1 June 2017

Tanzania: Headway Made in Plan to Build U.S.$30 Billion LNG Plant

Photo: The Citizen
Proposed liquefied natural gas plant.

Dar es Salaam — A proposed liquefied natural gas (LNG) project in Tanzania is moving forward, bringing with it the potential for major economic gains, though it still faces a long construction timeline and regional competition.

In mid-April the government submitted a draft agreement to the Ministry of Energy and Minerals to build a $30 billion LNG plant and export terminal in Lindi on the south-eastern coast.

Earlier ministry recommendations suggest the facility will have two trains, each with a capacity of 5m tonnes per annul.

Prepared with help from six major oil firms looking to take part in the project - Shell, ExxonMobil, Norway's Statoil, Singapore's Pavilion Energy, the UK's BG Group and London-based Ophir Energy - the draft is a big step towards reaching a "host government agreement" setting out foreign investor obligations and the role of the state oil firm, Tanzania Petroleum Development Corporation (TPDC).

Talks have been ongoing since September last year, and authorities expect to reach a final agreement with the oil companies by the end of 2018.

Broader impact

In one gauge of the investment's significance, the central bank said in January that just starting construction on the plant could alone lift GDP growth by two percentage points. Revised estimates put last year's growth rate at 6.9 per cent, and the treasury currently projects this to reach 9 per cent by 2020 - before factoring in the potential project.

The LNG plant would form part of a broader push by the country to increase exploitation of its underground wealth. The IMF estimates that as its natural resources are developed, Tanzania could see tax revenues - which were $6.6bn last year - grow by $3 billion-6 billion following a Petroleum Act passed in 2015 that set new royalty rates. As with its neighbours in Kenya and Mozambique, a supportive price environment and improvements in technology have helped uncover a wealth of new offshore hydrocarbons deposits in Tanzania. Most of the country's natural gas was discovered in the past seven years, with one of the most recent finds coming in February 2016, when UAE-based Dodsal Group tapped deposits of Sh2.17 trillion standard cu feet (scf) in the Ruvu Basin worth an estimated $ 8 billion. This raised total reserves to 57trn scf, some 86 per cent of which is located offshore, according to the energy ministry.

Development obstacles

While the draft agreement is a crucial step towards finalising the project, the complexity and sheer size of the LNG plant suggest it could take some time to get under way.

Some of the challenges related to securing the more than 2000 ha of land needed to develop the project were overcome in January, however, when the government awarded the title deed for the prospective site to TPDC.

However, Oystein Michelsen, Statoil's country manager for Tanzania, told international media in November that a final investment decision was at least five years out, and that construction of the plant could take an additional five years.

It may also take time to ensure ample feed stock for the new plant because of the complexity of producing from the country's fields. The bulk of Tanzania's offshore deposits are deep water, being found at depths of 1000-2500 metres, beyond a steep drop off in the continental shelf some 100 km from shore.

"We are still in the early stages of understanding how to overcome the topography, which involves deep canyon systems at those water depths; it is technically very challenging and will require innovative engineering solutions," Mark Fraser, president and managing director of ExxonMobil E&P Tanzania, told OBG. "The LNG project represents a complex technical, commercial and project management challenge and requires tens of billions of dollars of capital investment. However, it is surmountable with good stakeholder alignment and collaboration." The National Gas Utilisation Master Plan released last year by the Ministry of Energy and Minerals showed more than 40trn of the 47trn scf in then-known offshore reserves were deepwater, making them difficult to access.

"It is in the nature of oil and gas production that only a portion of reserves in place can actually be recovered from the reservoir. This effect is more pronounced when dealing with deep water locations," Marc den Hartog, Shell's vice-president for East Africa and director of its subsidiary BG Tanzania, told OBG. "Realistically, only 50-70 per cent of the gas can actually be produced, because the rest is not technically feasible, or not economically viable, or both."

The plant, which is expected to export to high-demand markets such as South Korea and Japan, is also likely to face increased competition from other planned LNG plants. Its southern neighbour, Mozambique, is currently developing a two-train LNG project with 12m-tonne capacity, in conjunction with US-based Anadarko and Italy's Eni. After a four-year construction period, operations are expected to begin in 2022 or 2023, with exports destined for Asia.

Tanzania also faces competition farther afield: Australia plans to open six new LNG plants by 2020 aimed at growing Asian demand, while in the US shale gas capacity is expected to continue increasing, which could lead to a glut in global supply.

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