BP And Kosmos' Cutting Edge West African LNG Strategy

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About: BP p.l.c. (BP), KOS
by: Callum Turcan
Summary

What BP plc and Kosmos Energy Ltd are cooking up in West Africa.

The cutting edge way the Tortue Field is being developed.

An overview of Senegal and Mauritania's emerging LNG industry.

Back in 2016, BP plc (NYSE:BP) teamed up with little known exploration firm Kosmos Energy Ltd (NYSE:KOS) to develop the massive gas resources Kosmos Energy had located a year earlier. Kosmos Energy Ltd discovered the Tortue Field within the Greater Tortue Area that is situated off the coast of Senegal and Mauritania in West Africa. The field is set to be developed by a consortium of BP plc, Kosmos Energy Ltd, privately-held Timis Corporation, and the state-owned energy firms of Senegal and Mauritania. Let's see where the project stands as of today.

Overview

Three key wells; the Tortue-1 drilled in Mauritania, the Guembeul-1 drilled in Senegal, and the Ahmeyim-2 drilled in Mauritania, indicated the Greater Tortue Area has a mean gross resource estimate of 25 trillion cubic feet of recoverable natural gas. On top of that Kosmos has a line of sight on an additional 25 trillion cubic feet of gross gas resources in the play. Those resources include some natural gas liquids and condensate as well.

Source: Kosmos Energy Ltd

BP notes that the Tortue Field has 15 trillion cubic feet of recoverable gas resources on top of the Greater Tortue Area housing another 50 Tcf of gas resources, with the difference probably coming from the definition of the play and % likelihood of recovery. Either way, a ton of recoverable gas.

Kosmos and BP seek to extract 15 trillion cubic feet of natural gas from the Tortue Field through an offshore development scheme that is cutting edge. Energy investors should know that LNG, liquefied natural gas, trains turn gaseous methane into a liquid by cooling it to negative 260 degrees Fahrenheit.

The norm for these projects the LNG plant (houses LNG trains) and the related processing complexes that the gas runs through beforehand (to remove impurities and separate out liquid gas products from the dry gas stream) are located on land. The offshore production, gathering, and pipeline infrastructure is connected to onshore facilities through extensive networks, creating an expensive endeavor for any consortium.

New type of LNG project

What BP and Kosmos want to do differently is develop these massive gas resources offshore with two FLNG [floating liquefied natural gas] vessels that will receive gas produced by an FPSO [floating production storage and offloading] vessel in a centralized location. An offshore marine terminal will be built to enable LNG carriers, another large vessel, to dock and load up with tons of liquefied gas that takes up 1/600th of the space methane does in its gaseous form.

Source: Kosmos Energy Ltd

Here is how this will play out. Subsea production wells will be connected by subsea gathering infrastructure to the FPSO vessel, which will route produced gas to the FLNG vessels. Those subsea production wells willed be drilled by a drillship that is capable of working in deepwater locations.

Investors should note that a recent drill stem test at the Tortue-1 well showed the high deliverability rate the venture can expect from future production wells, with a caveat. The Tortue-1 well's productivity was equipment-constrained, meaning bottlenecks arising from this test using exploration oriented equipment (instead of "normal" development oriented equipment) held production back. So the good news is what the venture inferred from the test.

BP and Kosmos saw the Tortue-1 produce a sustained 60 million cubic feet of gas per day for an extended period of time. With the proper equipment that should go up to 200 MMcf/d, similar to the kind of deliverability BP's Trinidad & Tobago wells yield across the Atlantic Ocean in the Caribbean.

At the FLNG vessel, a processing unit will remove the impurities and may also separate out the NGLs (however, ethane and other NGLs could be left in the gas stream if it isn't feasible/economical to do so on a vessel with limited space). After that the dry gas production will be routed to the onboard LNG train to convert that to a liquid product.

