Rovuma Basin: Transforming East Africa Into A Global Energy Player

East Africa is not the first region in the world that comes to mind when one thinks of energy production. Nevertheless, with discoveries of significant proportions taking place along the continent's eastern coast, it appears that the region may be clawing back some investor appeal from the global hydrocarbon community.

Semi-submersible rig Noble Clyde Boudreaux leaving the Port of Cape Town on heavy lift vessel Mighty Servant 1. Photo courtesy DCD Marine

Exemplifying the exciting new developments taking place in East Africa is the Rovuma Basin, a resource-rich geological region located along the border of Tanzania and Mozambique that could potentially hold up to 150 trillion cubic feet (Tcf) of gas.

Between the two major companies involved in discoveries on the Mozamibican side of the basin, Anadarko and ENI, there are currently 77 Tcf to 112 Tcf of declared reserves. "To put things into perspective, this is far bigger than the North Sea. Anadarko's discovery alone could likely hold up to 100 Tcf. Taking into consideration that this company is a publicly listed American company, the reserves are likely to be around 150 Tcf, a world-class reserve by any standard. Most specialists are predicting that Mozambique will likely be ranked second or third in the world in terms of liquefied natural gas (LNG) prospects," explained Paul Eardley-Taylor of Standard Bank, oil and gas coverage, Southern Africa.

Although discoveries made on Tanzania's side have been more modest, the 40 Tcf of proven gas reserves will undoubtedly have a transformative effect on the nation's economy as well. With Statoil paving the way for smaller junior players, many more discoveries are expected in the near future.

Given the location of these recent discoveries and global energy demand, it is highly likely that LNG production will be the path that both nations pursue. Speaking of the region's potential, Eardley-Taylor expects the region to follow in the footsteps of its Middle Eastern predecessors. "The two-train LNG will be the kick-start of the whole shooting match. As was the case with Qatar and Oman, the initial capital investments in order to develop these projects will be high. Trains 1 and 2 will be costly and will provide modest returns. Nevertheless, as trains 3 and 4 are built, the capital costs drop significantly, resulting in higher returns. There is no reason why this model should not work for Mozambique and Tanzania in the years to come."

This report was prepared by Karim El Badrawy, Gabrielle Morin and Sarah Hussaini of Global Business Reports. For more information contact.

Armando Emilio Guebuza, president of Mozambique, attends Aggreko's Ressano Garcia site inauguration.

Nevertheless, while excitement is undoubtedly in the air, there are a number of obstacles standing in the way of the respective governments' development plans, namely the lack of infrastructure and technical know-how. In order to ensure that East Africa's transition into an energy hub is successful, it is imperative that host governments engineer regulatory frameworks that encourage investment from abroad while at the same time guaranteeing that their citizens play a meaningful role in the growth of the nascent industries.

Bill Page, director, Deloitte Tanzania

In the case of Mozambique, it has been predicted that the development of its first LNG train will cost approximately $20 billion; a value greater than the entire country's 2011 GDP of $15 billion. It is expected that $12 billion will be raised in the form of debt, while the remaining $8 billion will be equity. "Raising the debt, particularly when taking into consideration the difficult period global financial markets are going through, will be much more challenging than raising equity. Further complicating issues is the fact that Mozambique has double-B-minus investment grade," said Eardley-Taylor.

Paul Eardley-Taylor, head of oil and gas coverage, Standard Bank, Southern Africa

Another daunting task that will face the government of both Tanzania and Mozambique will be ensuring that their citizens take part in the development of the basin. Given the limited experience of these nations in the sector, human capital in both countries is undeveloped. Overcoming this challenge will be integral to the success of the industry.

In spite of the challenges that lie ahead, optimism and excitement are abuzz in East Africa. Indicative of the positive energy, Bill Page, director at Deloitte Tanzania, said, "This will be the opportunity of a lifetime, particularly for the citizens of these countries. It is the biggest thing that has happened in East Africa since decolonization, and it will not come again. It has the potential to create the middle-income countries that they aspire to be, and lift entire populations out of poverty."