BP plc (NYSE:NYSE:BP) teamed up with Kosmos Energy Limited (NYSE:NYSE:KOS) to develop a massive offshore gas field that is located between Senegal and Mauritania in West Africa. Liquefied natural gas technology is being utilized to commercialize those resources, as the sheer size of the Tortue gas field means those supplies need to gain access to hungry customers in Asia and Europe. For Kosmos Energy Limited, this development is its largest ever and marks the beginning of its journey to becoming a medium-sized upstream player in the offshore conventional world. For BP plc, this development is part of its ongoing strategy to shift its upstream production mix from a 50/50 split between oil & gas to one that is 40% oil and 60% gas by the 2020s. Let's dig in.
The discovery
Kosmos Energy discovered the offshore Tortue gas field back in April 2015 through the Tortue 1 exploration well. Subsequent appraisal activity indicated the prospect was one large gas field. The discovery was rebranded as the Greater Tortue Ahmeyim complex, which consists of Tortue West, Tortue East, and Tortue North reservoirs. Kosmos Energy, as the operator of the exploration side of the venture, estimates the field houses at least 15 trillion cubic feet of recoverable natural gas resources. There is room for upside as the Greater Tortue Ahmeyim complex may house up to 50 Tcf of recoverable gas resources and an additional 1 billion barrels of recoverable liquids hydrocarbons (condensate and liquefied petroleum gas).
Due to Kosmos Energy's exploration success, BP bought into the play in late-2016 in a deal valued at almost $1 billion at the time. BP will be the operator of any development activities at the play, and Kosmos Energy will remain operator of the exploration activities.
After the deal, the ownership of the play is broken down as follows. In Senegal, BP owns 60% of the Saint Louis Offshore Profond and Cayar Offshore Profond Blocks. Kosmos Energy and Petrosen (Senegal's state-run energy firm) own 30% and 10% of those blocks, respectively. In Mauritania, BP owns 62% of blocks C6, C8, C12, and C13. Kosmos Energy and SMHPM (Mauritania's state-run energy firm) own 28% and 10% of those blocks, respectively. Combined, BP, Kosmos, Petrosen, and SMHPM own 61%, 29%, 5% and 5%, respectively, of the Tortue unit. Note that BP purchased a larger stake in this venture back in 2017 from a third-party no longer participating in the project.
The Tortue gas field is located at the maritime border between these two West African nations, and in February 2018, both nations signed a cooperation agreement that ultimately enabled a final investment decision to be reached. BP, Kosmos Energy, and their government partners sanctioned Phase 1 of the Greater Tortue Ahmeyim LNG development in December 2018, and first-gas is expected by 2022. It isn't clear how expensive the project will be yet, as procurement activities are required before obtaining a reasonable estimate.
Overview of the project
The first development phase seeks to commercialize the offshore Tortue gas field via an FPSO (floating production storage offloading) facility that is tied-back to a FLNG (floating liquefied natural gas) facility. Producing wells would be connected to the FPSO facility, which will separate natural gas (methane) from other hydrocarbons in the production stream (natural gas liquids and condensate). From there, the natural gas will be processed at the FPSO facility before being shipped off to the FLNG facility, where the gas will be cooled down to negative 260 degrees Fahrenheit. At that temperature, natural gas becomes a liquid product that takes up only 1/600th of the space of its gaseous form.
LNG cargos will be exported from the FLNG facility, while condensate and LPG (butane and propane) will be exported from the FPSO facility. This project also envisions building onshore gas-fired electricity plants that will be connected to the Greater Tortue Field via subsea pipelines running to both Senegal and Mauritania. Gas distribution infrastructure in both West African nations will need to be built out as well as Senegal and Mauritania want to develop domestic industries around the Tortue development. In other words, to go beyond simply exporting LNG. While gas demand is relatively low in both nations, that may change over time. Regional demand growth for natural gas offers the venture modest long-term upside.
Source: BP plc
BP and Kosmos Energy will be able to offer more concrete information on the development once "project execution activities" begin during the first quarter of 2019. For now, what is known is that the FLNG facility will have the capacity to produce 2.5 million metric tons of liquefied natural gas each year. That is equivalent to 335 million cubic feet of natural gas per day, making the first phase a relatively small endeavor.
Initial productivity assessments from a drill stem test at the Tortue 1 well point towards the venture being able to bring production wells online that will produce up to 200 million cubic feet of gas per day. This is due to the equipment-constrained Tortue 1 well reaching a peak production rate of 60 MMcf/d, with the assumption being that if the proper infrastructure is in place, those wells would produce a lot more on a daily basis as minimal reservoir pressure reductions were seen during the drill stem test. That makes these wells on par with those seen at Trinidad & Tobago in the Caribbean (BP is a big player across Trinidad & Tobago's entire natural gas industry), which are some of the most prolific gas wells in the world.
Longer term, BP and Kosmos Energy plan to increase the Tortue development's LNG production capacity up to 10 million metric tons per year, equivalent to over 1.3 Bcf/d of natural gas. The first phase is a greenfield development due to the nonexistent infrastructure in the region, but going forward, future brownfield developments will be able to take advantage of infrastructure (subsea pipelines, production handling infrastructure, onshore facilities) built out during the first development phase. Generally speaking, greenfield projects tend to have weaker returns than brownfield projects. Not to say that the first development phase won't generate a nice return for BP and Kosmos Energy, but note that the real upside is the growth runway the Tortue field offers the venture.
BP Gas Marketing will purchase all of the LNG supplies from Phase 1 of the Greater Tortue Ahmeyim development. As an experienced LNG marketer, BP is well-equipped to find end buyers for the project's production.
Final thoughts
Moving forward with this project validates the thesis that West Africa is one of the world's leading exploration regions for oil & gas. While many analysts, including those at BNEF (Bloomberg New Energy Finance), expect a mild glut of LNG from 2020 to 2021, the Greater Tortue development won't start exporting LNG until 2022 at the earliest. That means BP plc and Kosmos Energy Limited will be able to circumvent weak spot prices for LNG during that period, as the venture should come online at a time when global liquefied natural gas demand will begin to outstrip supply unless more LNG projects get sanctioned.
This development is a perfect example of BP plc's long-term strategy of becoming a gassier integrated energy major, and highlights how management is effective at extending the firm's growth runway. For Kosmos Energy Limited, this is a key part of the firm's transformation from an offshore exploration company to a serious producer of oil & gas resources. West Africa's economic future is getting brighter, and the governments of Mauritania and Senegal are positioning their respective economies to take advantage of this massive gas discovery. Thanks for reading.
