East Africa Update # 17 Is there a new normal?

Is there a new normal?

Colleagues

Oil and Natural Gas Projects are slowly progressing…very slowly

The world remains in varying stages of coronavirus lockdown, return to business as usual, and some form of new normal.  

There are very few if any who should think they know where we are or where we are going.  Uncertainty remains the watchword. Especially in the oil and gas world, staying in business is what most companies are worrying about.  The bold are few and far between.  

Petromall as we were known, has now changed names to Future Energy Partners with a continuing intent to be part of the energy future in Africa and globally.  The opportunities to develop energy resources while respecting stakeholders, the natural environment and delivering commercial success is what we are all about.  Our new website is under development at https://www.future-energy-partners.com

 

The oil and gas industry is in for dramatic restructuring.  For example, as this chart from Rystad illustrates, many companies are going to go bankrupt.  Well financed companies are in a buyers market as illustrated by Total’s purchase of Tullow Uganda. In many transactions, prices are being negotiated downwards, even after they are announced.  It is hard for the sellers to say no if they are committed sellers.  Those companies that can are renegotiating the terms of acquisitions that were agreed before COVID- 19 changed the supply/demand pattern.  For example, BP’s sale to Premier in the North Sea and BP’s sale to Hilcorp in Alaska are both examples of deals being renegotiated.  Shell’s deal with Gazpromneft in Russia has been cancelled, likely due to the slump.  I suspect Occidental may have serious regrets about buying Anadarko in 2019 and the onward sale of African assets to Total has encountered challenges in Algeria and Ghana.  Total is in a strong position to get good deals.

East Africa oil and natural gas developments have seen some bold announcements recently by the region’s political leaders but the reality in my humble opinion is that patience will be required to see real progress. 

The most important project in all of Africa is the Total led LNG project in northern Mozambique.  Total has just finalized the debt financing of ca $15bn USD for the $20bn development.  Total acquired their 26.5% working interest from Occidental for $3.75bn who offloaded the asset after acquiring Anadarko in an ill-timed acquisition in early 2019.  There are three major LNG projects in various stages in Mozambique.  The first to come on stream will be the Coral Sul project from a floating storage and regasification unit (FSRU) in Matola harbour near Maputo in southern part of the country to handle 3.4 million tonnes per annum(mtpa) of LNG.  A final investment decision is expected in 2020 with first gas imported via the FSRU into an expanded gas pipeline costing $350m USD and eventually into a 2000 MW gas fired power plant which could cost $2.8bn USD. LNG will be procured from Total’s international LNG portfolio.  The FSRU is under construction in Korea.

This project will be followed by Total’s Area 1 development called Mozambique LNG which will eventually develop ca 65 trillion cubic feet of gas in Area 1 offshore Cabo Delgado in northern Mozambique.  Contractors are busy at work including a significant effort to award contracts to local contractors.  However, security in the province remains a significant risk to the project.  Insurgents have killed eight individuals working on the project.  Over 1000 local people have been killed as well and security forces have been challenged to get control of the situation.  The project has also been affected by the COVID-19 in the contractor workforce with work temporarily stopped in April.  The combination of insurgents and COVID will challenge this project to be completed on time.

The third project led by Exxon-Mobil and ENI has delayed FID to 2021 which will deliver an additional 15 mtpa bringing the total LNG in Mozambique to over 30 mmtpa into the market.  The combination of low LNG gas prices due to a combination of reduced demand and competition from other LNG projects in Qatar and Australia will challenge this and many large scale projects to meet investor’s investment criteria.

The current gas production in Mozambique, operated by Sasol is the subject of an intended disposal which of course brings further uncertainty

In Uganda, the closing of the Total acquisition of Tullow’s interests in Uganda remain subject to a number of conditions, including approval by Tullow’s shareholders, host government agreements, bank financing, customary government and other approvals and the execution of a binding tax agreement with the Government of Uganda and the Uganda Revenue Authority that reflects the agreed tax principles previously announced.

Total has now relaunched the tender process for the Engineering, Procurement, Construction and Commissioning of the  Buliisa Project, also known as the Tilenga development. 

https://ug.total.com/request-expression-interest-provision-engineering-procurement-supply-construction-commissioning

This Request for Expressions of Interest were due to be submitted by June 22nd, so now the selection process will begin again.  Given the comprehensive nature of the request, the companies that are wanting to bid will need to sharpen their pencils even further than they already have as this remains a commercially challenging project.  Over the years, the false starts and delays will make many contractors careful about getting involved.  Preparing such a tender is not a one week job, so I suspect requests for proposals will go out in the next few weeks, but tenders will take a few months to prepare.  In the meantime, the Tanzanian government has indicated they are anxious to move forward quickly.  There are still many downstream issues to be resolved in addition to the host government agreements, there are export pipeline commercial agreements (including the $12.30 per barrel tariff for transporting crude through the pipeline to Tanga) and the tender process for that pipeline and the export terminal at Tanga.

