Energy in East Africa Update #16

Colleagues…..anyone for another webinar?  Not me.  I’ve had my quote for all of 2020.  Some are worthwhile but really…..

As I concluded in my last update  crude oil developments in East Africa are not going anywhere quickly despite all the optimism.  COVID-19 is not a topic I can comment on other than it has stalled most economic activity in North America and Europe.  I hope Africa can adjust more quickly due to the experiences of ebola, HIV/AIDS, malaria and more.  COVID-19 has caused a dramatic reduction in demand for crude oil, natural gas and energy more generally around the world.  Need I say more?

Given the continued delays in the development of East Africa’s hydrocarbon resources, I have really started to turn my attention to non-hydrocarbon/renewable developments which I have covered to some degree in past articles referring to hydro, geothermal, sun and wind.  There are many opportunities to diversify the region’s sources of energy but at least for several more years, crude oil provides the most cost effective source of transportation fuel for cars, trucks, airplanes and bodas.  However, families and businesses require electricity to power machinery, lights and conveniences.  Nowadays solar, wind and geothermal energy are cost competitive with fossil fuels including coal.  The use of wood and charcoal is well known to cause serious health issues for people who need to fuel their homes.

But first, some developments in the hydrocarbon opportunities…………………………

Tullow’s announcement a few weeks ago announcing the sale of their entire Ugandan interest to Total is important for all stakeholders.  More recently, Tullow also filed for force majeure for their Kenya Turkana development.  So Tullow is exiting east Africa.  As the Ugandan government has learned, project returns are important for a Final Investment Decision(FID) to be made by investors.  The Kenyan government has increased their fiscal take for the Kenyan development so the Force Majeure is a legally convenient way to halt further work on the project but I suspect underlying this decision is the fiscal arrangement being imposed on Tullow and partners especially in what I think will be a lower for longer oil price world.  In the case of both countries, I believe that the primary benefit to them is the contribution to the government’s tax take.  Since its establishment in 2015, the Uganda Petroleum Fund (which was funded by previous capital gains tax payments by Heritage/Tullow) has been dwindling in value due to several withdrawals by Government to finance the budget deficits – which at one point the Office of the Auditor General (AOG) described as irregular. Now, the latest audited accounts reveal that the Fund’s value has further dwindled to Shs 311.1 billion by the end of June 2019. This is a reduction of the Fund’s value from Shs 470.4 billion that was reported in June, 2018. The audit report details total revenues collected from petroleum related activities and a summary of outflows from the Fund from June 30, 2018 to June 30, 2019.

Many people are counting on the jobs to be created by both projects but in both cases, the operators are talking about ca 10,000 direct jobs during construction but ongoing jobs during operations will be a few thousand direct jobs and maybe 2-3 times that for local suppliers and contractors.  Tax negotiations in both cases are still to be finalised and investors committing to FID need to have confidence in a long term legally robust framework in a world where oil prices will continue to be volatile.  In fact, one Ugandan citizen is suing Tullow for $1.1 billion USD for taxes due to the state.

Im adding the link to both of Tullow’s recent announcements.  We should all understand these are carefully constructed statements.  It behoves all interested parties to read these statements carefully.  As I said in update 15a, I still expect FID for Uganda Albertine development to be 18 months away.  I’d add, ‘at least’ 18 months away. https://www.tullowoil.com/media/press-releases/tullow-agrees-sale-its-entire-stake-lake-albert-development-project-uganda-total/ https://uk.reuters.com/article/tullow-kenya-force-majeure/tullow-says-kenya-force-majeure-allows-time-to-resolve-tax-issue-idUKL1N2D00BU

In the meantime, Tanzania’s Minister of Energy Dr. Medard Kalemani has announced that construction of the East Africa Crude Oil Pipeline(EACOP) major crude oil pipeline from Hoima in Uganda to Tanga in Tanzania will/may begin in April 2021.  Clearly he has some inside info which is making him so confident.  The pipeline will be 1,445Km long and will cost $3.5 billion.

