LNG from Angola? Unthinkable – Until Now

RelevanceIf you had asked industry observers 10 years ago to rate the chances of Angola supplying LNG to the U.S., the most favorable would have said unlikely and many would have dismissed the notion as pure fantasy. And yet, in 2007, Angola LNG is on the cusp of a final investment decision.

10 years ago Angola was ravaged by a brutal civil war, a relic of the cold war. There was general lawlessness on a grand scale and the prospects for improvement were dim. Added to that were accusations of corruption and lack of transparency within government and the ruling class. Meanwhile the vast majority of the population lived in extreme poverty as they watched the country’s natural resources (oil and diamonds) being squandered by the fighting factions.

That Angola LNG is about to happen is testimony to the general improvement in conditions in Angola, and to the changing dynamics of an oil and gas industry where NOCs have the upper hand and IOCs are forced to take on greater risks in their efforts to secure hydrocarbons.

The recent departure of ExxonMobil from the project can now be seen as a temporary blip in Angola LNG’s progress – clearly Sonangol had already lined up a replacement in the shape of ENI.

AnalysisOil and gas projects do not come much bigger and much more complex than this. The scope of activity includes infrastructure to gather associated gas; development of non-associated gas; the liquefaction plant and port facilities; and shipping to a regas terminal in the U.S. And most of these activities will take place in Angola – with its associated lack of infrastructure and political, social and economic issues. The project is at final investment decision and key success factors in getting the project this far include: 

  • Sonangol leadership. Sonangol is joint project leader with Chevron, and from the outset has shown a gritty determination to see its vision through. It would no doubt have been pushing the IOCs along, with its power enhanced by high oil prices.
  • Strength of gas prices. At project conception Henry Hub prices were languishing at around $2/MMBtu. The perception is that prices in the range of $4-6/MMBtu are here to stay, creating greater economic incentives.
  • Solid partnership. By good fortune the developers of the associated gas in deep water offshore Angola also happened to be the world’s leading LNG players. In BP, ExxonMobil, Total and Chevron, Sonangol had access to the players that could make this project happen. The loss of ExxonMobil has been mitigated by the arrival of ENI, who will play a critical role in the disposal of the gas in the U.S.
  • Capable operator. In Chevron Sonangol has a capable project leader, familiar with doing business in Angola and with many LNG learnings to transfer (Chevron’s giant Gorgon project will catapult the company into the world’s leading group of LNG players).
  • Associated gas. The associated gas in the deep water oil fields is at the heart of this project. The gas needed a home – flaring was unacceptable to the investors and to Sonangol. Once the preferred option for disposing the gas was selected (LNG) the will to make it happen would have been high.
  • Political will. Support from the Angolan government has been critical. Angola LNG will be seen by the political establishment as a badge of honor and further proof of the development of the country (many politicians would have had at least half an eye on developments up the coast in Nigeria).

4 April 2007

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