THE LONG VIEW

Tanzania 2014 | ENERGY | INTERVIEW

TBY talks to Derek Hudson, President & General Asset Manager of BG Group East Africa, on the potential for natural gas discoveries and the need to prepare the country for a resource-driven economy.

Derek Hudson
BIOGRAPHY
Derek Hudson has been in the oil and gas business for over 24 years. In October 2012, he was appointed President and Asset General Manager of BG Group East Africa and is responsible for all of BG’s business activities in Tanzania, Kenya, and Madagascar. Prior to this, Hudson was responsible for BG’s activities in Trinidad and Tobago from May 2007 until October 2012, which included the operation of three offshore platforms, two onshore processing plants, and BG’s holdings in the Atlantic LNG’s Train 4 liquefaction project. He has also been involved in BG’s exploration activities, commercial negotiations, and business development. He was also Vice-President of BG’s North Sea operations from 2000 to 2004. Derek is a trained geologist, specializing in sedimentology and petroleum geology.

With recent gas finds in Tanzania, what pace and form of growth should the country ideally adopt?

Projects of this magnitude must be conducted at an effective pace. Both this country and its neighbors have made huge gas discoveries, which need to be appraised by additional drilling and well testing. Information gained during that process could also potentially be used to find gas in other areas. That's the first step. These gas discoveries are in very deep water, meaning related appraisal activities are quite challenging. We must carefully prepare for them and assimilate information from the original discoveries, as well as obtain additional seismic data. BG is looking to conduct further exploration and drill appraisal wells here in 2013, and we may take the decision to do more in 2014. Once we have that information, we need to feed it into the engineering setup in terms of pre-feed work and then carry out further detailed engineering and design work. In doing so, we must ensure that the commercial structure is appropriate and that our market projections for the product we wish to sell, in this case liquefied natural gas (LNG), are stable and in high demand worldwide as the price of the product and overall infrastructure cost will determine the manner in which we then proceed. That process in itself, we envisage, will take at least four years. There is absolutely nothing that we can do, or should do, to speed up the process. If you try to push progress along too quickly, errors can be made in design or market and cost projections, meaning that the investment may not be a fruitful one. We are guests here, and our advice to our hosts is to proceed cautiously to ensure that an investment of this magnitude is conducted in an appropriate fashion for all concerned.

What considerations will need to be made at the investment stage?

Once we get to the investment decision stage, which we are attempting to achieve in collaboration with Statoil and ExxonMobil, which discovered gas in Block 2, the construction of an LNG plant or plants on a site with all related upstream infrastructure will require a further four to five years. The benefits of deep-water gas to Tanzania will not show themselves in terms of substantial revenue until the next decade. To go any faster would not utilize the country's resources effectively. Because of the parameters set by a billion-dollar investment, the project cannot be approached in an abstract way. A project like this, with all its technological challenges, needs time. Some of the gas discoveries in very deep water use technology that has only recently granted us access to it. This means that Tanzania has time to develop its infrastructure, legislative framework, and regulatory bodies, as well as prepared its workforce for participation in this venture. I believe that the Minister of Energy and Minerals is heading in the right direction in terms of scholarships and the number of people being trained. I have been on the ground since January 2013, and my proudest moment will be when, in late June to early July, we hire three young Tanzanians as part of our graduate program; they will be the first of many. We also provide scholarships and funding. There is nothing more important than bringing people into your space and having them learn on the ground. I do believe that the biggest challenge for Tanzania in terms of project success is that it requires all sides, including the people, the government, and guests like ourselves, to work collaboratively in the developing of strengths, right from primary school through to high school and university. If we do that, the country will be in a better position to benefit from its resources. Building an energy plant and drilling in 2,500 meters of water is tough, but getting a country to produce outstanding engineers over a long period of time who will stay within the country to contribute effectively is a much more challenging task.

What partnerships are you developing in the country?

We are partnered with Ophir Energy in Blocks 1, 3, and 4, while Statoil and ExxonMobil are in Block 2. What we have is collaboration in principle to hopefully partner with Statoil and ExxonMobil. We are working well together. We are of course also partners with Tanzania Petroleum Development Corporation (TPDC) and for all intents and purposes, the government and people of Tanzania.


“ We are partnered with Ophir Energy in Blocks 1, 3, and 4, while Statoil and ExxonMobil are in Block 2. "

How do you foresee the demand for LNG developing?

BG Group's belief is that the demand for gas in the next decade will outstrip supply, and there are several reasons for this. First is the demand projection in the Far East and elsewhere, and second is the ability of today's LNG ships to exploit markets worldwide. Even with a recent dampening of demand in China, we still see considerable opportunities. This means that prices will be extremely robust. From Tanzania's perspective, under the terms of the production-sharing agreements (PSAs), investment risk lies with the contractor; we provide the upfront investment capital. Obviously, we are using the resources of Tanzania so it is essential that we frame our work in a manner beneficial to the country. However, given how the deals are structured, Tanzanians will still get an appropriate share even in times of lower prices. It is essential for a resource belonging to a country to be exploited appropriately. When we go to the TPDC, we present convincing data as evidence of why LNG remains the optimum utilization of deep-water gas in terms of return per molecule of gas. In regard to the East African region, there are also huge gas reserves in Mozambique. I do not see this as a problem; in fact, I believe that many synergies could be developed in terms of expertise and other forms of collaboration. As we develop capacity here, we have to ensure that that it is not sucked elsewhere. In that respect, the right institutional arrangements have to be in place to encourage businesses to remain in the country.

What benefits will a gas industry bring to the country?

A gas industry, which of course is part of the overall energy program, brings cutting-edge technology to a country. In terms of the depth that rigs have to drill to, as well as the seismic information we have on the seabed, it is amazing. There are literally grand canyons under water off Tanzania's shores that we have mapped. With such expertise come technological advances, which if managed carefully, can have a knock-on effect on the economy. The country itself begins thinking about its engineering capacities and the universities start to think about how best to drive the industry and become a part of it—it starts a thought process on whether more engineers are needed, and on the scholarships, or laboratories that might be necessary to develop them, for example. Such intellectual discussions do not just simply happen. Discussion brings about change, which is the key to development.

How do you feel about the Tanzanian business environment and existing challenges?

The energy industry remains in its developmental stage. I believe that even when gold prices were high, the maximum revenue from Tanzania's extractive industries per annum was circa $500 million per year. The potential benefits of a deep-water gas development dwarf that. Secondly, the requisite investment in deep-water gas developments can range into the billions of dollars. Preparing for the impact this will have on the economy is challenging in terms of the influx of goods and utilization of foreign exchange, and in avoiding hyperinflation. From a governmental perspective, such issues require careful evaluation. Moreover, the service economy must also develop in step with massive national changes. The issue of permits should also be well considered; you don't want a scenario where people commit to huge investments only to face regulatory obstacles.