Striking It Rich in East Africa

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Striking It Rich in East Africa

By Tim Maverick, Staff Writer

When investors think of a natural gas boom with promising lucrative exports, the United States usually comes to mind.

But readers may soon conjure another image . .  .

You see, there’s been a rash of massive natural gas discoveries half a world away in the water off Southeastern Africa. In fact, six of the 10 top oil and gas discoveries of 2013 were in Africa!

As a result, the continent has become a hotbed of energy industry activity, with more than 500 companies now exploring there.

Of particular interest to the energy industry are the areas off the coast of Mozambique and Tanzania.

Exploration companies have discovered more than 180 trillion cubic feet (tcf) of natural gas in the water near Mozambique and nearly 50 tcf of gas near Tanzania – and there’s a promise of more.

Both countries are jostling to be the first to export liquid natural gas (LNG) to energy-hungry consumers . . .  especially since demand for LNG is expected to double over the next 20 years.

Everyone’s on board to get this new LNG source going, but there’s one major problem… the lack of infrastructure.

Some well-known firms have jumped in hoping to reap the bounty, but it won’t be easy.

Getting Over the Hurdles

It’s estimated that between $20 billion and $40 billion will need to be invested in both countries just to get gas projects started in the next 10 years.

That price tag raises some questions for smart investors looking to support the companies taking on these projects.

1. Can anyone but the oil supermajors pull off these projects? As The Wall Street Journal notes, a company with a market capitalization of “only” $55 billion has never pulled such a grand project. Only the oil supermajors have.

1. Can the companies leading these new projects find customers in Asia? This is key, since about 70% of the world’s LNG is consumed by China, South Korea, Japan, India, and Taiwan.

And the most important question:

1. Can these companies maintain a good relationship with the local governments? In this matter, caution is warranted.

Tanzania says it’ll conduct a “review” of all outstanding gas production sharing agreements. Likely, the goal is to get more money out of the natural gas companies.

Mozambique’s government, too, says it prefers to have LNG facilities constructed onshore to beef up employment and infrastructure.

The bottom line is that all the companies involved will need to get through each of these obstacles in order to succeed.

Companies Leading the Way

Two of the leading players in the region are Anadarko Petroleum (APC) and Italy’s Eni SpA (E). Both seem to be meeting the inherent challenges head-on.

In 2011, both agreed to build the world’s second-biggest liquefied natural gas facility in Mozambique. In the initial phase, the facility will have a total capacity of five million metric tons a year and will eventually reach 20 million tons.

The two companies have already invested several billion dollars into the project, boosting the local economy. In fact, the International Monetary Fund projects the Mozambique economy will grow 8% annually over the medium term.

Plus, Anadarko is also in negotiations with buyers from Japan and Thailand to purchase two-thirds of the capacity of the first train of its proposed LNG processing facility.

Two other firms – Norway’s Statoil ASA ADR (STO) and Britain’s BG Group PLC ADR (BRGYY) –– have nearly as ambitious plans in Tanzania.

Thus, now is really the sweet spot for investing in African LNG.

If Anadarko, Eni, and the others fail, the window of opportunity may close as other countries, such as the United States, begin exporting LNG.

But if the companies succeed, the region may become, in the words of Anadarko CEO Al Walker, “the third-largest exporter of LNG in the world.”

And “the chase” continues,

Tim Maverick

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By Tim Maverick