East Africa May Lose Before It Even Enters Energy Game

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Aug 2, 2010
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Another day, another big gas discovery off the coast of Tanzania, fueling hopes that East Africa will soon be poised to ride its buried energy riches to a more prosperous future. But don't break out the Champagne just yet.

Despite all the paper oil-and-gas wealth in countries such as Tanzania, Mozambique, Uganda, and Kenya, it won't be easy for East Africa to jump onto an energy bandwagon already crowded with established producers, which is starting to topple with newcomers such as the United States and Australia on board.

The world is awash in oil, and crude prices are in
free-fall, making tricky and expensive projects in Africa less appealing. And by the end of the decade, the world will enjoy a surplus of natural gas export capacity. Coupled with softening demand, especially in Asia, it all spells bad news for countries hoping to turn untapped resource wealth into glittering riches.

Interest in East African energy bumped up a notch after Statoil and Exxon Mobil said Tuesday, Oct. 14, that they've found
even more gas off Tanzania's shore. The latest find brings the total in the Norwegian-operated block to 21 trillion cubic feet. Yet Tanzania's gas potential pales next to that of Mozambique, which could have as much as 180 trillion cubic feet of gas.

In all, the two countries' potential reserves amount to some 5,000 years of domestic gas demand, prompting visions of a gas-fueled economic renaissance at home and plentiful opportunities to export liquefied natural gas (LNG) to thirsty Asian markets. Anadarko, a midsized U.S. firm active there, figures Mozambique could eventually be the
third-biggest LNG player in the world, behind Qatar and Australia.

Nearby Uganda and Kenya, meanwhile, are hoping their own oil finds will translate into the kind of bounty that brings billions of dollars a year to oil-rich West African peers such as Nigeria and Angola. Uganda has already found more than 6 billion barrels of oil; Kenya could have as many as
1 billion barrels of crude. Uganda's president, between axingpolitical rivals and consolidating his nearly three-decade hold on power, has called the oil finds a "good godsend" that will enable countries like his to power their own development and regional integration without Western help.



There are two big problems with these brightly painted pictures, though: economics and politics.

Oil and gas development in East Africa is a high-cost operation. At a time of booming oil production and slumping demand and prices, what gets squeezed is precisely those kinds of projects that live on the economic margin. And both oil and gas projects in East Africa require massive investments in new infrastructure: pipelines to bring oil from landlocked Uganda, for instance, and multibillion-dollar LNG terminals that can freeze natural gas into a liquid so it can be shipped around the world.

"The soft-price environment is definitely not a good thing for these countries," said Luke Patey, an African-energy analyst at the Danish Institute for International Studies. "The industry was only attracted, I think, because of high oil prices."

Things were different when Uganda started rubbing its hands at its oil prospects in 2006: Worries that the world was running out of oil were at a fever pitch, and prices were on an upward slope that would shortly lead to record highs. Now, though, as Uganda prepares for its first big oil-block
bidding round in eight years, it's unclear how many of the major players will be angling for a piece of the expensive projects.

One company
active in the region, Britain's Tullow Oil, is still weighing all the factors before making a final investment decision (FID) late next year on an 860-mile pipeline from Uganda to the coast. Tullow officials estimate the cost of turning Uganda's oil from pipe dream to piped fuel to be between $15 billion and $20 billion.

A Tullow spokesman said that lower oil prices are just one consideration. "Clearly, if a project is uneconomic -- and the oil price plays its part in getting to FID, but so does tax, cost of people, and services -- then it won't reach FID," George Cazenove said.

Building the infrastructure Mozambique and Tanzania need to cash in is a huge undertaking. The International Energy Agency in its recent
Africa Energy Outlook report noted that just the first phase of Mozambique's natural gas plans will require investment greater than the country's entire GDP, which is about $14.5 billion. Realizing the country's full potential would cost four times the country's GDP, according to a reportpublished by the Oxford Institute for Energy Studies. Economic concerns alone make Mozambique's gas plans "highly speculative," the report concluded.

To make matters worse, Mozambique is far from the only country trying to get into the LNG business. The United States, awash in natural gas thanks to the fracking revolution, is steadily ramping up its export plans. Qatar and Australia are also betting heavily on the LNG market. Russian firms like Gazprom and Novatek are eager to grab part of the LNG market. Even nascent gas producers in the eastern Mediterranean want to fill tankers with liquified gas to meet Asia's growing demand.

The problem is, as more natural gas hits the global market, especially relatively cheap U.S. gas, Mozambique and the like will probably get pinched first; a
recent paper for Columbia University's Center on Global Energy Policy found that U.S. natural gas exports would dim East Africa's prospects.

"As prices come down in response to the increase in supply from the U.S., various projects start to look less economic, and East Africa gets hit the hardest," Jason Bordoff, one of the paper's authors, told Foreign Policy.

If the economics are dicey, East African politics are downright hazardous. Although the region wants to avoid the "
resource curse" that has plagued Nigeria and Angola in the wake of their own oil discoveries, regulatory oversight is weak and corruption is still rife, while fiscal terms can be fickle and ever changing.

"If I had to list five or six major impediments, I would put governance at the top," said Fatih Birol, the chief economist at the International Energy Agency. He said that governments are working overtime to correct the problems because they understand that otherwise "it will be very difficult to see an improvement in the economic and social life of these countries."

Cash-strapped governments have been eager to extract as much in the way of taxes and royalties as they can from international oil firms; indeed, the latest
contracts between Uganda and international companies showed a bigger take for the government. Kenya just announced a new capital gains tax to try to capture more revenue from foreign firms.

"There's this sort of creeping government hand into the oil industry as soon as discoveries are made," said the Danish Institute's Patey.

Source:Foreign Policy

http://omnifeed.com/article/www.for...rica_mozambique_kenya_uganda_tanzania_oil_gas
 
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