|Issue Number: 108||May 2014|
Gas Boom in East Africa: is it the next epicentre for LNG?
Emerging markets are creating exciting opportunities for liquefied natural gas (LNG) investors. India and China are buying more and more LNG, with energy consumption forecast to double by 2035 , whilst recent discoveries of gas in East African countries are creating new LNG export potential. Emerging markets are also exciting because they can change the dynamics of the global LNG market. As well as becoming new players in the market, emerging countries have the potential to re-direct investment and slow or stunt the growth of LNG production in an established market, such as Australia.
A decade ago, East Africa was seen as a 'non-story' in terms of oil and gas potential. But now the region is seen as the 'new promised land' or the next 'epicentre' for global natural gas. It is becoming the 'new frontier' . This article examines how the large gas potential and low upstream capital costs involved with the production of LNG in Mozambique and Tanzania have attracted a great deal of investment.
The Rise of LNG in Mozambique
Whilst Mozambique's current proven reserves are 75 billion cubic metres (bcm), recent estimates of potential reserves have ranged between 3 and 7 trillion cubic metres (tcm). If 3 tcm of natural gas is sold at $4/MMbtu, then the gas has a value of approximately $423bn, about six times the net worth of Bill Gates.
The recent discoveries off Mozambique's northern coast in the Rovuma Basin accounted for four of the five largest global oil and gas discoveries in 2012. Currently Anadarko and ENI are developing Area 1 and Area 4 respectively (as seen in figure 1), and expect commercial production of gas at around the end of 2018. Total investment, including drilling and onshore export facilities, is estimated to be around $50 billion . Investors have been attracted by Mozambique because of the low costs involved with the project. It has been estimated that integrated supply cost delivered to Japan is around $11-13/MMbtu, which is comparable to prices in Western Australia and Western Canada but cheaper than Eastern Australia .
The Mozambican Government has estimated that LNG production will be as much as 50 million tonnes per annum by 2026, with two trains built every two years. However, a writer for the Oxford Institute for Energy Studies has described this schedule as 'very aggressive' . The Government of Mozambique is keen to get the project off the ground because it could transform the country's economy. This has been confirmed by the Minister of Mineral Resources, Esperanca Bias, in a discussion about an Indian partnership, 'If the Indian government, or anybody, wants to buy LNG from Mozambique, we are ready to meet the demand.' 
Figure 1: Mozambique's gas blocks. 
However, LNG projects in Mozambique face immense challenges. Commercial production of natural gas only started in 2004, so there is very limited pipeline infrastructure. There is also a need to build deepwater ports to cope with large tankers, and the areas that could have LNG developments also lack roads or airports. In terms of hiring workers, the Government of Mozambique currently limits the employment of expatriate workers to a maximum of 10% of a company's total workforce. This will mean that investing companies will have to spend money on training the Mozambican workforce, which will be time-consuming and costly. Even after this, there is the risk that the Mozambicans who have gained the relevant skills could leave the country and find work where there is far higher pay, such as in Australia. Another issue is uncertainty over future taxation and regulation: the Government has recently introduced a 32% capital gains tax on all future gas asset takeovers, which sends an uncertain message to future investors that regulatory and taxation regimes are subject to change. 
Despite the challenges, there is still a great deal of optimism and recent supply contracts that have been agreed with Asian buyers have 'financially de-risked' the project, according to Anadarko's CEO, Al Walker .
Tanzania has experienced a boom in its natural gas sector following major discoveries of natural gas by Statoil, Ophir Energy and BG Group. The large gas reserves off the east coast of the country (location is shown in figure 2) are estimated to be around 40 trillion cubic feet (1.1tcm). These reserves have been divided between Statoil, which is working in partnership with ExxonMobil, and BG Group, which is working with Ophir Energy. Investments could be between $20 billion to $30 billion . A Final Investment Decision is expected in 2016, with exports beginning in 2021 or 2022.
However, like Mozambique, Tanzania faces similar challenges in terms of lack of infrastructure and skilled workforce. There are also additional problems from Somalian piracy, raising the risk factor as well as the insurance premium. There is another difficult challenge for investors in Tanzania because of the uncertain regulation over the country's LNG development, production and export. Although the Government of Tanzania published the Natural Gas Policy in October 2013, which marked the first step towards the regulatory context for future LNG projects, there remain uncertainties in what share of the gas production the government wants, as well as other windfall taxes, royalties, corporate tax and other income taxes .
Figure 2: Tanzania's gas discoveries 
Commentators on the global developments in the LNG industry often refer to the 'race'. This is a race that is usually seen in terms of which countries can 'win' by constructing the LNG export facilities first. Behind this analogy is an assumption that supply might outstrip demand in the future, so the more quickly established LNG projects will be more profitable in the short-term.
However, there is another way to look at it. If the race can be more cheaply arranged, then crossing the finish line in the best time will not be as crucial as just crossing the fini sh line. The key part of the race is therefore the cost involved in finishing, rather than the time taken. Time is still an important factor, however.
This analogy is ultimately flawed because of the uncertainties during and after the 'race'. Any LNG project in Mozambique and Tanzania will have a higher risk profile. The rewards, however, could be great.
Researched and written by MJMEnergy Analyst, Nico Cottrell,
 E&Y, 'Natural gas in Africa: The Frontiers of the Golden Age', http://www.ey.com/Publication/vwLUAssets/Natural_gas_in_Africa_frontier_of_the_Golden_Age/$FILE/Natural_Gas%20in_Africa.pdf
 Projections by ICF International and agreed by the Government of Mozambique. See 'The Future of Natural Gas: Towards a Natural Gas Master Plan', Downloaded from http://www.icfi.com/insights/projects/international-development/development-natural-gas-sector-master-plan-mozambique
 'Gas discoveries in east Africa: Making the most of a good situation', 7 February 2013, http://www.economist.com/blogs/baobab/2013/02/gas-discoveries-east-africa
 United Republic of Tanzania, The National Natural Gas Policy of Tanzania, October 2013.