What Tz should do to become Africa’s natural gas hub-Shell chairman

19Sep 2018
Winnie Henry
DAR ES SALAAM
Financial Times
What Tz should do to become Africa’s natural gas hub-Shell chairman

The Resident Chairman of Shell Tanzania, AXEL KNOSPE (pictured),-

AXEL KNOSPE.

explains to Financial Times Staff Writer WINNIE HENRY about delays in construction of a $30 billion export terminal for natural gas, a slowdown in oil and gas exploration activity and what Tanzania should do to become a major gas exporter in Africa.

QUESTION: What is the latest progress in plans by Royal Dutch Shell alongside Statoil, Exxon Mobil, Pavilion and Ophir Energy to build a liquefied natural gas (LNG) export plant in Lindi Region as a joint venture project with the state-run Tanzania Petroleum Development Corporation (TPDC)?

ANSWER: Shell and partners have been working with the government to find the most cost-effective and efficient way to develop a multi-billion-dollar liquefied natural gas (LNG) project.

The consortium of the five companies has submitted their proposal for the Host Government Agreement (HGA) terms to the Government Negotiating Team (GNT) and the government has also submitted their proposed term sheet.

The differences are still very significant and there is currently an ongoing effort to understand each other’s positions.

The complexities of an LNG plant are not to be underestimated and we are pleased the government of Tanzania has decided to hire an expert consultant to assist them in the negotiations.

Q. When do you expect to reach final investment decision (FID)?

A. Mega-projects such as the Tanzania LNG project have a series of decision points prior to the investors making their final decision. FID is preceded by a period called FEED (Front End Engineering Design) that lasts between 18 to 24 months and costs hundreds of millions of dollars.

Before any investor commits to FEED it is expected to have agreed to the HGA that covers all the legislative and fiscal terms for the project.

It is estimated that the total investment for the LNG project is of the order of $30 billion, which is on a scale unprecedented in Tanzania. 

Q.What's the expected construction schedule of the proposed LNG terminal?

A. It will very much depend on the output of the FEED work, based on our experience world-wide, a typical LNG project takes up to 5 years to complete.

Q. Which international oil company among the JV partners is leading the LNG project?

A. The project is still at a very early stage and discussions are ongoing. This is one of the details the consortium (Shell with partners Ophir Energy & Pavilion Energy, and Statoil with partner ExxonMobil) has not addressed yet. We do work as a group in collaboration with the government.

Q.Mozambique has overtaken Tanzania in construction of an LNG terminal. How will this affect Tanzania's LNG project?

A. While the deep-water gas in Mozambique has been discovered around the same time as in Tanzania, the government there has moved faster to agree the commercial and legal framework needed for LNG investments.

As a result, one project is already under construction in Mozambique, and the first gas will be flowing already in 2022.

The market for LNG is a truly global market, so there is no direct competition between Tanzania and Mozambique, even though they are close neighbours.

Rather, every project has to compete on its own merits in the global market place. However, there are more prospective LNG projects today than there is room for LNG in the market, so not all proposed projects can go ahead.

So the effect of Mozambique starting LNG projects is to take up some of the global demand, meaning that for Tanzania there is proportionally some less room in that global market to place its gas. 

 

Q. What are the expected export markets for Tanzania's gas once the LNG project is completed?

A. It is very early in the project life cycle. The LNG market is changing rapidly from long term off take contracts to shorter term contracts. Tanzania is positioned equally well to supply markets in Asia and Europe, and it is likely that Tanzania’s LNG will be shipped to a variety of countries across the globe.                                                                         

Q.What is the outlook for Tanzania's oil and gas sector?

A. Shell has a very good understanding of the oil and gas sector in Tanzania, with our participation in over 30 per cent of all wells drilled in the country as well as an extensive history in retail.

We are however seeing a slowdown in upstream activity which started with a poor response to the last upstream bid round.

The main reason we see in the slowdown is harsh legislation that doesn’t encourage companies to risk exploring.

Exploration is a high-risk activity, as it is very expensive from tens of millions of dollars for onshore exploration to hundreds of millions of dollars for offshore exploration and the risk for this money is for the investor.

If the exploring company doesn’t find anything, nobody will pay them back their exploration expenses. For example, we had a partnership with Petrobras that unfortunately didn’t find any hydrocarbons in their blocks.

So, for an investor to commit to exploration, they either look at a reduced exploration risk or at commercial conditions which would make a discovery attractive.

Q. What's the latest progress in Shell's exploration work in Zanzibar?

A. We are in discussions with the Revolutionary Government of Zanzibar to finalise our negotiations.

We agreed with the Zanzibar government that RAKGAS should be the first to negotiate followed by Shell for B9-12. These discussions should start shortly after RAKGAS concludes their talk. We are looking forward to these discussions.

Q.What potential does Zanzibar have in terms of probable hydrocarbon reserves?

A. There is very little existing data available on the acreage, so determining this potential will be part of our activities once we conclude the negotiations.

Exploration is a high risk activity and in the case of Zanzibar we will need to do a lot of exploration work and spend a lot of money to determine if there are any hydrocarbons at all.

Q. What should Tanzania do to realise its potential as a big gas producer in the world in future?

A. Being a big producer depends on very few elements. The first one is to determine how much gas there is which requires to attract investors for exploration but of course nobody can influence how much hydrocarbons are present.

The second factor is to have a predictable and conducive investment framework to compete with other resource holding countries for the required know-how and capital and this is where a country can write its own destiny.

A conducive business environment, sanctity of contracts and agreements, stability and predictability of the legal, fiscal and commercial framework for investment are important and critical success factors for Tanzania to be the gas hub in the region.