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Shell to Add Firepower to BG Assets in East Africa LNG Race

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Article by Paul Burkhardt published 12 May 2015 by

Royal Dutch Shell Plc’s $70 billion takeover of BG Group Plc will put Europe’s largest energy company in the middle of East Africa’s race to export natural gas and is set to boost the chances of Tanzania becoming a major supplier.

The acquisition would include stakes in three blocks off the coast that contain one-third of Tanzania’s estimated resource. This may give the East African nation an edge in the race to first exports of liquefied natural gas from the region over neighboring Mozambique, where discoveries could make it the world’s biggest producer of LNG after Qatar and Australia.

Shell has “strong expertise in working with governments and has also displayed strong appetite for risk, deploying new technologies and making cuts when necessary,” said Dolapo Oni, head of energy research for Ecobank Group. “These attributes could benefit the Tanzania LNG project and give Mozambique much-needed competition for the limited investment dollars available globally for these sort of projects.”

Statoil ASA and partner Exxon Mobil Corp. have blocks in Tanzania, while Eni SpA and Anadarko Petroleum Corp. plan developments in Mozambique.

The Tanzanian assets present a second chance for Shell to prove itself in the region. The major lost a 2012 bidding war for Cove Energy Plc and its prized 8.5 percent stake in Mozambique’s Rovuma Area 1 to PTT Exploration & Production Pcl, which paid 1.2 billion pounds ($1.9 billion) for the explorer. Two offshore areas in the Rovuma Basin hold reserves of about 120 trillion cubic feet of gas, according to consultants Wood Mackenzie.

Regional Benefit

“It should be a benefit to East Africa,” John Craven, the former chief executive officer of Cove, said of Shell’s potential presence. “The main challenge that I think they face is the gas is kind of scattered up the coast; it’s not consolidated in one area,” he said.

Producers operating in the two countries are working out whether to invest in facilities that chill the gas for export amid indications of the start of a glut. New shipment plants for the fuel in Australia and Papua New Guinea are starting to push out existing projects as demand weakens, Genscape Inc., which provides energy- and commodity-market data, said last month.

Natural-gas futures have declined 34 percent in the past 12 months, and were at $2.876 per million British thermal units at 9:50 a.m. on the New York Mercantile Exchange on Wednesday.

Bill Debate

Tanzania and Mozambique have yet to finish regulations for gas development and production, which are needed before the contracts are signed and final investment decisions are taken.

“There was hope that the draft natural gas bill would be tabled in Parliament and receive some level of fast-tracking to guarantee its passage,” Ahmed Salim, an analyst at Teneo Intelligence in Dubai, said of legislation in Tanzania. The government may use the 2015-16 budget debate session that starts May 12 to table the bill or leave it to the next administration, he said.

Legislative delays and a lack of infrastructure are pushing out estimates for when the first LNG shipments from the two nations will be loaded.

While Mozambique has kept a deadline of 2018 for its first exports, Rome-based Eni, which also has rights to a Rovuma field, has said that goal would be challenging as building an LNG plant can take as long as six years.

Mozambique GTL

“In our latest model assumptions, it’s 2024 Tanzania, 2022 Mozambique,” Mike Fulwood, a London-based principal at Nexant Inc., a consultancy, said in an interview last month. It is difficult to see a final investment decision in a Tanzanian plant “until the Shell takeover has gone through,” Fulwood said.

Shell isn’t in a position to give details on any aspect of the proposed combination with BG, said Jonathan French, a spokesman for The Hague-based company.

The producer is conducting a feasibility study for a gas-to-liquids plant in Mozambique in an agreement with state-owned oil company Empresa Nacional de Hidrocarbonetos, which “provides for further discussions on joint bidding for exploration acreage between Shell and ENH in selected areas of interest,” he said.

“Shell could take a year or two to decide what it plans to do in East Africa, and to assess how global demand and supply are evolving,” Jonathan Stern, the chairman of Oxford Institute for Energy Studies, said at an Amsterdam conference last month. “They will be busy with the merger, and therefore decision-making on all projects will slow down.”

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