Challenges Ahead As LNG Plans Advance

BMI View: Continued exploration success is paving the way for Tanzanian LNG to enter the market from 2021 according to our current forecast. While we see Tanzania trailing Mozambique, where we expect first LNG from 2018/19, our view is that while challenges will be similar in both countries, the above ground risks in Tanzania appear greater at the outset.

Drilling success offshore Tanzania continues, with both BG Group and Ophir Energy reporting the Pweza-2 app raisal well intersected some 20 meters (m) of net gas pay on Block 4 at the end of August. The drillship will now move to spud the Pweza-2 well in a further test of the Pweza field, where gross recoverable resource estimates are now some 47.6bn cubic meters (bcm) .

Exploration and appraisal activity on Blocks 1,3 and 4 operated by BG Group (60%) and Ophir (40%) continues to prove up Tanzania's offshore potential. Recoverable gas resource estimates across the three blocks are new in excess of 364bcm. Promising activity also continues on Block 2, with partners Statoil (65%) and Exxon (35%), where gas in place is now estimated between 420 and 476bcm.

Risks Firmly To Upside As E&A Advances
Tanzania Oil, mn bbl & Gas, bcm Reserves

Challenges Ahead As LNG Plans Advance

BMI View: Continued exploration success is paving the way for Tanzanian LNG to enter the market from 2021 according to our current forecast. While we see Tanzania trailing Mozambique, where we expect first LNG from 2018/19, our view is that while challenges will be similar in both countries, the above ground risks in Tanzania appear greater at the outset.

Drilling success offshore Tanzania continues, with both BG Group and Ophir Energy reporting the Pweza-2 app raisal well intersected some 20 meters (m) of net gas pay on Block 4 at the end of August. The drillship will now move to spud the Pweza-2 well in a further test of the Pweza field, where gross recoverable resource estimates are now some 47.6bn cubic meters (bcm) .

Exploration and appraisal activity on Blocks 1,3 and 4 operated by BG Group (60%) and Ophir (40%) continues to prove up Tanzania's offshore potential. Recoverable gas resource estimates across the three blocks are new in excess of 364bcm. Promising activity also continues on Block 2, with partners Statoil (65%) and Exxon (35%), where gas in place is now estimated between 420 and 476bcm.

With plans for drilling activity to continue at a robust pace, the energy ministry expects US$680mn to spend on 17 new well between July 2013 and June 2014, our expectation are that natural gas reserves are in line for steady growth. However our forecast is more conservative than recent pronouncements from same ministry, which in August revealed its expectation that gas reserves would rise from a current official estimate of 1.2tr n cubic meters (tcm) to 5.6tcm by 2015.

Positive But Reserved On Reserves

While offshore success has proven up sizable and likely commercial deposits of natural gas in Tanzania, we note that pace and scale of discoveries, w hile impressive, have been less prolific than in neighbouring Mozambique. The 20m net gas pay on the recent Pweza-2 well pales in comparison to the 160m in net pay intersected by Eni 's Agulha-1 well offshore Mozambique , the most recent discovery in September . Thus, while we expect a steady upward trend in natural gas reserves over the coming years, our forecast is more conservative than official targets and will likely fluctuate as estima tes from operators are revised accordingly.

Risks Firmly To Upside As E&A Advances
Tanzania Oil, mn bbl & Gas, bcm Reserves

Given assumed geological similarities to proven rift plays in Kenya and an uptick in onshore activity with Total for example interest in acreage near Lake Tanganyika where initial estimates indicate the presence of 200mn barrels (bbl), we have pencilled in small oil reserves from 2017 onwards. However , we note that given the nascent stage of oil exploration, risks exist both to the upside and downside. Our forecasts reflect our expectation that investment is in line to continue targeting oil and that a strong geologic case can be made for the likelihood of future success in targeting oil.

Slow Growth Until LNG From 2021/2022
Tanzania Gas Production, Consumption & Net Exports (bcm)

Gains In Line For Steady Gains...

Our current forecast for gas production assumes some incremental gains in output onshore/offshore fields in the Songa Songa area, the key source of existing production, are further developed. One key project in the region will be the Mnazi Bay to Dar Es Salaam Pipeline which will connect gas fields in the south to population centres in the north. This should help unlock new demand for gas in the domestic market, but the project has encountered unplanned delays as communities near to production in the south protest against investment in the north while electricity shortfalls continue locall y.

Tanzania is also planning significant investment in expansion of gas fired power generation, which comprises a more significant share of the existing energy mix than in Mozambique. With access to electricity around extended to only around 18% of the population, gas presents a significant windfall to tight supply-demand balance where there are immediate supply issues stemming from problematic hydropower generation. Tanzania could also see consumption grow should any major industrial projects be announced to tap the growing offshore gas bounty. In Mozambique major fertilizer and even gas-to-liquids (GTL) projects have been proposed to monetise gas resources.

Gas Powered
Power Generation By Type, % of Total Electricity Generation

... But Boom From LNG Years Away

A lthough operators are now confident they have 'enough gas to move forward', an investment decisio n is 'at least three years away ' according to Statoil exploration vice president Tim Dodson. Although 2016 is now the target date for FID, more recent reports have cited a 7 - 10 year time frame for first LNG. A recommendation for a landing site is due to be delivered to the Tanzanian government in the first half of 2013. Following that, a decision on feasibility is due by October, concept selection in Q314 and then FEED work is due to be completed by mid-2015 according to officials from Statoil. With FID by end 2016, Statoil, Exxon , BG and Ophir targeting first gas from LNG project underpinned by resources on Block 1,3, and 4 by end 2021.

Initial development work will 12-15 subsea wells drilled, increasing to more than 20 wells during additional development phases. A seafloor marked by deep canyons and depths of up to 2600km around 100km offshore contribute to what Statoil called a 'challenging environment.' While Statoil has indicated they have accepted official demands for an onshore concept, offshore infrastructure remained under consideration with both a floating production and storage unit entailing pipeline to shore and a subsea-to-shore concept currently being evaluated.

Considering the pressures to lower development costs in order to maximise profits, and given the challenges operators are likely to face as they confront poor infrastructure, workforce constraints and possible supply chain woes, a jointly developed LNG project represents the most likely and arguably most-effective outcome for the monetisation of offshore gas deposits with BG Group now targeted FID on development of its Tanzanian acreage in 2016/17.

Challenges And Opportunities As Gas Advances

Although Tanzania is planning to open an licensing round in October 2013 that will put onshore and offshore acreage up for auction, regulatory uncertainty remains given the overhaul of the country's oil and gas laws is well behind schedule and not yet formalised. We highlight a number of risks which we are closely watching that could delay progress or undermine the economics of projects in the sector:

  • Recent sector wide audits of oil and gas contracts;

  • Disputes between Tanzania Petroleum Development Corporation (TPDC) over payments and terms;

  • Troubling comments from the officials sources;

  • Gradually increasing tax burden on the telecoms sector following its rapid expansion;

  • History of socialist polices enacted by the government;

Given we have already seen violent protest over a pipeline project stemming from concerns about the distribution of economic benefits from natural resource developments, our view is that the risk for the enactment of populist policies designed to appease local concerns but that may well slow and undermine progress on LNG is set to grow.

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