Monetising Mozambique’s gas

By Ian Simm

Mozambique is home to some of to the largest gas finds made in recent years – “large enough to satisfy 10 trains of LNG and several domestic mega-projects,” according to the country’s gas master plan.

Neighbouring Tanzania has also made finds that, while dwarfed by those of Mozambique, are significant in their own right. Added together, and coupled with considerable recent oil strikes in Uganda and Kenya, they have drawn a great deal of attention to East Africa.

Indeed, at October’s East Africa Oil and Gas Summit held in London, a great deal of excitement surrounded the presentation of Tavares Martinho, exploration manager for Mozambique’s state-owned Empresa Nacional de Hidrocarbonetos (ENH), who noted that out of the 23 wells drilled in the country, only two were not considered commercially viable.

Of a total of 170 trillion cubic feet (4.8 trillion cubic metres) of Mozambican gas, around 100 tcf (2.8 tcm) is recoverable, and with further exploration, the total reserves could reach 200-250 tcf (5.7-7 tcm). High hopes indeed.

With numbers like these being trumpeted, it is no wonder that industry executives and commentators alike have spoken of Mozambique becoming a regional energy hub. The discovery of oil, while not commercially viable, has given hope that the area may also hold liquid hydrocarbons.

And north of the border, several major finds have taken total Tanzanian gas reserves up to around 33 tcf (935 bcm).

Reserves

The largest of Mozambique’s finds have been made in Areas 1 and 4. In offshore Area 1 – which covers around 2.6 million acres (10,683 square km) in the deepwater Rovuma Basin – operator Anadarko and its partners have drilled 11 successful wells.

Nine of these were in the Prosperidade complex, and the other two are located in the Golfinho/Atum complex. Prosperidade holds 17-30 tcf (481-850 bcm) or more of estimated recoverable resources.

Golfinho, which was discovered in May 2012, is located around 32 km northwest of Prosperidade, and was followed by the Atum discovery in June. The complex is estimated to hold 10-30 tcf (283-850 bcm) of recoverable gas.

Anadarko holds an operating 36.5% working interest in Area 1, and is partnered by Mitsui E&P Mozambique Area 1 (20%), BPRL Ventures Mozambique (10%), Videocon Mozambique Rovuma 1 (10%) and Cove Energy Mozambique Rovuma Offshore (8.5%), while ENH holds a 15% interest, which  is carried through the exploration phase.

To the east, Italy’s Eni and its partners discovered the Mamba complex in late 2011. Located in the 17,646-square km Area 4, Mamba is thought to hold 30 tcf (850 bcm) or more of gas in place.

Eni is the operator of Area 4 with a 70% stake, and is joined by Portugal’s Galp Energia (10%), South Korea’s KOGAS (10%) and ENH (10%, carried through the exploration phase).

 

Big difference

While gas looks likely to present a prosperous future for both Tanzania and Mozambique, David Ledesma, an independent strategy and LNG consultant at South Court, told me in early February that the differences were stark. “Tanzania has quite a lot of gas, while Mozambique’s reserves are vast.”

“It is important to note that the amount of gas in Mozambique is so great that it can do what it wants,” he said, noting that Mozambique’s gas consumption is negligible compared to its reserves, and that the country can therefore export vast quantities. According to the US Energy Information Administration (EIA), Mozambique’s population of 22.9 million people consumed only 18 bcf (510 million cubic metres) per day of gas and 109,000 barrels per day of oil in 2011. Clearly Mozambique has enough gas to cater to local demand without putting much of a dent in the volume it can put to other uses. Indeed, Ledesma said: “There is the ability to utilise all forms of gas monetisation.”

Putting it to use

Unsurprisingly, most of the talk about the monetisation of Mozambique’s gas has been focused on LNG.

According to the country’s gas master plan, the first train is expected to come on line in 2018, with two further trains coming on line every two years, reaching a total of 10 trains by around 2028. This would put it on a par with current LNG export champion Qatar, which ships around 77 million tonnes per year.