Total plans to launch its 230,000 barrel per day project in Uganda by the end of the year, CEO Pouyanne said at the time of announcing the acquisition.

Uganda has had to push back the licensing round for five new oil blocks in the Albertine Graben to September 30, 2020, following low interest from exploration companies. Apparently, six companies had submitted expressions of interest proposals, but there were no detailed bids for the advertised oil blocks by the end of March 2020 as hoped for.  “The six have yet to submit their detailed proposals. Once we get all the bids in by September 30, we hope to award the licences by end of this year but more likely in January next year,” said Robert Kasande, the permanent secretary at Uganda’s Ministry of Energy and Mineral Development.  He said the postponement was as a result of the Covid-19 pandemic that has shrunk economic activity, curtailed air travel and partly led to the global collapse of the crude oil prices, a situation that is likely to linger until the global economy rebounds.

Tullow’s Kenya Turkana project has also been delayed.  Tullow filed a Force Majeure claiming that COVID-19 had made it difficult to progress the project.  However, it is also rumoured that the joint venture partners had refused to approve the 2020 planned budget.  The Kenyan government has challenged the merits of the Force Majeure.  There is also continuing negotiations with Tullow regarding government take on the project as the Kenyan government, like others are looking for additional sources of revenue after their economies have collapsed with the COVID situation.  Tullow and Total have both announced their intention to sell some or all of their interests in this project, so I anticipate this project is going nowhere in 2020.  Multi billion dollar greenfield projects like Turkana are not attractive in this global economy where demand is uncertain, oil and gas prices are still lower than many hoped and alternative energy sources are getting more interesting by the day.  More on that later.

Tanzania is one country that is actually producing hydrocarbons and has done for many years. Midstream and downstream activities in natural gas are carried out by Tanzanian Petroleum Development Corporate ( TPDC), Songas, Pan African Energy Tanzania (PAET, also known as Orca Exploration) and Maurel and Prom(M&P). Songas generates electricity using gas from the Songo Songo Island gas fields. M&P delivers gas in partnership with Wentworth Resources from Manazi Bay also to Dar through a gas pipeline with significantly more capacity than is currently being utilised.

Orca, Wentworth and M&P continue producing natural gas buy at reduced levels for industrial and power use in the country. Manazi Bay is fully operational with 2020 production guidance unchanged at 65-75 MMscf/d gross with no reported cases of COVID-19 which has meant that restrictions have been lifted in Tanzania.  Orca’s Songo Songo operation continues to produce ca 60-70 MMscf/d but with capacity well over 100 MMscf/d, there is much more capacity than demand.  Aminex continues to wait for their licence extension to be approved which could add significantly to gas production capacity of well over 100 MMscf/d once the development comes onstream in a few years.

The big prize in Tanzania is the well over 40 TCF of offshore gas discovered years ago but which has no signs of coming to market.  This would require a world scale LNG project to be approved.  Equinor and Shell and partners continue to struggle to get the project moving.

Infrastructure in Africa continues to require capital to upgrade to meet growing demand.   Tazama (Tanzania Zambia Mafuta) Pipelines Limited, which is partly owned by the government of the Republic of Zambia and that of the United Republic of Tanzania, is currently seeking US$ 400M to upgrade its Tanzania–Zambia Crude Oil Pipeline. The Tazama oil pipeline is over 1,700 kilometers from the port of Dar-es-Salaam, Tanzania, to the Indeni Petroleum Refinery in Ndola, Zambia. For 954 kilometers, the pipeline has a diameter of 8 inches, and for the remaining 798 kilometers, the pipeline diameter is 12 inches. The difference of the pipeline in diameter limits its pumping capacity to 2 million litres a day. The company will be able to upgrade the entire pipeline to a diameter of 12 inches and consequently this would increase the capacity of the pipeline to approximately 1.1 billion litres a day. The Tanzania–Zambia Crude Oil Pipeline started operating back in 1968 and it was initially designed to pump diesel, but the plan was revised two years later when it was sought profitable to import crude oil instead of refined products.

Elsewhere in East Africa, South Sudan and Somalia continue to progress their planned licence rounds.

So that leaves the door wide open for renewable energy developments such as wind, solar, geothermal and hydro.  Fossil fuels will eventually be bypassed especially when it comes to providing local energy as most fossil fuels are destined for export.  Yes, they will generate tax revenue, but experience tells us that tax money is easily diverted to projects which don’t always improve the welfare of the country’s citizens.

Greg Coleman

Greg.coleman@future-energy-partners.com

+44 (0)778 856 6028

Skype:  Greg.Coleman1

www.future-energy-partners.com 

https://virtualuni.ac.ug

https://www.eastafricahighereducationscholarshipfund.org/

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