Dr. Kalemani said that an environmental audit has been completed and communities close to the pipeline will be compensated. Tanzania, Uganda and investors need to complete the host government agreements (HGA), a shareholders’ agreement (SHA) for EACOP, a land lease agreement (LLA) and a port agreement (PA).  Land ownership and compensation are challenging issues at the best of times.  Remember ‘lower for longer’. 

Tanzania is also continuing discussions about bringing their vast natural gas resources to market.  In addition to the country’s oil plans, the minister also set out a number of gas projects. Talks need to continue on proposals for LNG exports from the 50 TCF+ offshore gas resources. Progress has been slow thus far and it seems likely that Tanzania LNG will have to wait for the next round of LNG project FIDs, which may stem from a projected supply crunch which will become more apparent around 2025.  Tanzania is working on plans to export gas to Uganda via a pipeline. The country secured expressions of interest for companies to serve as research advisors and a bilateral agreement with Uganda was drafted. 

Tanzania Petroleum Development Corp.’s (TPDC) has a ambitious plan for gas use that is intended to see 18.7 trillion cubic feet (530 billion cubic metres) go into the domestic market.  TPDC is working on a compressed natural gas (CNG) plan , mini LNG and gas pipelines as part of its aims of distributing the country’s natural gas resource. Gas production from Songo Songo and Mnazi Bay, in the south of the country, reached 210 million cubic feet (5.9 million cubic metres) per day in 2019-20. 

After almost two years, the country has finally started to progress Aminex’s licence extension for Rovuma.  Partners Aminex PLC (LON:AEX) and Solo Oil PLC (LON:SOLO) have announced an extension of the Ruvuma licence by Tanzania’s Ministry of Energy by one additional year, commencing April 17, 2020. The move will then allow Aminex and ARA to advance work programmes on the Ruvuma project and see the Ntorya discovery move towards first gas.  It is expected that the partners will acquire 200 square kilometres of 3D seismic (estimated gross cost of US$7mln) and drill the Chikumbi-1 exploration well (at least US$15mln). These programmes are expected to provide key inputs into an application for a development licence for the Ntorya project area.  He commencement of this next operational phase that should further de-risk 763 billion cubic feet of 2C resources at the Ntorya field.

In South Sudan implementation of key aspects of the South Sudan peace agreement are being affected by the coronavirus pandemic. The situation has been made worse by the drop in global crude oil prices as global energy demands decrease due to the pandemic. The resource accounts for 98 per cent of South Sudan’s budget. The funds for the implementation of the security arrangements were supposed to come from the oil resources, but most of the funds are now being diverted to Covid-19 programmes.

Total’s LNG project in Mozambique acquired from Occidental after their acquisition of Anadarko is now starting to make significant progress despite the security issues in the local onshore communities where terrorists are causing significant challenges.  W-Industries has been awarded a significant contract by Total E&P Mozambique Area 1.  The contract includes engineering, manufacturing, integration, automation and testing of the Onshore Subsea Equipment related to the development of the Golfinho subsea assets. W-Industries will provide two Onshore Subsea Support Equipment Modules (OSSEMs) with integrated electrical and instrumentation buildings, subsea production hydraulic power unit, MEG injection system, methanol injection system, and an independent chemical injection skid with a fully integrated local process control and safety system. 

Total has secured $14.4 billion of funding for this project according to Bloomberg reports.  A source with knowledge of the matter said Total has reached a financing agreement with a group that includes around 20 lenders for the first phase of senior debt funding of $14.4 billion. One of these funders is likely to be the Export-Import Bank of the United States (EXIM) that has unanimously voted to amend the agency’s previously approved September 2019 direct loan supporting US exports for the development and construction of this project.  The package amends the original scope of EXIM’s financing of the project from exclusively the onshore portion of the LNG plant and related facilities to also allocate an estimated $1.8 billion of the estimated total of $4.7 billion (decreased from the original $5 billion) to support the project’s offshore production. As a result, the transaction now will support an increased number of —16,700— estimated American jobs over the five-year construction period.

