Industry Trend Analysis - Upstream Focus Shifting East - MAY 2017

BMI View : East Africa is on track to become a major oil and gas exporter in the 2020s, with a strong projects pipeline in Uganda, Kenya, Tanzania and Mozambique. However, financing, logistical and security concerns remain, with substantial risk of project delays.

East Africa is set to emerge as major oil and gas producer post-2020, through the monetisation of large crude reserves in Kenya and Uganda and offshore gas deposits in Tanzania and Mozambique. However, as frontier markets, elevated security and political risks combined with large infrastructural and capital requirements pose continued risk to project timelines.

Below Ground Favours Uganda, Kenya Holds Advantage Above Ground

Uganda holds the advantage over Kenya below ground, with 17 oilfield discoveries made in the Lake Albert basin, totalling 1.7bn barrels (bbl) of oil. The resource base has been materially de-risked and is above the threshold for development. Kenya's recoverable resource base is smaller at 766mn bbl, but above the development threshold. Exploration and appraisal is also significantly less advanced, although the restart of Tullow's South Lokichar drilling programme in Q416 will help further delineate the resource base and may add substantially to growth.

Above ground, the environment in Kenya is the more favourable of the two. Fiscal and licensing terms are reportedly more preferential, while the government has shown itself strongly supportive of resource development. Discoveries in Uganda were made six years before those in Kenya, but progress stalled during this time due to regulatory roadblocks and disputes over taxes and development plans. The production licence awards to Tullow and Total in August 2016 following the resolution of these disputes marked important progress. However, substantial risks remain.

East Africa: The New Frontier
Kenya And Uganda Crude Production Forecast, '000b/d
Source: BMI, EIA

Both developments hinge on pipeline construction to export the crude to international markets. In Uganda, the route will run via Tanzania to Port Tanga. Given the need for cross-border cooperation, this substantially raises the probability of delay. In contrast, the Kenyan pipeline is domestic; however, insecurity in the north of the country may threaten construction. Capital requirements for both projects will be large, although the financial backing of Total will help alleviate some of the pressures for Uganda-Tanzania pipeline.

Kenya has begun works for an early production programme which is set to begin in 2017, with peak output of 2,000b/d, transported to the coast by road and rail. Final investment decision (FID) for full field developments in both Kenya (80,000-120,000b/d) and Uganda (200,000-300,000b/d) are slated for 2018, targeting first oil in 2020-2021. While the project timelines may be pushed back, we are positive on the prospects for FID. Both the size and the low-cost nature of the resources favour developments in these markets, in light of the current low weaker oil price environment.

External Environment Challenging For Gas, But Projects Remain Attractive

Mozambique and Tanzania have both substantially de-risked their gas resources and have enacted major legislative overhauls in support of commercialisation. Mozambique is on track to outstrip first production in Tanzania, due to faster progress on its legislative reform and the use of a floating liquefied natural gas (FLNG) facility - Coral FLNG - for one of its two planned developments. Eni is reportedly on track to reach FID on Coral by the end of 2016 or early 2017 at the latest, while FIDs on the onshore facilities are expected in 2017-2018.

Resource developments in both markets are attractive, due to the scale of production potential. However, given thin domestic gas markets and a lack of regional pipeline connectivity, progress hinges on LNG export ventures. The external environment here is poor, given rapid growth in global supplies and a sharp fall Asian spot prices. When East African supplies hit the market in the 2020s, the market will likely be significantly tighter and prices. However, current market weakness creates headwinds to securing the long-term offtake contracts typically needed to underpin project financing.

LNG Exports To Lead Growth
Mozambique And Tanzania Natural Gas Production Forecasts, bcm
e/f = BMI estimate/forecast. Source: BMI, EIA