East African Gas Potential to Bolster Acquisitions, Analysts Say

Potential gas resources in East Africa estimated at 40 trillion cubic feet will drive big explorers to buy stakes in projects in the hope of new finds, Wood Mackenzie Consultants Ltd. and Deutsche Bank AG (DBK) said.

Anadarko Petroleum Corp. (APC) and BG Group Plc (BG/) have so far made the biggest gas discoveries from the total 15 trillion cubic feet (2.6 billion barrels of oil equivalent) found in the last 18 months across Mozambique and Tanzania, according to the analysts’ estimates. The world’s largest oil companies, including Royal Dutch Shell Plc (RDSA) and Exxon Mobil Corp. (XOM), are moving into the frontier where only a fraction of Africa’s wells were drilled.

“The region will see increased corporate activity as smaller companies look to farm-out their acreage in order to fund drilling and the majors are attracted to the potential for material gas discoveries,” Lucas Herrmann, a London-based analyst at Deutsche Bank, wrote in the May 18 report. “Use of the major’s balance sheets and project expertise seems a future inevitability.”

Tullow Oil Plc (TLW) together with Apache Corp. (APA) and Origin Energy Ltd. (ORG) plan to drill Kenya’s first deep-water exploration well in the Lamu Basin later this year. BG also plans to drill wells to find enough gas for its possible liquefied natural gas project. Anadarko and BG each may need about $20 billion to make LNG from gas in East Africa to supply the fuel to world markets, according to estimates from Edinburgh, Scotland-based Wood Mackenzie.

‘Financial Challenge’

“Both projects have the potential to create significant value with internal rate of returns in the mid to high teens,” Deutsche Bank said citing WoodMac estimates. “Even for a company of Anadarko’s size, the $20 billion plus associated cost of a full scheme development would prove a challenge to finance.”

Only about 480 wells have been drilled in East Africa, compared with 14,500 in the west of the continent and 19,000 wells in central and north Africa, according to data from U.K. explorer Afren Plc. (AFR)

Statoil and Exxon plan to drill their first well in Tanzania in 2012, the Norwegian oil company’s chief executive officer, Helge Lund, said in February. Afren plans to drill exploration wells in Kenya, Tanzania and Ethiopia this year and next year, the London-based company said today in a statement. Malaysia’s Petroliam Nasional Bhd is also expanding in East Africa.

Shell Chief Executive Officer Simon Henry in October said that the Anglo-Dutch company has examined projects in Uganda and Tanzania. Shell is applying for four licenses in the African country, Deutsche Bank said in the report.

“Significant licensing activity over the past five years across each of the major countries has meant that much of the more prospective onshore and offshore acreage has now been grabbed,” Deutsche Bank said. “At this stage the super-majors are, as ever, largely notable by their absence.”

To contact the reporter on this story: Eduard Gismatullin in London at egismatullin@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net