Ledesma noted that while Mozambique’s resource was sufficient to provide for 10 trains, the number of major LNG projects slated to come on line in the coming decade worldwide would bring fierce supply competition.

Mozambique’s location puts it at an advantage for providing gas to Asian markets, but large Australian LNG projects will also be competing there. The US shale gale, which changed the face of the global LNG markets, is also likely to provide cheaper gas than Mozambique, while progress in China’s shale gas sector could also pose a challenge further down the line.

Mozambique has already received industry requests for a total of more than 790 bcf (22.4 bcm) per year of gas as feedstock for projects in countries including Japan, South Africa, South Korea, Germany, Norway and India. (See table)

Downstream demands

Obviously, most of Mozambique’s gas will be exported. But that begs the question, how will the remainder be processed to meet domestic needs best?

In its Middle Africa Annual Outlook for 2013 – released last week, Ecobank said: “Demand for refined products across the entire African continent is likely to rise by up to 40% to 4.3 million barrels [per day] in 2020, from just 3 million barrels 5 years ago. This will equate to roughly an annual average growth rate of between 3-4%.”

It added: “East Africa’s downstream market consumes about 328,000 bpd of petroleum products annually, and should witness a 4.5% increase to 342,000 bpd in 2013,” with diesel representing nearly 50% of the 156,000 bpd of refined products consumed in southern Africa.

“We do not expect any new capacity to be added [to southern African refining] in 2013, though a handful of refinery construction projects could start this year. One such project is the construction of Mozambique’s 350,000 bpd refinery, likely to commence in 2013 but not due for completion before 2015.”

Gas-to-liquids (GTL) technology has been mooted, but Ledesma told me that while “it would work in practice,” costs would likely prove too high for it to be viable. GTL plants tend to be large and expensive – like Qatar’s US$19 billion 140,000 bpd Pearl GTL project in Ras Laffan. However, South Africa’s Sasol has indicated that smaller plants could be profitable in Mozambique.

According to the gas master plan, if GTL were to come into play, it “could displace imports and open up regional African markets for transportation fuel.”

Power, petchems and problems

In addition to LNG and GTL, Maputo has said that we can expect to see gas-powered plants, fertiliser plants and methanol units appearing around the country. The master plan says that 150-200 MW gas-powered plants will be used for local markets and to add voltage support for the grid.

Meanwhile, around 58 new fertiliser plants – producing urea – should be brought on line in the next few years, and while excess supply in potential export target countries could make it unprofitable, locally produced urea would reduce or eliminate ongoing imports for the Mozambican agriculture sector. It noted that, despite current oversupply, methanol output would be targeted at China.

Mozambique appears set to ride the gas boom and has the potential to give its economy a full overhaul. However, there will likely be issues with local content. According to the CIA World Factbook, 45.7% of the population is 0-14 years of age.

Combined with a literacy rate of 56.1% in those older than 15, this leaves us with a populace ill-equipped to work in the energy sector. Training will be forthcoming, however, and in the interim period it is likely that an immigrant workforce will be required to get the first LNG train running.

Qatar imported more than 100,000 workers in order to build its various projects. This could prove politically difficult in East Africa and is unlikely to be replicated. Like their counterparts in Tanzania – where demonstrations about a pipeline from Mtwara last week led to several deaths – Mozambicans will want to see the benefits from the country’s new-found riches.

This leaves questions about education, contracts and cultural differences.

However, Mozambique’s enormous potential is likely to tide it over and weather even the most contentious civil storm.

Europe pins hopes on opening Southern Gas Corridor

By Ian Simm

The European Union has made no secret of its desire to reduce its dependence on Russian gas imports, and the opening of the Southern Gas Corridor is seen as pivotal to weaning the bloc off Gazprom’s teat.

EU Energy Commissioner Guenther Oettinger last week said that opening the corridor was a priority and that 2013 would see a final decision made about the pipeline’s route as well as the final investment decision (FID) on the entire project.

