x Abu Dhabi, UAEThursday 20 July 2017

East Africa becoming hot bed for oil and natural gas finds

Oil companies have taken a closer look at the geology to the east of the Horn of Africa and have come up with some welcome surprises.

For decades, oil wealth has eluded East Africa, while producers in West Africa have been plagued by bitter internal conflict over their resources.

But in recent years, oil companies have taken a closer look at the geology to the east of the Horn of Africa and have come up with some welcome surprises that will in time turn the region into an oil and gas export hub.

Offshore blocks in Tanzanian and Mozambiquean waters are rich in natural gas. Plans are in the works to monetise those reserves through exports of liquefied natural gas (LNG).

On Monday, Norway's Statoil and Britain's BG Group announced plans to build an LNG terminal in Tanzania, after the Norwegians had discovered additional gas. The finds boost Statoil's estimated reserves to about 10 to 13 trillion cubic feet, a similar amount has been found in BG's blocks.

"We can expect more discoveries," said Tim Dodson, Statoil's head of exploration.

Italy's ENI and the United States company Anadarko have plans for an oil terminal in Mozambique. The US Geological Survey estimates that natural gas reserves off the coast of Mozambique, Tanzania and Kenya are larger than those of their oil-rich West African neighbours. The gas finds in the region are timely. Growing use of gas in power plants in China and Japan - a consequence of economic expansion and the 2011 Fukushima reactor meltdown, respectively - and spiralling demand in the Arabian Gulf have created sizeable export markets within easy reach of LNG tankers.

Whereas the seabed holds the promise of gas riches, the red earth of Kenya holds the potential for an oil bonanza. The British oil company Tullow and its Canadian counterpart Africa Oil last year struck oil in the Rift Valley, also known as the cradle of mankind after the world's oldest remains were found there.

More drilling is planned for this year, and Tullow estimates that the 725-kilometre valley holds up to 10 billions barrels of crude. Kenya, East Africa's economic heavyweight, may find its leadership position cemented by crude flows from neighbouring countries that would turn the country into the region's oil hub.

Oil discovered in Uganda in 2006 could soon be pumped, and the two countries have agreed to link up their pipeline systems.

Landlocked South Sudan is looking for ways to export its 350,000 barrels per day (bpd) that avoid piping it through Sudan, after Juba and Khartoum only recently resolved a dispute over transit rates that disrupted exports for a year. Tullow and Africa Oil have also been drilling in Ethiopia.

Kenya's election process has not yet crowned a winner, but there is a consensus on benefiting from the East African energy story.

"Becoming a regional energy hub will be a big priority for any government in Kenya," said Clare Allenson, an analyst for the Eurasia Group. In West Africa, oil has been a curse rather than a blessing, as civil wars, corruption and an overreliance on commodity exports extracted a heavy toll on Nigeria and Angola, the main producers.

Fears that oil and gas finds in East Africa will distort economies and politics to the same extent are overblown, Mrs Allenson said.

"In terms of revenue, it's not any way near the scale of Angola and Nigeria," she said.

Obstacles remain, as none of the countries have yet put in place an oil and gas law, and uncertainty remains over the terms of the deals struck with oil companies. The creaky infrastructure needs to be modernised, and government stability is never guaranteed.

In Tanzania, a dilapidated power sector is adding to political concerns, as opposition to gas exports are growing in a country that recently experienced a complete grid shutdown.

"The power problem has become so big it has become a political issue, and a major issue for gas producers. There is the risk that the regulatory framework will seek to supply domestic needs first," said Mrs Allenson.

Nevertheless, analysts say this will do no more than slow down the development of export capacities in Tanzania, as East Africa continues its march towards becoming an energy hub.