The U.S. hosted an unprecedented summit of 50 heads of African states in Washington, D.C. in early August. The event was meant to highlight the enormous investment opportunity that the African continent has to offer, and the three-day summit resulted in $37 billion worth of business commitments.
The continent has long been a source of natural resources, with oil and gas proving to be the most lucrative. Countries like Nigeria, Libya, Algeria, and Angola have produced enormous volumes of oil for years.
But there are other opportunities in Africa that have not hit investors' radar.
Take Tanzania, a mid-sized East African nation whose economy is built on agriculture, tourism, and gold mining. Tanzania produces almost no oil at all, and until recently, it has produced negligible volumes of natural gas.
But the Tanzanian government hopes to change that. Its top energy official, Sospeter Muhongo, visited Houston ahead of the African summit in D.C. Muhongo met with over 50 companies in Houston during his visit, seeking to court investment for the country's fledgling natural gas sector. "We need both human capital and the institutional knowledge to go into the gas economy. This is very new to us," Muhongo said in a recent interview.
The country has built a bit of momentum over the last four years. In 2010, the BG Group (LON: BG) discovered offshore natural gas fields near the island of Zanzibar. The company worked in concert with Ophir Energy (LON:…
The U.S. hosted an unprecedented summit of 50 heads of African states in Washington, D.C. in early August. The event was meant to highlight the enormous investment opportunity that the African continent has to offer, and the three-day summit resulted in $37 billion worth of business commitments.
The continent has long been a source of natural resources, with oil and gas proving to be the most lucrative. Countries like Nigeria, Libya, Algeria, and Angola have produced enormous volumes of oil for years.
But there are other opportunities in Africa that have not hit investors' radar.
Take Tanzania, a mid-sized East African nation whose economy is built on agriculture, tourism, and gold mining. Tanzania produces almost no oil at all, and until recently, it has produced negligible volumes of natural gas.
But the Tanzanian government hopes to change that. Its top energy official, Sospeter Muhongo, visited Houston ahead of the African summit in D.C. Muhongo met with over 50 companies in Houston during his visit, seeking to court investment for the country's fledgling natural gas sector. "We need both human capital and the institutional knowledge to go into the gas economy. This is very new to us," Muhongo said in a recent interview.
The country has built a bit of momentum over the last four years. In 2010, the BG Group (LON: BG) discovered offshore natural gas fields near the island of Zanzibar. The company worked in concert with Ophir Energy (LON: OPHR), Statoil (NYSE: STO), andExxonMobil (NYSE: XOM). The Tanzanian Petroleum Development Corporation maintains that Tanzania has 50.5 trillion cubic feet of proven natural gas reserves. The U.S. Geological Survey estimates that there could be 441 trillion cubic feet of natural gas spread across East Africa's coastal region.
The major natural gas fields were discovered off of Tanzania's coast, south of the capital Dar es Salaam (see map). BG Group has a 60 percent controlling interest in Blocks 1, 3, and 4, with Ophir Energy accounting for the other 40 percent. There are a total of seven gas fields, with an estimated 10 trillion cubic feet of technically recoverable natural gas.
Block 2 is owned by Statoil (65 percent stake) and ExxonMobil (35 percent stake). The four natural gas fields hold 10 to 13 tcf of technically recoverable natural gas, with 15 to 17 trillion cubic feet in place.
Tanzania proposed a production sharing agreement law in 2013 that seeks to incentivize development. Although there are still taxes and a minimum stake by the state in any new projects, the law lowered the offshore royalty rate from 12.5 percent down to 7.5 percent.
Thus far, Tanzania's offshore natural gas has been disconnected from the mainland. However, that is expected to change, as the China National Petroleum Corporation (CNPC) is set to complete a pipeline system by the end of 2014 or early next year. The Mnazi - Dar es Salaam pipeline will connect offshore gas fields to the mainland in Mnazi Bay. Then it will run northward along the coast and connect into the existing Songo Songo pipeline system (see map).
The pipeline is critical for Tanzania's future growth in natural gas production. And even though the pipeline has yet to be inaugurated, Tanzania has ambitious plans to burn more natural gas for electricity. With the pipeline in place, and natural gas fields open for business, Tanzania's Electricity Supply Company expects it will be able to attract enough private investment to build out the nation's electric power system. It hopes to more than quintuple Tanzania's electricity capacity, from 1,600 megawatts today to over 10,000 megawatts within 10 years. While it is unclear if Tanzania can meet such a lofty goal, there is a lot of pent-up demand - only one-quarter of Tanzanians have access to electricity.
Although there is a lot of promise in this East African nation, investors should be wary of the obstacles that exist to Tanzania getting its gas sector off the ground. Tanzania is one of the worst places to do business in the world, ranking 145 out of 189 in ease-of-doing business rankings. A dearth of infrastructure remains a significant problem, and a massive build out will be a prerequisite before natural gas begins flowing in earnest. Also unclear is how large of a stake the Tanzanian state will take in offshore drilling projects. Other taxes and royalties also need to be ironed out.
Perhaps most importantly, the country has yet to work out a regulatory framework. The key obstacle at this point is clearing up who controls natural gas resources. Tanzania was considering amending the constitution to clarify this point, but there is debate about whether or not Zanzibar, as a semi-autonomous region within Tanzania, has sole control over the natural gas resources near its shore.
If Zanzibar does indeed have control over hydrocarbons near its shores, the archipelago could theoretically sign deals directly with oil companies and reap the profits of doing so. But, at this stage, that has not been decided.
The debate is holding up investment, with major oil companies BG Group, ExxonMobil, Royal Dutch Shell, and Ophir Energy waiting on the sidelines. An election is scheduled for October 2015, and it appears that the government will not decide on the pending matters until after then. The delay is a major setback for Tanzanian's president, who hoped to secure a long-term hydrocarbons framework as a part of his legacy.
Pushing the issue off would further delay the production of the vast energy resources that lie in Tanzanian waters. According to the Eurasia Group, a consultancy, Tanzania may not begin production until 2022.
The delay could be critical. In addition to using natural gas production for domestic consumption, Tanzania also hopes to export excess supplies in the form of liquefied natural gas (LNG). But Tanzania is competing with its neighbor Mozambique, who is much further along in developing LNG export capacity.
And there is a race of sorts underway for global LNG suppliers. Demand is strong in the short-term for LNG supplies, as Japan is still trying to replace lost power from its idled nuclear reactors. China's appetite for LNG is also rapidly growing. But Tanzania is not operating in a vacuum - there are dozens of LNG export facilities under construction. By the end of this decade, there could be a glut of global LNG supplies, leaving the market relatively saturated just as Tanzania expects to be coming online.
In summary, there are many obstacles standing in the way of Tanzania developing its nearly 50 trillion cubic feet of natural gas. On the other hand, investors should keep watching. When the resources are in place, they tend to see investment at some point or another.
The International Monetary Fund views Tanzania's natural gas sector as a potential game-changer. Development of gas resources, plus the construction of an LNG export terminal, could result in $20-$40 billion in investment - which would be enough to make it Tanzania's largest investment ever.
"Although gas resources haven't yet been declared commercially viable, estimates of discoveries indicate recoverable offshore gas resources of at least 24 trillion-26 trillion cubic feet, potentially sufficient for a four-train Liquid Natural Gas plant (possibly as a common facility for several upstream gas fields)," the IMF said in a report. "A final investment decision is expected at the earliest in 2016 or 2017."