cautious and making sure they have the capacity to negotiate a good deal.”
The government has indicated that it would like to have the Host Government Agreement in place by late 2018, covering an LNG plant and arrangements between offshore blocks and pipelines. Yet while the Tanzanian government seeks ways to wring the best possible terms from the negotiations, there are ominous signs that movements in the global gas market are clouding the industry’s future.
In an analysis of Tanzania’s plans, the National Resources Governance Institute argued that the commercial viability of the project may be in significant doubt given estimates of future prices. Even if the industry takes off, they warn, average price estimates suggest it may return only $2.3bn per year over the period of gas production – roughly $20 per person or a paltry 1.2% of GDP a year.
“Investment is still very uncertain. Our estimate suggests that under current conditions and expectations the project is not likely to go ahead… If the project does go ahead, the government revenues it generates are unlikely to be transformative.”
Given the already precarious financial nature of the project, well-meaning government efforts to extract additional value from the sector in the form of local content – jobs and investments that benefit from the projects– could make or break the negotiations. Concerned extractors are casting a worried eye over President John Magufuli’s attempts to overturn what he claims are unfair agreements with international mining firms.
As companies come under increasing pressure, gas explorers may fear that a deal signed with Tanzania is subject to the vagaries of the political system. “Pronouncements by politicians are partly aimed at a local audience but local content is also a critical part of development… I think the reality is that local people need to be able to see a direct benefit pretty soon in these projects,” says Sulaiman.
While the government intends to fully effect local content regulations in November, companies still await a comprehensive survey on the best ways of aligning industry opportunities to local realities. Until that happens few seem aware of what an optimum local content strategy might actually look like.
“The government has rightly been very ambitious… The key weakness is that the legislation and regulations have been developed without a comprehensive baseline survey on the potential capacity of the Tanzanian workforce and companies to meet local content requirements,” says Scurfield.
Despite the difficulties facing Tanzania, many analysts believe that long-term trends – not least the increasing demand for energy across the continent – could support an African industry. BP projects that energy demand in Africa will grow 88% between 2014 and 2035, with a 95% expansion in natural gas.
It projects that production of natural gas on the continent will expand by 80% by 2035 – comprising 7% of world production and 16% of inter-regional exports. “In some countries you’ve got government-led programmes and detailed plans for making gas a more central part of power generation, like South Africa and Morocco… There’s a good story for gas and the signs are generally promising but the real challenge is just to convince the market generally that gas has to be the fuel for the next 30 years,” says Sulaiman.
The industry’s big players are showing few signs of waning interest. In May, BP and New York-listed Kosmos announced a large gas discovery off the coast of Senegal just five months after BP invested $1bn to develop a “world class basin” spanning the maritime areas of Senegal and Mauritania.
In September, Shell signed a $300m agreement with Nigeria’s Shoreline Energy to develop and distribute gas around the commercial hub of Lagos. Given significant uncertainty over global prices – particularly as vast US shale gas fields await development – analysts argue that African producers should focus on forging a compelling commercial environment in the hope that the market recovers.
“The advent of shale gas means producers in the US are now commercially viable as exporters to Asia. If that is borne out, East African LNG projects are probably in quite a lot of trouble and the project agreed in Mozambique might be one of those because greenfield projects have much higher costs,” says Scurfield.
“There are reasons for optimism and significant reasons for pessimism. In some ways because of the uncertainty, it gives parties time to find out what the best approach is in terms of regulation, the structure of the projects and where cost efficiencies can be made.”