East Africa risks losing out in gas export race

http://www.iol.co.za/business/international/east-africa-risks-losing-out-in-gas-export-race-1.1590928#.UljfRxAyL0c

October 11 2013 at 06:35pm

London - Mozambique and Tanzania are locked in a race to be first to export gas from east Africa, but a bigger battle awaits as the US and others gear up for a share of the global gas market.

Liquefied natural gas (LNG) shipments from huge recent discoveries could transform their struggling economies, where average annual incomes languish below $600 (R6 000) and life expectancy is less than 60 years.

As things stand today, natural gas is the fastest-growing fossil fuel and the market is tight, boding well for these would-be sellers.

Yet return on investment for the companies footing the hefty upfront costs will hinge on how fast they can reach market and how much gas is found as new rival LNG exporters come to market at the same time or sooner. Those include Australia, which has a head start, and a thriving US energy market buoyed by shale gas, which is expected to begin exporting gas from 2015.

Russia, the world leader in piped gas, has also set its sights on LNG, aiming to ramp up exports targeting Asia’s lucrative markets later this decade.

“Mozambique and Tanzania need to move fast to become major exporters,” shipping research group Lloyd’s List Intelligence said in a recent report.

“The clock is ticking for both nations, as global shale gas exports threaten to saturate the markets before either has had time to export any gas.”

The tasks they face include passing legislation to encourage and safeguard investors, securing investment for infrastructure, and allaying concerns about potential corruption.

“To ensure… LNG captures the market window in 2018 to 2020, given the five- to six-year construction timetable for such a large project, it needs to reach financial close during 2013/14,” Simon Ashby-Rudd, Standard Bank’s head of oil and gas, said.

The Tanzanian government is expected to launch a new bidding round for gas exploration this month.

However, it has yet to finalise its natural gas policy, and debate rumbles on over how much gas should be sold to foreign investors and what safeguards should be put in place to ensure development of the country’s own gas and electricity sector.

Adding to the mix, the government’s term ends in 2015, stirring political debate within the ruling party and the opposition over the best approach.

“The government will hesitate to bring it [the gas policy] forward in the current political climate,” political risk consultancy Eurasia Group said.

“The opposition will seek a firmer stance on local participation in the sector,” it said, adding that existing agreements could be under threat.

In neighbouring Mozambique, the ruling Frelimo’s hold on power offers political stability for foreign investors, which could mean speedier passage of needed regulations.

“Frelimo’s dominance remains unchallenged. As such, pending changes to regulatory and fiscal codes for the gas sector are likely to pass through Mozambique’s legislature by year’s end,” Eurasia Group said.

Given the different political and regulatory environments, energy consultancy Wood Mackenzie expects Mozambique to export its first LNG cargo by 2019, while Tanzania will have to wait until 2021.

Britain’s BG Group and Ophir Energy have been at the forefront of exploration in Tanzania, and energy majors Exxon Mobil and Statoil have also found gas.

Reflecting Asia’s hunger for gas, Japan’s Mitsui, China National Petroleum Corporation and South Korea’s Kogas have also joined projects.

“We think east Africa has a very competitive cost base,” said Mike Fisher, Ophir’s chief operating officer, but he noted that after 2020 it might become more difficult to clinch good deals as increased supply could weaken prices. – Henning Gloystein and Oleg Vukmanovic for Reuters