By Kim Moss, for Future Directions International
Decades of exploration in East Africa, have produced few large discoveries of oil and gas. Past exploration has also been hampered by political uncertainty and regional conflict. Things look set to change, however.
Attention is now focusing on East Africa’s offshore natural gas discoveries and this process escalated in 2012. The discoveries have garnered the attention of large international oil companies, which has led to investments in large exploration projects in the region. The gas finds have generated a marked interest, due not only to their size but also their placement in proximity to Asia. The discoveries have placed East Africa in the running to supply major Asian Liquefied Natural Gas (LNG) importers, putting them in competition with the USA and Australia.
Where are these fields located and who are the primary players?
The primary areas of interest for oil and gas discoveries in east Africa, both onshore and offshore, are Mozambique, Tanzania, Uganda, Kenya and Madagascar. These countries have also shown the most progress in readying themselves for commercial development. The US Energy Information Administration (EIA) has predicted that Uganda and Madagascar are poised to become Africa’s top oil producers. As this paper seeks to explore the opportunities available from offshore natural gas discoveries, however, the focus will be on Tanzania and Mozambique.
The primary offshore discoveries in East Africa have been off the coasts of Mozambique and Tanzania, where estimates indicate that the discoveries contain at least 100 trillion cubic feet (tcf) of natural gas. The finds, which have been equated to those off the North West Shelf of Western Australia, have attracted a variety of oil and gas companies, ranging from junior independents to oil majors. Several Australian companies are already involved in the region, primarily Tanzania, as both operators and joint venture partners on several projects. Energy, Beach Energy Limited (ASX:BPT), Jacka Resources Ltd (ASX:JKA) and BOUNTY OIL AND GAS (OTCMKTS:BYOGF), are all involved in Tanzanian projects. As the interest in the area has escalated an interesting trend has begun to emerge; there has been an increase in Asian, state-backed oil and gas companies buying into these projects at high prices.
In Mozambique, the key players are Italy’s Eni SpA (NYSE:E) (BIT:ENI) and the US independent Anadarko. These companies have led successful exploration in their offshore licence areas (Area 1 and Area 4) According to Anadarko, the company has drilled more than a dozen deepwater wells within the Offshore Area 1 Block with discoveries of between 35 and 65 tcf of recoverable natural gas.
In contrast, the discoveries in Tanzania are smaller than those in Mozambique. The key players in this area are considered to be BG Group plc (LON:BG) (OTCMKTS:BRGYY) and Statoil ASA (NYSE:STO) which have thus far led offshore exploration activities in Tanzania. BG and partner Ophir Energy Plc (LON:OPHR) have made seven discoveries in Blocks 1, 3, and 4 and Statoil, in partnership with Exxon Mobil Corporation (NYSE:XOM), has made four discoveries in Block 2.
The two countries are at varying stages of development and it is difficult to forecast a clear front-runner; however, it is worth noting that the EIA predicts that Mozambique will be the first of the two to develop the capability to export LNG.
Anadarko has said that it anticipates sales of LNG from Mozambique will begin in 2018, reaching full operational capacity by 2030-32. Commentators have argued otherwise, however, stating that a more reasonable expectation for the commencement of LNG sales would be 2020.
Why should Australian companies invest in East Africa?
East Africa is a region that is still relatively underexplored and thus represents a frontier market. The discoveries provide numerous opportunities for investment, not only as part of the upstream process, but also in other sectors that will subsequently face increased demand. For example, London-listed Baobab Resources is calling for a strategic partner to assist in developing its pig-iron project in Mozambique’s northern Tete Province due to the surge in demand for steel from the emerging energy sector; a trend that is expected to continue in the medium-term.
East Africa’s governance has also improved, as has the economy; consequently it is becoming more attractive for foreign investors. Australia’s private sector has already recognised the potential of investing in Africa and the economic importance of the region. This is particularly true in the case of the mining industry. The stabilisation of the region, reduction of political risk and a decrease in the overall cost of capital, have meant that projects that were previously considered to be uneconomic, have now become viable.
Improving Corruption and Transparency
According to the Extractive Industries Transparency Initiative (EITI), countries that have a wealth of resources, such as oil and gas, are inclined to under-perform economically. They have higher levels of conflict often combined with poor governance. These factors can result in countries falling under the so-called ‘resource curse’. Although this is not always the case, by encouraging greater transparency in these countries, the negative impacts can be diminished.
Tanzania and Mozambique are considered to be fully compliant members of the EITI. Their participation in such international initiatives is of importance, particularly in Africa, as it instils confidence in investors, who are cautious about the region due to integrity risks. It also helps to ease fears among the civil society, as the government has to be more accountable. Membership of the EITI promotes improved economic and political stability, which contributes to the prevention of conflicts associated with revenue accrued in the oil and gas and mining sectors.
Challenges to investing in Africa and Key Risks
Why Australian IOCs may find it difficult to enter the market: NOCs v IOCs
Although Australian energy companies have shown interest in investing in East Africa, the process has proved to be expensive and this may deter future investment interests. Western Australia-based Woodside Petroleum’s chief executive, Peter Coleman, said in November 2012 that East Africa was becoming too expensive for oil and gas exploration. Coleman did indicate, however, that the company would continue to monitor the East African region, particularly Mozambique and Tanzania, as a potential competitor to Australian LNG exports. Similarly, Royal Dutch Shell plc (NYSE:RDS.A) (NYSE:RDS.B) (LON:RDSA) (LON:RDSB)/Shell was involved in a prolonged battle with state-backed Thai company PTT for the purchase of Cove Energy PLC (LON:COV) , which held an 8.5 per cent share in Andarko’s Offshore Area 1 of Mozambique. Although analysts originally speculated that Shell would be prepared to spend up to £3.20 per share for the company, it declined to bid more than £2.20 per share. Shell was outbid by PTT Public Company Limited (BKK:PTT) , which paid £2.40 per share (approximately US$1.9 billion in total). In response to questions raised about its decision not to bid higher, the company responded that, based on market valuations and the economic potential of Cove’s assets, a higher bid was not a good investment. In May 2013, according to media sources, Shell has reiterated its stance, after being involved in talks with Anadarko.
In another recent development, unconfirmed reports from April 2013 have suggested that two of India's state-backed companies are the leading joint bidders for a twenty per cent stake in the Rovuma 1 offshore block, owned by Anadarko Petroleum Corporation (NYSE:APC) and Videocon Industries Ltd. The value of the stake, which the Oil & Natural Gas Corporation (ONGC) and Oil India Ltd. (OINL) are said to be interested in, has been estimated at up to US$6 billion. The third biggest European oil company, France's Total, reportedly considered bidding for the same stake, but decided against it due to the risks of project delays and cost overruns.
These examples highlight the continuing prominence of national oil companies, their ability to manage increasingly complex projects and to compete directly with IOCs, especially on price. Consequently, investing in these areas may prove to be too costly for Australian companies, especially junior and mid-size independents. It is likely that many will come to a similar opinion to the large-independent, Woodside Petroleum, and look elsewhere to seek potentially high-value deals before they are claimed by others.
It is important to note that the presence of NOCs and their increasing status in the region will not fully deter interest in investment