“EXIM’s financing for the Mozambique LNG project continues to strongly support President Trump’s Prosper Africa Initiative to unlock opportunities for US businesses in Africa. The amendment approved today expands the scope of US involvement in the project to support even more American jobs—16,700 US jobs—across additional states,” said EXIM President and Chairman Kimberly A. Reed.  This financing was originally blocked when the financing was going to benefit non-American suppliers.

Now to renewables and developments in that area…..

It is critical that the region develops plans to support the growth of their urban areas.  The population is growing and young people need meaningful work.  Energy is critical to allow the economy to grow in an efficient way.  COVID-19 has demonstrated that crowds and congested cities are hot spots for the outbreak of coronavirus, and although that is where the jobs are, new ways of working are now being forced upon us.  Working from home even has its own acronym now (WFM).  If this continues there is less need for the daily commute, less need for office buildings and services/restaurants in crowded city centres. 

Electrification of the region and upgrading of broadband internet services are key challenges to create a new future that is less damaging to where we live and work.  Infrastructure and renewables come with their own challenges such as what happens at the end of their life, or what about the water reservoirs that are filled to provide supply…

Solar energy is a natural for Africa and according to the International Energy Agency ( IEA) will likely provide  more energy than hydro or natural gas.  Wind energy should be deployed but will be limited to areas such as Turkana and the coast where there is reliable and suitable wind ‘resource’.  Geothermal has a lot more potential and Kenya is leading the way in this regard.  Battery storage will be an important element for storing energy when the wind isn’t blowing or the sun is not shining.  The following graph shows how much costs have come down in the last 10 years:

Currently a large proportion of energy in the region of East Africa is from biomass, wood burning, coal in some cases,  Transmission lines and regulatory policy on land acquisition, tariff rates for both into the grid and offtake. The availability of crude oil and natural gas for regional use is still some years off so in the interim, renewable energy is the short term solution.  Coal burning power plants are still being built in places like Zimbabwe where Chinese state companies are pushing forward on a $4.2bn USD coal power project.  And coal resources are abundant across the continent but they really shouldn’t be extracted unless expensive technology such as carbon capture and storage ( CCS) can be developed alongside.  At least that is my view when considering the environmental implications.

There are new projects progressing through the financing stage such as a small run of river hydro 15 MW Kaptis project in western Kenya.  In Tanzania, a 2.4 mW wind farm development is under construction in the Iringa region to supplement the existing 4MW hydro plant proving electricity for local businesses and homes.  Multiple generation sources and offtake agreements make these projects viable.

In the context of East Africa and energy, geothermal energy is a prime prime resource for development, largely being led in Kenya.  The regional governments have formed The Geothermal Risk Mitigation Facility (GRMF) to faciliate the development of geothermal resources in the member countries in East Africa as shown on the map following.  .  The GRMF is an internationally supported orgnsiation with matching funded available to support geothermal development.  Since the initial licence round, 30 projects have been awarded consisting of 10 private and 6 public developers.  The GRMF opened bidding for new licences on May 6th 2020 with Expressions of Interest(EOI) to be submitted by July 15th, 2020

Awarded projects of GRMF rounds 1 to 5 (source: GRMF)

Kenya has developed a roadmap for the development of their energy resources with geothermal resources having the potential for 10,000 MW which could be developed from the current level of ca 800 MW in operation.  In addition, the country Is planning two new coal fired power plants with the first in Lamu planned for 2024 providing 980 MW and a second in 2034 providing 960 MW.  According to the IEA, geothermal energy could provide 40% of Kenya’s electricity demand.  The ‘Energy Transition’ challenges from coal remain to be addressed.

Now even Uganda has embarked on a program to evaluate the geothermal resources in the country along the rift basis.  However, like many subsurface evaluation projects, drilling is required.  Following a well blow-out during geothermal exploration drilling in Kibiro, Uganda, the country’s Ministry of Energy and Mineral Development has halted further exploration until a comprehensive environmental and social impact assessment has been conducted.  This sounds like a familiar issue to me and one that needs appropriate regulation and competent developers.

By Greg Coleman