A Stop-and-Start revolution in natural gas

Oil has long been the foundation of Angola’s economy, having attracted massive foreign investment and driven economic growth over the past decade.  But with known reserves of Africa’s second-largest oil producer expected to reach their peak by the end of the decade, Angola has embarked on a new energy adventure: the natural gas revolution.

State-owned Sonangol has joined the oil majors Chevron, Total and BP – the ones responsible for developing the offshore fields and deepwater fields at the heart of the country’s oil boom –  to form Angola LNG (Liquefied Natural Gas), a project that will allow the country to develop its energy industry in an environmentally-friendly fashion, while providing the revenues the government needs to help diversify the economy.

Despite ranking second in sub-Saharan Africa in total natural gas reserves – 9.7 trillion cubic feet (Tcf) according to the latest Oil and Gas Journal estimates – Angola has always remained a small natural gas producer.  However, the $10 billion Angola LNG project will change all that, marking a shift in the country’s oil and gas dynamic that reflects the new trends in the global energy market.

Launched in 2008, Angola LNG is headed by Chevron, which owns a 36.4 percent stake, with state-owned Sonangol holding a 22.8 percent stake and France’s Total, BP and Italy’s ENI completing the consortium.  While the initial target was to start exporting LNG by early 2012, after 18 months of delays due to technical glitches and labor shortages, the project finally shipped its first cargo to Brazil last June.

“First gas (export) at Angola LNG is an important milestone in support of our strategic plan to grow our production,” George Kirkland, vice chairman of California-based Chevron, said in a statement at the time. “This project will commercialize natural gas resources in western Africa to meet growing demand in the region and internationally.”

However, in April 2014 the plant was once again shut down to allow its US contactor Bechtel to perform repairs after a succession of technical faults. Plant officials have said that production will not commence again until mid-2015, meaning LNG capacity likely won’t be reached for quite some time to come. The LNG facility in Soyo – just outside the capital city of Luanda – has an expected lifespan of at least 30 years, with the capacity to produce 5.2 million metric tons of LNG per year.  

Just as the United States hopes to become a net exporter of LNG through its shale gas production in the next two years, Angola likewise wants to take advantage of the growing rush for the resource. According to analysts at Ernst & Young, global LNG demand has risen by an estimated 7.6% per year since 2000, and will continue to increase at a rapid rate of 15 million metric tons a year through to the middle of next decade, led by growth in Asian nations such as Japan and South Korea.

For Chevron – which has also invested $77 billion on LNG production in Australia – such increasing demand is a huge opportunity that it aims to tap through the Angola project, just as other oil majors continue to invest in LNG around the world.  For Angola, which seeks to diversify its economy from its oil exports – LNG provides part of the solution.

Following the first shipment of LNG last year, in 2014 the group confirmed the sale of three more cargos from the Soyo plant, said to be one of the world’s most modern LNG processing facilities. 

In the meantime, construction work will continue on the infrastructure project to transport natural gas gathered from offshore to a liquefaction plant, which at full capacity, will produce an additional 63,000 barrels of natural gas liquids (propane and butane) per day for export.  Complementing the export terminal, Sonagas – the subsidiary of Sonangol that is moving aggressively to develop the country’s domestic production facilities and export markets – plans to construct a massive industrial park in Soyo. The industrial park will receive 125 million cubic feet per day of imported gas, which the companies installed there will then use to supply electricity, produce petrochemicals, and develop other downstream gas industries.

When fully functioning, the Angola LNG project will also give an opportunity to continue the development of Angola´s oil and gas resources with less impact on the environment - providing cleaner and more reliable energy to domestic and international customers, along with good returns on the investments of its shareholders.

Primarily, Angola LNG will be fed by associated gas – a substance produced with crude oil production that is usually flared (as waste) or re-injected into petroleum reservoirs.  Instead, this gas will now be used either domestically, or liquefied and exported to other markets.

As one of the world’s largest gas flaring reduction projects – encompassing offshore and onshore operations to turn the previously flared gas into more productive uses – Angola LNG will reduce carbon dioxide emissions by up to nine million tons a year (equivalent to taking around two million cars off the road). This will reduce greenhouse gas emissions while  promoting the use of natural gas, a much cleaner source of energy.

As climate change takes on ever greater importance – with most companies, and indeed countries, looking for an opportunity to increase energy efficiency and curb pollution – Angola LNG is a standout achievement in reducing CO2 emissions.

In a recent World Bank Report, Bjorn Hamso – manager of the organization’s Global Gas Flaring Reduction Partnership, gave high praise for the project, saying: “Angola LNG marks a milestone for flaring reduction and shows that when partners work together, it is possible to develop major projects with minimum impact on the environment. These are impressive efforts and results that should inspire others around the world.”

Going forward, a “large number” of LNG sales from the plant in Soyo have already been signed, according to Angola LNG Marketing CEO Artur Pereira.  Despite the fact that a portion of these deals will now have to wait until production resumes next year, if Angola LNG can further prevent the kind of technical issues that has slowed production since 2008, the future for the project – and the hope that it can make a real and lasting impact for the sustainable development of the country – looks bright.

While LNG exports are temporarily interrupted, Sonangol continues to explore for new oil reserves to offset the decline in existing oilfields. The state oil company has targeted a crude oil production rate of 2 million barrels per day in 2015, up from last year’s 1.71 million bpd. Industry analysts are skeptical as to whether that goal will be reached; Angola’s crude output has averaged 1.65 million bpd during the first half of 2014, due to declining output at existing wells and extended maintenance issues.

