THE LONG VIEW

Tanzania 2014 | ENERGY | VIP 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.

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

Projects of this magnitude must be conducted at an effective pace. Both this country and its adjacent neighbors have made huge gas discoveries, and those discoveries 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 is the first step. These gas discoveries are in very deep water, so the appraisal activities associated with them 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 drill more exploration and 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. While we do that, we have to make sure that the commercial structure is appropriate and that our market projections for the product that we wish to sell, in this case liquefied natural gas (LNG), are stable and in high demand across the world as the price of the product and overall cost of the infrastructure will determine the final way forward. That process in itself, as we envisage today, is going to 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 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 the related upstream infrastructure will also take another four to five years. The benefits of deepwater gas to Tanzania will not show themselves in terms of substantial revenue until the next decade. To go any faster would be not utilizing this 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 get its people prepared, from a capacity perspective, to participate in this venture. I believe that the Minister of Energy and Minerals is heading in the right direction in terms of scholarships and how many people are 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; and 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 of it being a successful project for Tanzania is that it involves everyone, including the people, the government, and guests like ourselves, to work collaboratively to develop strengths 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.

“I do believe that the biggest challenge of it being a successful project for Tanzania is that it involves everyone."

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 a 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.

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 that. First is the demand projection in the Far East and elsewhere, and second is the ability of today's LNG ships to exploit markets all over the world. Even with a dampening of demand in China in recent times, we still see a lot of opportunities. This means that prices will be extremely robust. From Tanzania's perspective, under the terms of the production-sharing agreements (PSAs), investment risk is with the contractor; we provide all the upfront investment capital. Obviously, we are using the resources of Tanzania so we have to frame our work in a way that will be 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 very important that a resource belonging to a country is exploited in the most appropriate fashion. When we go to the TPDC, we go with robust information to show why LNG is still the best utilization of deep-water gas in terms of return per molecule of gas. In regard to the East African region, there is also a lot of gas in Mozambique. I do not see this as a problem; in fact, I believe 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 capacity is not sucked elsewhere. In that respect, the right institutional arrangements have to be made in order to encourage people to stay in the country.

What benefits will having a gas industry bring to the country?

A gas industry, which of course is part of the overall energy industry, 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 offshore of Tanzania that we have mapped. With that expertise comes technological advances. If that is managed carefully, it can have a knock-on effect on the economy if people are employed properly. The country itself begins thinking about its engineering capacities and the universities start to think about what they have to do to drive the industry and be a part of it—it starts a thought process on whether we need more engineers, scholarships, or laboratories, for example. Such intellectual discussions do not just simply happen. Discussion brings about change and it is important for development.

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

With respect to the energy industry, it is slightly immature because it is relatively new. 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 deepwater gas development will dwarf that. Secondly, the investment for deepwater gas developments can range into billions and billions of dollars. Preparing for the impact this will have on the economy is challenging in terms of the influx of goods and the utilization of foreign exchange and how to avoid hyperinflation. From a government perspective, these things need to be thought through. Service companies also need to be ready. The issue of permits should be considered as well; you don't want to bring people in with huge investments only to have them faced with obstacles.

© The Business Year - August 2013