A new petrostate gathers influence

If all goes according to plan, by the end of the decade the impoverished east African nation of Mozambique will improbably transform into one of the world's premier petrostates -- locally prosperous and the trigger of a geopolitical and market disruption from Europe to Russia and Asia.

This promise has captured the attention of a global oil industry already on a sharp rebound, punctuating an oil and gas boom under way up and down both African coasts. In Mozambique, it has triggered a multibillion-dollar competition among latecomer companies wishing to get in on the bonanza, bidding for natural gas properties pioneered by Italy's ENI and U.K. wildcatter Cove Energy, which is up for sale.

Yet there is also deep unease about Mozambique and much of the Africa frenzy, given the continent's long, tainted history of resource development, in which the nations have remained poor and unstable. Oil executives, diplomats and humanitarian groups have expressed concern of social turbulence should local governments not prepare themselves for coming wealth.

"If it is done right, it has the potential to lift a lot of African nations from the poverty that they have been in for years and years and years," said John Christiansen, a spokesman for Texas-based Anadarko Petroleum, which has a huge discovery alongside ENI's in Mozambique. "But I think a lot of that depends upon it being done right, in a transparent fashion."

In 2010, Anadarko initiated Mozambique's hydrocarbon age with the discovery of Lagosta, a supergiant natural gas field. Earlier this year, Anadarko said that Lagosta and adjacent fields contain the gas equivalent of up to 5 billion barrels of oil. Last year, ENI announced a similar natural gas find -- the equivalent of as much as 5 billion barrels of oil in a nearby field called Mamba. Both companies suggest that they expect to find much more gas, as well.


The companies are aiming to spend tens of billions of dollars on liquefied natural gas facilities to ship the gas mainly to Asia, and Mozambique's geographical position allows for exports to Europe, as well, analysts say. In a presentation to investors two weeks ago, Anadarko said its initial plans alone are to export the LNG equivalent of about 300,000 barrels of oil a day starting in 2018. ENI's production would be on top of that.

Qatar, the world's largest LNG exporter, currently sells the LNG equivalent of about 2 million barrels of oil a day; Australia, the second-largest exporter, says its LNG sales will surpass Qatar's by the end of the decade.

East Africa's new discoveries extend up the coast to Tanzania -- last month, Norway's Statoil said it had discovered the natural gas equivalent of about 900 million barrels of oil off the Tanzanian coast. Due north, Anadarko and other companies plan to drill off the coast of Kenya, and oil drilling has begun even in Somalia. Inland, Uganda has about 1 billion barrels of oil.

Analysts say the Mozambique volumes alone could shake up a primitively segregated global market in which gas sells for less than $2.40 per 1,000 cubic feet in the United States, but up to $20 per 1,000 cubic feet in Asia. The reason for the price disparity is that contracts in Asia and Europe are linked to oil -- since the price of oil is high, so is that of natural gas. No such link exists in the United States, so a glut caused by the boom in shale gas has depressed the U.S. price.

Many analysts think that at some point, the global price will equalize, with the oil link vanishing, and that Mozambique may be the trigger. If it is, it would seriously undermine Qatar and Australia in Asia.

Already, Qatari LNG has been key to the creation of a competitive spot market in Europe, undercutting Russia's Gazprom, which supplies more than 25 percent of Europe's natural gas. To the degree that Mozambique LNG reaches Europe, it would further undermine Gazprom.

"They can revolutionize the natural gas market globally, ending Gazprom's hold on the oil link in Europe, and ending the crude oil link across Asian LNG," said Edward Morse, chief of commodities research at Citigroup. "It's big, big stuff. ... This is great news for consumers eventually. [It is] terrible news for Qatar. Disastrous news for Russia."

High risk

The scale of the projects means that these Western companies -- or others in case they sell out shares of their properties -- could be engaged in East Africa for decades. Analysts say the region has comparatively little infrastructure such as roads and electric capacity, so that the companies essentially will be building up from scratch.

In Mozambique, the American and Italian companies are navigating a country of 23 million people with a fast-growing economy that has failed to deliver -- it has among the world's lowest living standards and greatest poverty. Analysts say these conditions make it politically risky -- no one can judge the stability of any government, nor how any future leader will view past energy deals.

"The political risk in Mozambique and Tanzania is relatively high, so the companies have to make sure that with a $20 billion investment, they have a pretty good rate of return," said Guy Caruso, former director of the U.S. Energy Information Administration and currently a fellow at the Center for Strategic and International Studies.

Yet risk is a two-way street. A long record of scholarship holds that energy booms and the presence of foreign oil companies in poor places typically create instability of their own accord with rising public social and economic expectations. Claudio Descalzi, chief operating officer of ENI's exploration and production division, said that the company, with a half-century history in Africa, has developed "a clear model, a clear culture" for how to navigate this landscape.

American oil companies have tended to avoid economic projects unrelated to their energy dealings. But Descalzi suggested that building up local infrastructure improves the stability of a foreign company's presence in such countries.

In Nigeria, he said, an ENI-operated natural gas-fired power plant at Okpai provides 25 percent of the country's electricity. He said that in Congo, ENI built a gas-fired power plant at Djeno that supplies more than 60 percent of that country's electricity. Such actions "create a good reputation," he said, and "make sustainable our presence in the country."

"When you are investing in energy, you are helping, you are investing in the domestic growth of the country. That is your best protection, and that is what has happened the last 50 or 60 years," Descalzi said.

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