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Tanzania isn’t likely on many investors’ radar screens - and for good reasons. Daily trading volumes on its fledgling stock exchange often don’t breach the $100,000 mark, and the government places heavy restrictions on foreign share ownership.

In spite of its hair-thin capital markets, however, the tranquil East African nation is putting together a remarkably consistent record of economic growth. Tanzania’s GDP has expanded at an average rate of 7% per year over the past decade thanks to a booming mining sector, a peaceful political environment, and significant policy reform. The IMF believes the country will be among the world’s 20 fastest growing economies during the next five years.

As remarkable as this economic expansion is, Tanzania’s growth would be even more impressive if energy constraints weren’t an issue. Blackouts in the commercial capital, Dar es Salaam, have become commonplace, dramatically increasing the cost of doing business in the country.

The electricity shortages stem from Tanzania’s heavy reliance on hydro power. Hydroelectric plants supply most (55%) of the country’s power, but a long-running drought has drastically reduced their output. Quite simply, no rain means no water to turn the dams’ turbines, and a 300MW drop in power production.

So, policy-makers believe the development of a large offshore natural gas reserve named Songo Songo is key to the nation’s energy security. The field is yet to be fully explored, but independent engineers estimate that it could contain as much as 830 billion cubic feet of natural gas.

Investors can speculate on the development of this reserve through Orca Exploration Group (OTCPK:ORXGF) The small, Toronto-listed company owns the license to develop the Songo Songo field. Virtually all of its revenue comes from the sale of Songo Songo gas.

Orca currently supplies 57 million cubic feet of gas per day to the Tanzanian grid, but the country’s inadequate generating and pipeline capacity has proven a bottleneck to increased output.

Recent developments indicate these constraints will soon disappear. Since late September, Chinese lenders have agreed to fund projects to double pipeline capacity between Songo Songo and the Tanzanian coastline and to construct a 300MW gas-fired power plant. Both projects are slated for completion by 2013.

In response to these developments, Orca announced last week that it will ramp up production capacity by drilling new wells and upgrading existing ones. When complete, the planned $130 million expenditure will allow the company to deliver 250 million cubic feet of gas per day, more than double its current capability.

This production increase portends a significant boost to Orca’s cash flow in coming years, especially because the base power price that Tanzania pays to Orca will increase by 33% beginning in July 2012. The extra cash should allow the company to fund further exploration or to initiate a dividend. The company currently trades on the Toronto Venture Exchange at 4.9x its 2010 cash flow.

Potential investors should be aware that increased production will rapidly deplete Orca’s proven gas reserves. Analysts estimate that the Songo Songo field could be sufficient for 14 years of production, but proven reserves will last less than half that time span. So further exploration is essential. Orca will be test-drilling a promising prospect to Songo Songo’s west late next year, but if it doesn’t pan out as expected, costs could rise substantially.

Still, there’s reason for optimism. The company appears to be well-placed geographically. Eni (NYSE:E) and Anadarko Petroleum (NYSE:APC) have made discoveries totaling more than 21 trillion cubic feet off the coast of neighboring Mozambique in recent months. The finds have triggered talk of developing a liquefied natural gas (LNG) facility in the region, a development which would likely have positive spin-offs for Orca.

With Tanzania’s energy demand forecast to increase 58% by 2015 and few alternate supply options available, Orca definitely merits inclusion on Africa investors’ watchlists.

Source: Orca Exploration: An East African Gas Play