By Henning Gloystein and Oleg Vukmanovic
LONDON (Reuters) - Mozambique and Tanzania are locked in a race to be first to export gas from East Africa, but a bigger battle awaits as the United States and others gear up for a share of the global gas market.
Liquefied natural gas (LNG) shipments from huge recent discoveries could transform their struggling economies, where average annual incomes languish below $600 and life expectancy is less than 60 years.
As things stand today, natural gas is the fastest-growing fossil fuel and the market is tight, boding well for these would-be sellers.
Yet return on investment for the companies footing the hefty upfront costs will hinge on how fast they can reach market and how much gas is found as new rival LNG exporters come to market at the same time or sooner.
Those include Australia, which is off to a headstart, and a thriving U.S. energy market buoyed by shale gas which is expected to begin exporting gas from 2015.
Russia, the world leader in piped gas, has also set its sights on LNG, aiming to ramp up exports targeting Asia's lucrative markets later this decade.
"Mozambique and Tanzania need to move fast to become major exporters," shipping research group Lloyd's List Intelligence said in a recent report.
"The clock is ticking for both nations, as global shale gas exports threaten to saturate the markets before either has had time to export any gas."
The tasks they face include passing legislation to encourage and safeguard investors, securing investment for costly infrastructure, and allaying concerns about potential corruption.
"To ensure... LNG captures the market window in 2018-20, given the five- to six-year construction timetable for such a large project, it needs to reach financial close during 2013/4," said Simon Ashby-Rudd, head of oil and gas at South Africa's Standard Bank.
The Tanzanian government is expected to launch a new bidding round for gas exploration this month.
However, it has yet to finalise its natural gas policy, and debate rumbles on over how much gas should be sold to foreign investors and what safeguards should be put in place to ensure development of the country's own gas and electricity sector.
Adding to the mix, the government's term ends in 2015, stirring political debate within the ruling party as well as among the opposition over the best approach.
"The government will hesitate to bring it (the gas policy)forward in the current political climate," said political risk consultancy Eurasia Group.
"The opposition will seek a firmer stance on local participation in the sector," it said, adding that even existing agreements could be under threat.
In neighbouring Mozambique, the ruling Mozambique Liberation Front's (FRELIMO) hold on power offers political stability for foreign investors. Which could mean speedier passage of needed regulations.
"Frelimo's dominance remains unchallenged. As such, pending changes to regulatory and fiscal codes for the gas sector in Mozambique are likely to pass through the legislature by year's end and before a new bid round in Q1 2014," Eurasia Group said.
Given their different political and regulatory environments, energy consultancy Wood Mackenzie expects Mozambique to export its first LNG cargo by 2019, while Tanzania will have to wait until 2021.
GAS BOOM COULD END SOON
Britain's BG Group and Ophir Energy have been at the forefront of exploration in Tanzania, and energy majors Exxon Mobil and Statoil have also found gas.
"We think East Africa has a very competitive cost base," said Mike Fisher, Ophir's chief operating officer, but he noted that after 2020 it may become more difficult to clinch good prices for supply deals as increased supply could weaken prices.
Drilling in Tanzania has so far shown reserves of over 1 trillion cubic metres (tcm), twice Europe's annual demand.
In Mozambique, exploration efforts are being spearheaded by Italy's ENI and U.S.-based Andarko Petroleum, with drilling producing results showing reserves of more than 3 tcm.
Reflecting Asia's hunger for gas, Japan's Mitsui, China's National Petroleum Corporation (CNPC), and South Korea's Kogas, have also joined projects.
Many analysts put Mozambique's first LNG exports at around 55 billion cm per year, which would amount to annual revenues of over $30 billion at current spot LNG prices paid in Asia, where Mozambique plans to sell.
That would make Mozambique one of the world's top global LNG exporters, trailing Qatar but competing with new suppliers Australia and the United States.
One factor that could benefit Tanzania is that oil has also been found in Mozambique waters.
"Any commercial oil discovery would pose difficult questions for Mozambique: would LNG remain the priority, or would the focus switch to oil," asked Wood Mackenzie.
WILL IT COME IN TIME?
Despite the huge potential, there are concerns that neither Mozambique nor Tanzania will be able to develop their potential before a glut of other new supplies pulls down prices.
It took Angola 11 years of preparation and $10 billion to launch LNG exports which began this year at a rate of 7 billion cubic metres.
"African gas producers certainly do not represent a risk-free alternative," said Amy Gibbs at political risk insurer Jardine Lloyd Thompson.
The United States is expected to begin exports of LNG in 2015, with Bernstein Research estimating that annual volumes could reach around 70 billion cubic metres by 2020.
By 2016, Australia is expected to be exporting around 85 billion cubic metres of LNG each year to Asia, closing in on top-ranked Qatar's output of 100 billion cubic metres per year.