Production is expected to recover, however, as new discoveries come on line. France´s Total in June started production at its CLOV offshore field, located 140 kms west of Luanda, which has expected daily output of 160,000 bpd and proven reserves of 500 million barrels. Total, the largest foreign operator in Angola,  has  also decided to move head with the $16 billion Kaombo deepwater project, which could add another 230,000 bpd to the country´s output by 2017.

Exploration activity in pre-salt formations is also slated to accelerate this year, with the government planning to auction off 10 onshore blocks. Pre-salt refers to the geological layers that were laid down before a salt layer accumulated above them during the breaking up of the supercontinents over 180 million years ago. It has been responsible for hugely significant finds in Brazil, where total reserves of around 50 billion barrels of oil are estimated. Due to its geographic similarities, explained by the scientific theory of plate tectonics and continental drift, Angola is also believed to hold large quantities of hydrocarbon resources from pre-salt formations.

According to the U.S. Energy Information Agency, many oil majors invested in Angola are currently or planning exploration activity in pre-salt bearing blocks. So far, U.S.-based Cobalt International Energy has had the most success, making five pre-salt discoveries in the offshore Kwanza Basin.

What’s more, the ten onshore areas to go up for auction this year may offer more crude oil than previously thought, according to a surveying company that assessed the deposits in January. Norway’s Petroleum Geo-Services ASA said that “new seismic images show more potential” than a previous survey showed 40 years ago, assuring that the sediments observed correspond to formations of hydrocarbons. It is now believed the ten blocks may account for over half of Angola’s known oil reserves, or at least 7 billion barrels.

Opportunities to explore Angola’s lucrative pre-salt formations will not end there, either. Sonangol has recently announced that the company is planning a second auction for five offshore blocks, four of which are in the Kwanza basin and the other in the Congo basin.

These five blocks will be auctioned off in two and half to four years’ time, and in the meantime will be the focus of geophysical or geological surveying by Sonangol.

The true extent of Angola’s potentially massive oil resources is not likely to be known for some years to come. However, if Angola’s pre-salt discoveries prove to be anything as fruitful as Brazil’s across the Atlantic, and Angola LNG continues to develop as expected, the country’s oil and gas industry will be an increasingly important player in the world energy market.

A SOVEREIGN FUND FOR SUSTAINABLE GROWTH

While Angola’s oil resources have been almost solely responsible for the country’s robust growth in recent times, critics say that little of the resulting revenue has filtered down to make a lasting positive impact on ordinary Angolans.

With the introduction of a new Sovereign Wealth Fund (SWF), the government is now promising to put the oil wealth to work towards the goal of generating wealth for all Angolans, by promoting more inclusive socio-economic development.

The Fundo Soberano de Angola (FSDEA) – the brainchild of President José Eduardo dos Santos – was established in 2012 to promote greater national growth and prosperity by investing Angola’s oil income in different industries, across domestic, regional and global markets.  In doing so, it is hoped that these investments will generate long-term and sustainable financial returns, improve the country’s infrastructure and create opportunities for Angolan citizens.

Headquartered in Luanda, the fund has an initial endowment of $5 billion – half of which has been allocated to projects in Angola, as well as other African countries.  While investments in Angola will eventually focus on a diverse set of non-oil sectors such as agriculture, mining, and real estate, the FSDEA is initially concentrating on hotels and commercial infrastructure in the whole of Sub-Saharan Africa.

“We are focusing on investments which are sustainable in terms of their long term returns and we also are focusing on the social and economic well being of the people in Angola and in the regions. That is where we see the potential of African institutions and countries growing and going forward,” the Fund´s Chairman, José Filomeno dos Santos, the son of President dos Santos, said in a recent interview.

Considering the region’s growth potential – with its huge mineral reserves helping it to become a commodity hub – the FSDEA expects demand for hotels to be particularly high among international business travelers, thus offering the high probability of a good return on its planned investment in 50 properties over the next three years.  

The added rationale in creating this dedicated Hotel Fund is that the hospitality sector holds substantial potential for job and wealth creation and stimulates a local supply chain that positively impacts the region’s local economies.

For Angola specifically, these types of investments will hopefully play a critical role in development of the country’s human capital, helping to build the foundations that are essential to improving the living conditions of its people.

Meanwhile, the FSDEA is also currently setting up a separate infrastructure fund for Sub-Saharan Africa that will participate in projects including ports, airports and power plants.  Both the hotel and infrastructure funds are expected to become operational in the coming months, with some possible projects already identified.

The remaining half of the FSDEA’s initial $5-billion endowment is intended to be reserved for capital preservation, meaning that it will be invested in interest-bearing assets such as sovereign and corporate bonds, as well as invested in stocks in developed economies that have highly regulated markets, such as the G7 countries.  In the long term, investments in high risk- high return frontier markets outside of Africa will also be considered.

For the time being though, the FSDEA will have a lot of work to do to before it can convince its own citizens of the Sovereign Wealth Fund’s true worth in terms of achieving comprehensive social progress. Until now, much of the population has been left aggrieved that the country’s oil money failed to bring real development to those who need it most,   with large portions of wealth apparently siphoned off  by corruption.

The FSDEA has already come in for criticism because its chairman is the son of the country’s president.  Some argue that the appointment immediately sapped the fund’s credibility.  José Filomeno dos Santos says his studies in finance and experience in founding and running an investment bank qualify him for the job.

While Angolans will have to wait and see what kind of genuine impact the fund will deliver, they will likely be encouraged by the success of SWFs in other resource-rich African countries.  For example, Botswana’s Pula Fund – established in 1994 – is fed with income from exports of minerals and diamonds, and its value has increased substantially over the course of the last two decades through investments in foreign currency.   This has helped lay a foundation for a future when its resource revenues may eventually run dry. 

By Aled Bryon