Oettinger told Azeri news agency Trend: “The aim of the Commission has always been to open the Southern Gas Corridor for the EU in order to link directly and physically the EU gas market to the largest deposits of gas in the world in the Caspian Sea Basin and the Middle East.”

The plans currently centre on transporting gas from the second stage of Azerbaijan’s offshore Shah Deniz field (SD2) to Europe by pipeline.

Pipeline planning

The plan is first to pipe the gas through Turkey and to the doorstep of Southeast Europe via the Trans-Anatolian Gas Pipeline (TANAP), which has an initial capacity of 16 billion cubic metres.

From there it will be piped into the heart of Europe; however, the decision has yet to be made about the route it will take. A decision is expected to be made by June, but Trend has reported that Shah Deniz gas may not reach Europe until 2019.

BP, the operator of Shah Deniz, has identified the Nabucco West and the Trans Adriatic Pipeline (TAP) – each designed to carry 10 bcm per year of gas – as the final candidates for deliveries to European customers. It is expected to select one of these shortlisted routes later this year.

In a recent interview with Bloomberg, Alasdair Cook, BP’s vice president for Shah Deniz development, said his company was dedicated to the TANAP project. He said that BP would sign a commercial agreement in the next few months.

Cook also indicated that BP’s entry into TANAP was part of a wider US$40 billion investment programme focused on SD2. In addition to this upstream development project, BP will also work to open a corridor for SD2 gas exports.

According to Cook, the super-major will oversee the expansion of the capacity of the South Caucasus Pipeline (SCP), which is currently pumping Shah Deniz Stage 1 (SD1) gas, from 9 bcm per year to 25 bcm per year. This will cost around US$25 billion.

The company will also participate in the construction of TANAP and a connecting pipeline into Europe. The governments of Azerbaijan and Turkey recently ratified an agreement on TANAP, which is set to carry a price tag of around US$10 billion. The pipeline project is currently split as follows: the State Oil Company of Azerbaijan Republic (SOCAR), the project’s operator with 80%; Turkey’s state pipeline operator Botas, with 15%, and Turkish Petroleum (TPAO), with 5%.

SOCAR has invited other members of the Shah Deniz consortium to join TANAP. It has offered 12% to BP – which the super-major announced in late January that it intended to buy – and hopes to transfer another 12% to Norway’s Statoil, which is in charge of marketing Shah Deniz gas. Meanwhile, it also intends to sell 5% to France’s Total.

These firms have also struck agreements with Nabucco Gas Pipeline International (NGP), the group backing the Nabucco West route for SD2 gas shipments to Central Europe, and TAP, which hopes to pump the gas across northern Greece and Albania into southern Italy. BP, Statoil and Total may eventually take as much as 50% in either pipeline, depending on which of the two wins the contract to transport gas from SD2 to Europe later this year.

BP and its Shah Deniz partners have promised to make a final decision on the issue in the second half of 2013. Gas from SD2, which will see output peak at 16 bcm per year, is now scheduled to flow in 2018.

The next phase of development will see the Azeri field produce an additional 16 bcm per year, bringing total output up to around 25 bcm per year. Around 10 bcm per year of SD2 output is slated for delivery to Europe – not enough to fill both Nabucco West and TAP.

However, it is not guaranteed that 10 bcm of SD2 gas will be available for Nabucco West/TAP owing to increasing Turkish demand.

Euro-Russian relations

Oettinger told Trend that the European Commission was neutral as to where the gas is piped to in Europe, adding that it equally supported both projects.

He said: “Our policy remains that we firstly want to see a dedicated pipeline to be built outside the EU, and if its capacity is limited at the start, it should be ensured [that it] legally and technically [can] increase [its] capacity to transport higher volumes at a later stage when these become available; and secondly, we want a clear and transparent legal framework for the pipeline, which would ensure uninterrupted gas supply to the EU.”

This brings us back to the EU’s issue with dependence on Russia. With the bloc in economic disarray, the sense of continuing to rebuff an increase in trade with Russia could be questioned.

