According to Business Monitor International (BMI), with limited domestic and regional gas demand, the development of LNG export capacity remains key to the monetisation of Tanzania’s substantial offshore gas resources. The Tanzania LNG export facility is targeting final investment decision (FID) in 2016. Given standard project lead times, this could see the facility brought online by 2022. Although this remains BMI’s core forecast scenario, the balance of risk lies increasingly to the downside.
Continued legal and regulatory uncertainty has been a major drag on progress. Most damaging has been delay in passage of the country’s Natural Gas Act. The act, which will be the main legislation governing the gas sector, is unlikely to pass ahead of the 2015 presidential elections.
The recent fall in Brent also poses substantial downside risk to FID in 2016. LNG contracts remain heavily indexed to oil and a period of sustained lower oil prices would threaten the project’s commercial viability.
BMI forecast’s Brent to average US$55 -70/bbl over the next five years. Assuming a 14.5% slope to crude (relatively typical of Asian LNG contracts), this would yield an LNG price of in the range of US$8.00 – 10.15/million Btu.
Critically, prices at these levels could fall below the commercial breakeven for the Tanzania LNG project. A study by Ernst & Young estimated a commercial breakeven of approximately US$11.60/million Btu, or US$10.10/million Btu excluding shipping. This is broadly consistent with figures given by industry sources from within the region, which put breakevens in a range of US$10.00 – 11.50/million Btu.
However, with a wave of new liquefaction capacity due online in the period 2015 – 2018, and with global supply growth significantly outstripping the growth in consumption, the LNG market looks set to loosen over the coming years. Buyers may become more reluctant to tie in to long term contracts, while increasing competition on the supply side will bring further downward price pressure.
Tanzania LNG would largely target the Asian markets. It is worth noting that at US$10.00 – 12.00/million Btu, Tanzania’s commercial breakeven price would be above the January 2015 landed LNG prices for China, India, Japan and South Korea. Given the lower breakevens of many of the other export projects (and particularly those of the brownfield projects in the US), Tanzania LNG could struggle to compete.
Given the size of the resource base and its potential value to the economy, BMI does not see Tanzania’s offshore gas deposits become a permanently stranded source. However, there is an increasingly high probability that the Tanzania LNG project partners will delay FID until the emergence of a more supportive price environment and more favourable supply and demand dynamics, pushing first LNG outside BMI’s 10 year forecast period.
Adapted from a report by Emma McAleavey.
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