Once in liquid form, an LNG carrier will dock and begin loading up. When full, the LNG carrier will export that energy all over the world, ideally under long term contracts tied to Brent pricing.

BP and Kosmos are also catering to domestic demand by building out pipelines from the centralized offshore production and processing complex to Dakar in Senegal and Nouakchott in Mauritania. From there thermal power plants will turn processed methane into electricity. The venture may also build and/or own those gas-fired power plants, we will have to wait until the final investment decision is made.

Those FLNG vessels with each have the capacity to produce 2.3 million metric tons of LNG per year for a combined capacity of 4.6 mpta. Compared to other LNG ventures that would be considered somewhat small, and that is probably the best way to go. The world already has plenty of LNG supply under construction, even when considering strong global demand for natural gas.

By starting out small BP and Kosmos can keep capital expenditure requirements manageable. Turning the project online gives the venture something to build off of when the LNG glut starts to fade by the next decade.

Some wonder why build LNG complexes when there is a glut, and that is a fair point. Many LNG projects have already been scrapped or delayed because of this issue. However, the expected breakeven of this large find is below $5/Mcf before taking into account shipping costs. Future expansions would see a materially lower breakeven price as those developments capitalize on existing infrastructure.

In mid-2017, the average spot price of LNG in Japan was $5.60 per mmBtu (equal to 1,000 cubic feet of gas). As long as demand forecasts aren't completely wrong (Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) sees global LNG demand rising by 4-5% per year from 2015 to 2030) and Brent moves up to $60 long term, the Tortue venture should be able to realize prices closer to $7-8/Mcf.

A final investment decision is expected next year with first-gas from the first FLNG vessel due in 2021, with the second FLNG vessel starting up operations in 2023. That means, at least in theory, the venture will begin exporting LNG when the market is improving. Building two identical FLNG vessels should materially enhance the project's economics, and would set the stage for a third vessel later on.

Who owns what

The ownership of this endeavor is a bit complicated. While a framework has been established between the governments of Senegal and Mauritania, a final deal between those two countries is still needed.

In Mauritania, Exploration Blocks C6, C8, C12, and C13 are 62% owned by BP, 28% owned by Kosmos, and 10% owned by SMHPM (nation oil company of Mauritania).

Over in Senegal, the Saint Louis Offshore Profond and Cayar Offshore Profond Blocks are 32.49% owned by BP, 32.51% owned by Kosmos, 25% owned by Timis Corporation, and 10% owned by Petrosen (national oil company of Senegal).

These various blocks house the Greater Tortue Area and other interesting prospects. Keep in mind these ownership interests may have shifted around a bit since the big BP deal was announced last year.

Kosmos Energy is still running the exploration and appraisal process. Once FID is reached, BP is taking over the development side of things as it has the experience needed to turn exploration success into commercial LNG operations.

BP has successes like the Tangguh LNG venture in Indonesia and Atlantic LNG facility in Trinidad & Tobago to tout, but it also has some mistakes investors should keep in mind such as the problems that arose at the Angola LNG development.

When FID is reached those ownership percentages may change again. For instance, the ownership interests in the offshore FPSO & FLNG assets may be different than the ownership of the upstream assets, and the pipelines to Senegal and Mauritania may also have a different ownership makeup. Just something to look out for, not something to stay up at night worrying about.

Final thoughts

BP plc wants to move towards a heavier natural gas weighted in its upstream production, going from 50% currently to 60% by the mid-2020s, to capitalize on the global shift to gas. Kosmos Energy Ltd wants to monetize its huge discovery and teaming up with BP plc is a great way to do so.

Senegal and Mauritania want to see their economies grow, want to rake in material amounts of hard currency via energy exports, and want to secure long term supplies for electricity generation (with the goal being to build out far more electricity generation capabilities over the coming decades). I would bet that both governments will be accommodating enough so BP plc and Kosmos Energy Ltd are fairly rewarded for their hard work and capital commitments. This is a very interesting development to watch.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.