The Hottest 2013 Natural Gas Story You’ve Never Heard (APC, E, STO, XOM, RDS.A)
Tony Daltorio: The story for natural gas companies in 2013 is an improving one. As Money Morning Global Energy Strategist Dr. Kent Moors explained last month, he believes natural gas prices in the U.S. will come back strong next year.
But the natural gas story is not just an American one.
Ask the average energy executive what region he or she is really excited about today and the answer you will get is one that was not even on many companies’ radar a few short years ago – and one of which many investors are unaware.
2013 could be the year when investors become aware of the vast potential of the prolific natural gas fields in this region, potential that will be unlocked when gas from those fields is someday turned into liquefied natural gas (LNG) and sold to the energy-hungry markets of Asia.
I’m talking about the offshore waters of East Africa.
The Huge Natural Gas Potential of East Africa
The reason for all the excitement in the industry is simple: there is a lot of gas in East Africa.
According to a recent assessment by the U.S. Geological Survey, there are at least 440 trillion cubic feet of natural gas and 14 billion barrels of natural gas liquids (not to mention 28 billion barrels of oil) in the coastal waters of Kenya, Tanzania and Mozambique.
The recent activity in the region by energy companies even led Kenya’s energy minister Kiraitu Murungi to tell Reuters that “We are becoming the new Middle East.”
Even though exploration efforts have barely begun (only around 500 wells have been drilled), successes have been bountiful.
“With gas exploration you have to find an elephant field to make it worthwhile. They [exploration companies] didn’t just find one elephant – they found a herd,” Simon Ashby-Rudd, an investment banker at Standard Bank, told the Financial Times.
Already about 100 trillion cubic feet of natural gas have been found. That is roughly equivalent to Iraq’s gas reserves. The major discoveries so far have been found in the waters off the coasts of Tanzania and Mozambique, mostly in the Rovuma Basin.
That is very good news for two companies that have blocks in Rovuma.
These companies are Anadarko Petroleum Corp. (NYSE:APC) and Italy’s Eni SpA (NYSE:E). The two firms are thought to be discussing combining their assets into one big project, including building a LNG plant.
The partner of Anadarko and Eni in these fields was U.K.-based Cove Energy. It was recently the subject of a bidding war between Royal Dutch Shell Plc (NYSE:RDS.A) and Thailand’s PTT Exploration & Production (PTTEP) that was won by the Thai company.
The Rovuma Basin is not the only discovery in the region. Norway’s Statoil ASA ADR (NYSE:STO) and its partner Exxon Mobil Corp. (NYSE:XOM) this year made one of the biggest gas discoveries to date in neighboring Tanzanian waters, the Zafarani field. The estimated 5 trillion cubic feet gas discovery was Statoil’s biggest outside of Norway.
Other players in Tanzania include U.K.-listed Ophir Energy and a rather large player in the global gas industry, BG Group ADR. These two companies recently upgraded the potential of the area they are exploring, near the Rovuma Basin, to about 6 trillion cubic feet of gas.
Natural Gas Companies: LNG Potential in 2013
Underlying the large energy companies’ interest, according to Bernstein Research, will be the growing demand for LNG in Asia.
Bernstein forecasts that demand is growing at 20% a year and that demand for LNG will double over the next decade to 408 million tons annually.
Anadarko’s CEO Jim Hackett told an Eni company magazine that “we can help vault Mozambique into being one of the world’s three largest LNG exporters.”
According to Reuters, Mozambique could be vying with Algeria as the world’s #6 LNG exporter by the middle of the next decade.
It is believed the east African region could support 12 LNG trains – the term used for plants that turn natural gas into freezing liquid gas. Twelve trains means about 60 million tons of LNG a year. Japan, the biggest importer of LNG, consumes about 78 million tons a year.
However, since most of the companies exploring in the region right now lack experience in the liquified natural gas business, the belief is that the oil majors will be invited in.
For example, it is thought that once their assets are merged together, Anadarko and Eni will attempt to sell some of the project to major oil companies like Exxon or Shell or BP. It should be an easy sale considering that the world’s largest buyer of LNG – Korea Gas – is involved in Eni’s project.
A Few Obstacles
Of course, it’s not all smooth sailing for natural gas development in East Africa.
The countries there have poor infrastructure. Four-fifths of Mozambique’s 23 million people, for example, still have no access to power. The region has no skilled workforce to speak of – a concern when 7,000 workers are needed to construct an LNG plant. The countries will also have to build deepwater ports capable of handling large tankers.
The big energy companies can certainly bring in a workforce to do the necessary work. But then the question becomes what that action will do to the key, and to-date, very positive relationship with the governments allowing the companies to drill in their waters.
Despite these obstacles, investors should look in 2013 for increasing interest in the region by the energy majors. That interest should result in a pick-up in merger and acquisition activity with the smaller and mid-sized oil and natural gas companies in the region as the targets….targets that will command a pretty premium in takeover value.
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