Tanzania LNG adrift

13 February 2017
07 February 2017, Week 05, Issue 675

WHAT:Tanzania hopes to reach terms for the construction of an LNG plant by 2018.

WHY:The complex will enable Tanzania exploit its huge offshore gas reserves.

WHAT NEXT:A number of factors will need to be aligned in order to develop the offshore reserves-to-greenfield LNG plan – government desire alone is insufficient. 

Tanzania is hoping for an agreement in 2018 with the four foreign companies that are working on a US$30 billion LNG complex in the southern town of Lindi, close to the country’s large offshore natural gas discoveries.

A host government agreement is the first step required towards the construction of an LNG plant, as part of a larger plan for a new export terminal, Reuters was told by the acting head of Tanzania Petroleum Development Corp. (TPDC), Kapuulya Musomba.

“Discussions for a host government agreement started in September 2016 and we expect the negotiations to last for about one and a half years,” said Musomba, in comments cited by Reuters in late January.

The project involves TPDC partnering with Statoil, ExxonMobil, Ophir Energy and BG Group, which was acquired in February 2016 by Royal Dutch Shell.

Musomba suggested the companies would be likely to push the government hard for assurances of reliable and acceptable fiscal, regulatory and commercial terms before they commit to investment in the project. “Conclusion of these talks will determine when the international oil companies [IOCs] will actually put in money for construction of the LNG,” Musomba said.

Starting in 2011, Tanzania has made its way onto the world energy map through a series of consecutive gas finds, the latest of these occurring in February 2016, when an additional 2.17 tcf (61.4 bcm) of possible natural gas deposits was announced. This raised the East African state’s total estimated natural gas reserves to over 57 tcf (1.61 tcm), making it the third largest gas resource in Africa. Alongside the discovery of substantial deposits of crude oil in Uganda and major gas reserves in Mozambique, these deposits have helped transform East Africa into a major focus for hydrocarbon exploration.

The majority, at 47.13 tcf (1.33 tcm), of the gas discoveries in Tanzania have been made in deepwater offshore blocks in the south of the country. These will require the construction of pipelines and other tieback facilities to bridge the 200 km or so between the onshore plant and the gas reserves.

These will not be added to by two recent offshore wells drilled by Shell, which owns Blocks 1 and 4 with Singapore’s Pavilion Energy and the UK’s Ophir Energy. The joint venture partners began work on the Kitatange-1 well in Block 1 and the Bunju-1 well in Block 4 in the Mafia Basin in early November 2016 to meet exploration commitments signed with the government. 

“After evaluation, Shell … has confirmed that good quality reservoir was encountered in both wells.” However, hydrocarbons were not found, said Ophir in late December.

Developments

Tanzania already uses some of its gas reserves to generate electricity and to power domestic industries such as cement, steel, textiles and breweries, by tapping gas from the Songo Songo and Mnazi Bay onshore fields. However, the planned LNG infrastructure will enable the government to export gas and build up revenues that the government claims will help strengthen areas such as education, health, water and infrastructure.

The country’s central bank, the Bank of Tanzania, has forecast that just by starting work on the plant another two percentage points will be added to ongoing annual economic growth of around 7%.

Tanzania is aiming to sell much of its LNG to large Asian markets, including China, India, Japan and South Korea, where most of the demand growth for LNG is anticipated. 

Energy Permanent Secretary Justin Ntalikwa said in late October that the LNG plant would have two trains, each with a capacity of 5 million tonnes per year. “This LNG plant size will consume 11.1 tcf [314 bcm] of gas over 20 years, which is equivalent to around 29% of the recoverable natural gas,” he said. Adding a third and fourth train of the same size would require 15.8 tcf (447 bcm) and 19.5 tcf (552 bcm) of gas respectively over the same 20-year project lifecycle, he observed.

Reforming Tanzanian President John Magufuli has taken a forceful approach in pushing for progress with the gas liquefaction plant and the LNG export terminal project since his election in late 2015. In August 2016, Magufuli ordered officials to accelerate work on the planned complex, contending it had taken too long to start the project.

The government has acquired more than 2,000 hectares (20 square km) of land for the construction of the planned LNG terminal at Likong’o village in Lindi, near Mtwara. A final investment decision (FID) has reportedly been held up by government delays in completing issues relating to the acquisition of the land and establishing a legal framework for the country’s early-stage oil and gas industry. 

Long lead time

Although the government has made regular statements on its enthusiasm to promote the LNG project, it has been less than specific on the timeline. Statoil’s Tanzania country manager, Oystein Michelsen, said in November 2016 that at least a decade would be required before first LNG exports. 

He said an FID on the LNG export terminal would not be made for at least five years, and possibly much longer. It would take another five years after that decision to build the plant, he predicted, adding that 40 years of LNG production is expected by Statoil once the complex comes on stream. 

A tendency for delay at East Africa’s key hydrocarbons projects has certainly been visible in Uganda, where there is still no clear date for first crude exports from the country’s Lake Albert scheme. Another worry could be the concern among investors caused by issues involving Tanzania’s power sector, where Magufuli has cancelled a long-expected tariff increase, and has also sacked state-owned utility Tanesco’s managing director, replacing him with a university professor. Tanesco has been struggling to pay off massive debts, including substantial arrears to independent power producers (IPPs), in a situation that bodes poorly for establishing commercial energy templates. 

Tanzania has taken the sensible step of preparing a natural gas utilisation master plan, which will detail the development and uses of the East African country’s substantial gas discoveries for the next 30 years. But while NewsBase expects that the country’s LNG project will be aided by the major debt difficulties that have arisen in neighbouring Mozambique, the logistics and complexities involved in building a large LNG export scheme are legion. 

Tanzania has shown at Songo Songo and Mnazi Bay that it is able to develop onshore gas reserves successfully. Developing offshore reserves is a step up in terms of complexity that will require government and companies to be aligned. Given the industry’s cautious stance on such megaprojects, coupled with some concerns over Tanzania’s regulatory authorities, first Tanzanian LNG appears unlikely to come until the second half of the 2020s.

 

Edited by

Ed Reed

Editor

Any questions? Please get in touch