Trade between Russia and Europe is currently worth more than 300 billion euros (US$393 billion) per year and Russia supplies Europe with around 20% of its gas.

In October 2012, former German Chancellor Gerhard Schroeder, the chairman of the Nord Stream gas pipeline consortium, was quoted by Deutsche Welle as saying: “If Europe wants to assert itself in global competition, this won’t work without Russian gas in particular”.

Nord Stream is a twin pipeline system that runs from Vyborg in Russia to Lubmin in Germany through the Baltic Sea. The pipelines cross the exclusive economic zones (EEZs) of Russia, Finland, Sweden, Denmark and Germany. Completed in April last year, the twin 1,224-km pipelines have a total capacity of 55 bcm, and will pipe gas to Europe for at least 50 years.

But there have already been reports that levels of Russian gas coming into Europe have not risen since Nord Stream’s inauguration, suggesting that the gas is being sent through Nord Stream instead of via Ukraine, where disputes over back payments have still to be fully resolved.

However, with Gazprom currently facing an anti-trust investigation from the EU regarding competition, it seems unlikely that the union will be in any hurry to strengthen ties.

When contacted about creating distance from Russia, the European Commission told me: “Russia will continue to be our partner in the future. Gas imports from Russia are not likely to decline in absolute numbers. We would like to diversify supply (more sources); this is why in addition to Russian partners it is our priority to get gas from Azerbaijan via TAP/Nabucco/TANAP.”

The Commission added: “Gas consumption in the EU will increase in the medium term – also as a back up or in addition to renewable energy because gas power plants can be turned on or off easily on demand. Gas from the Caspian region should cover this increase of demand.”

Russia’s answer to the SD2 pipe options, South Stream, is envisioned to pump Russian natural gas to Europe via the Black Sea and Balkans, bypassing transit countries like Ukraine. A rival to the Nabucco West and TAP projects, the US$39 billion venture will have an annual capacity of 63 bcm per year of gas. At the request of Russian President Vladimir Putin, Gazprom held a groundbreaking ceremony on Russia’s Black Sea Coast for the first link in the pipeline in December.

Putin has prioritised the project despite consensus among energy experts that it is too expensive and unnecessary, and he appears to be the driving force behind the project, with Gazprom signing related deals with other Balkan countries in recent months.

The EC told me: “South Stream has started construction on Russian territory only. On the EU territory, there is no final route decided and vital environmental impact assessment studies, which might take years, have not been carried out yet. South Stream is not a priority for the EU because it would most likely re-route Russian gas that currently is delivered via Ukraine.”

On February 25, Matt Bryza, director of the International Centre for Defence Studies (ICDS) and former US ambassador to Azerbaijan, told New Europe: “I think strategically knowing the people I do in Brussels and elsewhere that they would like it to be Nabucco. Nabucco was the flagship EU project. TAP wasn’t, Nabucco was. And there are other reasons why I think the EU overall people maybe on balance favour Nabucco West.”

“For example, the markets served by Nabucco West will be the ones that are most heavily dependent in Southeast Europe on one major supplier. That said, I also think the European Union will be absolutely fair, [and] will not pressure anyone on this.” The Shah Deniz consortium’s decision is eagerly awaited by both politicians and energy institutions throughout the region.

Both Brussels- and Moscow-backed projects for the Southern Gas Corridor are shrouded with at least some uncertainty. As the EU moves to make its energy ‘greener’, gas will play a pivotal role, and thus the demand for the new imports is likely to be there. However, with LNG export projects from major new gas discoveries – notably those in the Eastern Mediterranean and Mozambique, as well as Australia’s plethora of gas export facilities and ever increasing US unconventional output – there are plenty of options. It remains to be seen how competitive the price of gas transported through the Southern Corridor projects will be, but as the EU sees it, Europe needs secure supply of gas from non-Russian sources to protect it from geopolitical concerns about Gazprom’s role in Eastern Europe. Can you put a price on that? Brussels would apparently argue not.