One Of The Brightest Prospects In LNG

Introduction

When Royal Dutch Shell (NYSE: RDS.A) proposed the acquisition of BG Group (LON: BG), it was staking its future on the growth of liquefied natural gas (LNG).

Much of the attention focused on BG Group's Australian assets. In Australia's northeast, BG is behind the Queensland Curtis LNG project, a large export facility that could earn BG (and if the deal goes through, the combined Shell-BG company) a large return for years to come.

While Australia has positioned itself to become one of the largest exporters of LNG, it is not the only player in the market.

East Africa also has large deposits of natural gas and is geographically positioned to capitalize on exports. And it is here where BG also has a strong presence, and its assets in Kenya and Tanzania certainly did not go unnoticed by Shell executives.

East Africa Natural Gas Discoveries

Tanzania is pushing hard to develop their oil and gas resources. It is still in the early phases, as infrastructure and actual investment dollars committed need to catch up to the excitement. But there is a lot to like about the region, particularly offshore.

BG got a foothold in Tanzania in 2010, and it is sitting on several blocks offshore that have a lot of potential. It farmed into blocks 1, 3, and 4 (see map), taking a 60 percent ownership stake in them. The original holder was Ophir Energy (LON: OPHR), a small company that actually holds the largest net acreage off the coast of Tanzania. Ophir held the remaining share.

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BG and Ophir have done very well with their acreage. Block 4 yielded the Pweza discovery, a natural gas discovery at 1,400 meters of depth. But that was followed by several more discoveries. The Mzia project (holding around 3.5 trillion cubic feet of natural gas) and the Jodari (estimated 4.5 tcf) both were discovered in block 1. Block 1 alone yielded six gas discoveries. Altogether, the BG/Ophir joint venture logged around 17 tcf in natural gas discoveries across the three blocks, enough natural gas to support an LNG export facility.

Ophir, as a small company, cashed out of part of its holdings in 2013, selling a 20 percent stake to Pavilion Energy for $1.2 billion. Its strategy has been to add value on the exploration side, leaving drilling to larger partners and selling off stakes when it has proven the resource.

From BG's perspective, the drilling campaign has been a huge success. It achieved 10 natural gas discoveries out of the 15 wells that it drilled.

Block 2 was handled by Statoil (NYSE: STO) and ExxonMobil (NYSE: XOM). Together, the two oil companies (Statoil with a 65 percent stake, ExxonMobil with 35 percent) made seven gas discoveries. On March 30, 2015, Statoil announced yet another discovery, this one in which it had a 100 percent working interest. The Mdalasini well could hold around 1 to 1.8 tcf of gas. Next, Statoil plans on evaluating one of its previous discoveries, and then it will take stock of what it is sitting on.

"Since the start of the programme in February 2012, we have drilled 13 wells and made eight discoveries, including Mdalasini-1. We still see prospectivity in the area, but after appraising the Tangawizi-1 high-impact discovery, which was made in March 2013, there will be a pause in the drilling to evaluate the next steps and to mature new prospects," Nick Maden, a top Statoil exploration official said in a statement.

Exporting the Gas to Asia

It is clear that Tanzania is sitting on a lot of gas, perhaps as much as 53 tcf or more. If fully developed, that is enough to make it a world class LNG player. BG, Ophir, Statoil, and ExxonMobil are all confident they have enough gas to commercially produce. The next step is to ensure the construction of an LNG facility to provide a way out for the gas.

Shell's purchase of BG raised the region's profile significantly. It is clear that the oil major sees a much brighter future for LNG than it does for other sectors, such as unconventional drilling in North America.

That puts Tanzania in the spotlight. By acquiring BG, Shell could seize control of one-third of Tanzania's gas resources.

Last year, the companies handling blocks 1, 3, and 4 signed a memorandum of understanding with the firms controlling block 2. That wanted to collaborate on the development of an LNG export facility. It only makes sense to work together so that all operators can have their gas reach international markets.

The coalition of companies plan on building a two-train LNG facility to be constructed in Lindi on Tanzania's southern coast. The terminal will export LNG to Asia - China, Korea, Japan, and India.

Obstacles

As we wrote in a 2014 edition of the Executive Report, one of the biggest obstacles holding back Tanzania's LNG is the lack of clarity in the regulatory environment. The government is still working that out. There are domestic concerns over exporting natural gas versus using natural gas to build up Tanzania's electric power and industrial sectors.

But the government recently announced plans to send $6 million in order to purchase land for an LNG export site. After a long period of limbo, that may finally push the ball forward on the planned $30 billion project.

While Shell's purchase of BG is a vote of confidence in Tanzania's LNG prospects, the merger itself is a significant obstacle to progress. Shell will face stiff antitrust scrutiny in multiple countries, and it may be forced to sell off assets. Ultimately, the outcome of the deal is still uncertain, and until that is cleared up, there won't be any final investment decisions made on Tanzanian LNG.

That means a final investment decision may not be issued until 2016, a crucial moment that will decide the fate of Tanzania's energy future. That would put the first shipment of LNG leaving Tanzania's shores at some point in the early to mid-2020s, perhaps 2024.

There is one factor to consider that is outside of Tanzania's control - its neighbor to the south is also seeking to build LNG export capacity, and may beat Tanzania to the punch. Mozambique is moving quicker and may being exporting sooner than Tanzania. No doubt that is being watched closely within Tanzania's government and is perhaps adding a bit of urgency to their work.

Conclusion

Tanzania has large natural gas resources off its eastern coast. It is in a good location to serve Asia with LNG, a fuel that could become increasingly important in the decades to come. For the companies involved, this is shaping up to be an important area of investment for the long haul.

Yet, there are a lot of uncertainties that will make corporate executives hesitate about putting significant money on the line. The most obvious of which is the uncertain investment climate in Tanzania. There are still a lot of question marks.

But even if they push forward, Tanzanian LNG will be entering a fluid marketplace that is set to see a rush of supplies come online before the decade is out. Australia, the US, Qatar, and perhaps even Canada are all building up their export capacity. That could depress LNG prices - already down by more than half since their highs of 2011-2013 - for years to come.

On the other hand, as mentioned above, Tanzania's LNG will only hit the market in the 2020s, far enough away that the LNG supply overhang could very well be sorted out by then. Shell thinks that LNG is the way of the future, and its purchase of BG is evidence of that. The down period for LNG markets could only be temporary, Shell believes, and over the next few decades the world will shift more towards natural gas as their main source of energy.

If Shell is right, then Tanzania has very bright prospects indeed