DESPITE MAJOR DISCOVERY BY STATOIL, EAST AFRICAN OIL STILL FACES OBSTACLES

East Africa holds out a lot of promise for oil and gas exploration, but its ultimate emergence as an energy player remains in doubt.

Statoil, the mostly government-owned Norwegian oil company, announced on March 30 that it has made a major natural gas discovery off the coast of Tanzania. But the gas find is merely the latest among eight significant discoveries of hydrocarbons off the coast of East Africa. Statoil was already sitting on nearly 21 trillion cubic feet (tcf) in its Block 2, and the latest discovery will chip in an additional 1 to 1.8 tcf.

Statoil is not the only international oil company drilling in Tanzanian waters. ExxonMobil and the UK’s BG Group are also drilling offshore. Along with Kenya and Uganda, Tanzania has put East Africa on the map for exploration companies. The Tanzanian government says that it has 53.2 tcf of recoverable natural gas reserves within its borders.

However, the optimism surrounding Tanzania’s oil and gas sector has darkened since last year, for several reasons. First, the arrest of two top officials at the Tanzania Petroleum Development Corporation in November 2014 threatened to derail the nation’s push towards oil and gas development. The arrests came because the officials refused to disclose the details of the production sharing agreements they reached with foreign oil companies Statoil, ExxonMobil, BG Group, and Ophir Energy.

Also, delays in hashing out the details of major gas development have plagued the sector because top political figures are afraid of taking politically unpopular positions in an election year. Without legal certainty, large investments will stay on the sidelines.

A longer-term stumbling block to fully exploiting its resources has been the dearth of adequate infrastructure. The Tanzanian government is laying out an ambitious spending plan to change that, detailing $14.2 billion in new spending on railways in order to build the transit capacity to move coal, iron ore, and other mining products to ports on the coast.

Landlocked countries like Uganda and Rwanda have trouble getting their natural resources to global markets, and Tanzania hopes to transform itself into a major regional trading hub. But while upgraded rail will help Tanzania ship mined minerals, the massive offshore oil and gas projects as well as projects inland need separate pipeline infrastructure.

These are substantial obstacles that must be overcome before Tanzania can emerge as a major gas producer. The collapse in oil prices has only made East Africa that much less viable as a high-growth region for oil and gas companies. That can even be gleaned from Statoil’s press release. While the Norwegian company is enthusiastic about its new discovery, instead of expanding its drilling campaign, it will appraise prior discoveries and then take a pause “to evaluate the next steps.”

Oilprice.com