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Firms hold off investment decisions as red tape delays oil projects in East Africa

Saturday December 12 2015
oil

East Africa’s oil producers are unlikely to start earning money from the export of crude oil and natural gas before 2020, due to lengthy government procedures, lack of production facilities, and high transport and export costs.

East Africa’s oil producers are unlikely to start earning money from the export of crude oil and natural gas before 2020, due to lengthy government procedures, lack of production facilities, and high transport and export costs.

The industry’s global standard lead time to start production is five years for oil and at least seven years for gas from the time a commercial discovery is made.

East Africa’s hopes of earning from these resources sooner have been further dented by the decline in global oil prices.

“New exploration may slow down as prices fall and companies increasingly apply caution while investing in frontier markets with nascent industries, poor infrastructure and long lead times,” said South Africa-based financial consulting firm RisCura. 

Uganda, Kenya and Tanzania boast large hydrocarbon finds. Uganda has 6.5 billion barrels of oil in the Albertine basin while Kenya reported six million barrels of oil in the South Lokichar basin in the northwest. Tanzania has found about 55.1 trillion cubic feet of gas offshore.

These finds have attracted several prospecting and production companies, including Tullow Oil, BG Group, Statoil, Ophir Energy Plc, ExxonMobil and the China National Offshore Oil Corporation.

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READ: Oil and gas: How East Africa can become a key global player

Tullow, which has exploration interests in Kenya and Uganda, is expected to make final investment decisions for both countries by 2017 on commercial oil production. The company’s chief executive Aidan Heavey conceded that 2015 has been a difficult year across the industry.

Global oil prices declined from $100 per barrel in mid-2014 to about $40 early this year, before rising to about $50. This forced exploration firms in the region to reduce their capital expenditure.

“Sustained low prices are likely to take a toll of gas production and downstream refining, as uncertainties affect the viability of liquefied natural gas (LNG) projects, delaying investment in the region,” said RisCura’s private equity analyst Adam Bennot.

He said oil companies are likely to hold off final investment decisions to cut costs and watch prices.

Tullow and Africa Oil Corporation are soon expected to submit the South Lokichar field development plan to the Kenya government for approval in order to move to the production stage.

“Tullow and its partners plan to submit the field development plan in 2016,” said Tullow Kenya’s communications officer Peterson Thiong’o.

READ: Tullow set to begin Kenya oil production by 2020

Total and Tullow are still waiting for oil production licences from the Ugandan government. Kampala has issued a production licence to China National Offshore Oil Corporation.

The award of the production licences is expected soon as they were awaiting the inauguration of the National Petroleum Authority and National Oil Company board, which happened on October 23.

“We anticipate that it will take at least three years to constitute the requisite upstream and midstream infrastructure. Like all infrastructure projects, these are best case schedule estimates and the timelines may shift when critical variables change,” said Tullow Uganda corporate communications manager Cathy Adengo.

Uganda is yet to decide on the rout of the crude oil export pipeline. There are three routes: The northern route from Hoima in the west through Lokichar to Lamu on the Kenyan Coast; the central route from Hoima through Kampala to Mombasa; and the southern route from Hoima through northern Tanzania to Tanga port. The route Uganda selects is expected to have a direct bearing on the structure of crude oil production in the South Lokichar basin.

Natural gas contracts remain heavily indexed to oil, and the fall in global oil prices poses a significant risk to gas production projects. Oversupply on the oil market continues to put downward pressure on prices.

“This trend is unlikely to be reversed in the near future, with the Brent crude price estimated at between $50 and $65 per barrel over the next five years,” said Mr Bennot, adding that an oil price of $70-$80 per barrel would be needed for gas projects to break even.

The free fall of global oil prices is forcing companies to re-evaluate their growth strategy in East Africa. BG Group, Statoil, Ophir Energy Plc and ExxonMobil have vast natural gas interests offshore southern Tanzania, but they have not completed final investment decisions to pave the way for production, as Dar es Salaam has delayed approvals for the gas plant site.

“We have submitted our proposal to the government. If an LNG plant is sanctioned, we will announce it in due course,” said BG’s external communications manager Kim Blomley.

BG, Ophir, Statoil and ExxonMobil will jointly build the plant to process offshore gas for export as LNG. It will have two processing units with an output of five million tonnes per annum each, and is estimated to cost about $30 billion.

Tanzania was expected in to approve a site for BG Group, Statoil, Ophir Energy Plc and ExxonMobil to build an onshore gas liquefaction and terminal export of LNG in 2014.

The Tanzanian government is expected to spend about $6 million on acquisition of land for construction of the LNG terminal, which has been delayed by legal and regulatory processes.

In October 2014, Dar approved a policy giving the domestic market the priority in gas supply. Parliament recently passed the Tanzania Extractive Industries (Transparency and Accountability) Bill and the Oil and Gas Revenue Management Bill and Petroleum Bill, 2015.

“The delays will hand a strategic advantage to other major LNG developments looking to lock in long-term supply contracts. Such a delay will result in opportunity cost to Tanzania’s economy,” said Standard Bank Group director of oil and gas Charlie Houston.

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