From the Editor: Senegal: a test case for West African LNG [Gas in Transition]

Just as the Senegalese/Mauritanian Greater Tortue Ahmeyim (GTA) LNG project gears up for its first LNG exports in early 2024, BP appears to have gone chilly on Senegal by departing from the offshore Yakaar-Teranga gas field project.

News that a final investment decision (FID) on Yakaar-Teranga was imminent have been recurrent since 2021, but, as it turns out, wide of the mark. With no other potential investor in view, minority partner US energy company Kosmos has increased its interest in the field from 30% to 90%. Senegal’s state oil and gas company Petrosen holds the remaining 10%.

An FID – had it been taken this year – was expected to result in initial production from the field in 2024 at a rate of 150mn ft3/d.

Swift change in focus

The original BP/Kosmos plan envisaged Yahaar-Teranga as a gas-to-power project to bolster Senegal’s electricity supply with a second phase considering the development of petrochemicals facilities. BP had said that the field could become part of a future LNG hub in the region, but the first phases of development appeared primarily focussed on domestic gas industry development as part of Senegal’s plans for economic growth.

However, in taking over the majority shareholding, Kosmos Energy has already changed the focus of development to put at least on an equal footing domestic gas provision and LNG production. Kosmos is also dangling greater participation in the project for Petrosen, as an equal partner.

The company says its development concept involves offshore production of about 550mn ft3/d of gas, based on gas-in-place of some 25 trillion ft3. Some of the gas will be transported by pipe to shore for domestic use, and some will be liquefied for LNG exports on an offshore floating liquefaction vessel. In a press release, Kosmos said that following concept optimisation, the project will move to the Front-end Engineering and Design phase.

BP exit raises Kosmos’ exposure to Senegal

The Yaakar-1 exploration well was drilled in 2017 in a water depth of 2,500 metres in the Cayar Offshore Profond block. A successful, frontier-opening exploration campaign had previously been led by Kosmos. BP bought into the company’s discoveries in Senegal and Mauritania in 2016.

A key question is whether Kosmos wants to carry the near full investment cost of Yakaar-Teranga as a 90% majority owner of the project. It will also have to land offtake agreements for the planned LNG plant to support project financing. In the case of GTA Phase 1, BP Gas Marketing obliged with a sale and purchase agreement for 2.45mn t/yr for an initial term of 20 years, i.e. all of the project’s output.

Kosmos is not an oil major, although its cash flow is on an upward trend, following the start-up of the Jubilee South East development offshore Ghana. In its third quarter results, it recorded net production of 68,200 barrels of oil equivalent a day. Cash flow will be further improved when GTA Phase 1 starts production early next year.

However, in February this year, BP and Kosmos announced confirmation of the development concept for GTA Phase 2, which will be a gravity-based structure with capacity of 2.5-3.0mn t/yr. BP said then that it was working with contractors to progress the project to the pre-FEED stage. As a result, FID on Phase 2 is very much ‘pending’, just as it was with Yaakar-Teranga.

If BP stays the course with GTA and both companies move to phase 2, Kosmos will have to fund its share of the partnership, raising the question of whether it can, or would want to, to bear the cost of Yaakar-Teranga as well. As it did with BP, it may decide that a better option would be to reduce its enlarged exposure to Senegal by bringing in another partner, ideally one which could offer an offtake agreement for the LNG from the project, thereby killing two birds with one stone.

With these questions in play, development of Yakaar-Teranga may benefit from the exit of a reluctant majority partner, but may also take a few years yet, as a new development concept is developed and Kosmos weighs its desired level of exposure to Senegalese gas.

State partner has limited capacities

Petrosen offers a possible alternative, but this is not a company with either excess cash or great technical expertise. Senegal’s public sector debt levels have increased significantly in recent years, according to the International Monetary Fund (IMF).

Covid-19 saw public debt surge from 63.6% of GDP to 73.3% at the end of 2021. It rose further in 2022 to 76.6%. Petrosen’s debt-funded spending on hydrocarbon projects is an important contributor to the widening government spending deficit, even if it promises returns in the longer term.

Government debt, which makes up 89.1% of public debt, stood at 68.2% of GDP in 2022, very close to the IMF’s 70% ceiling for the West African Economic and Monetary Union (WAEMU) area, of which Senegal is a part. The pandemic period resulted in a suspension of the WAEMU’s Convergence Pact, and the IMF is keen to restore some form of fiscal anchor for the region.

As a result, there are doubts first about Petrosen’s ability to fund the investment costs implied by becoming an equal partner in Yakaar-Teranga, and, second, whether the IMF would look favourably on such a deal. In contrast, a new partner would bring more capital to the table.

Few decisions likely ahead of presidential elections

The political backdrop also has to be taken into account. BP has not commented on whether this was a factor in its decision to exit Yakaar-Teranga.

Last year, Senegalese President Macky Sall indicated that he would run for a third term of office in apparent contravention of the country’s constitution, which mandated a two-term limit following Sall’s second election victory in 2019. The possibility of Sall running for a third term resulted in widespread opposition, sometimes violent.

Sall announced in July that he would not re-seek election. His prime minister, Amadou Ba, has been picked as the ruling coalition’s candidate.

However, the contest, set for February 25 next year, is being bitterly contested. A key opposition candidate, Ousmane Sonko, whose rhetoric is often inflammatory, looks likely to be barred from standing, owing to a criminal conviction his supporters say was politically motivated and his arrest in July on new charges. The government also in July dissolved Sonko’s opposition Pastef party.

Senegal has had relatively peaceful democratic transfers of power since 2000 and has a reputation as one of Africa’s most stable democracies. However, attempts to weaken the opposition by means perceived to be unfair, alongside resentment at widespread corruption, may result in an election result which proves highly contentious.

The unrest in Senegal has also to be seen in the context of a surge in political coups in the region – Niger in 2021, Guinea-Bissau and the Gambia in 2022, and Sierra Leone and Burkina Faso in 2023.

As a result, BP, Kosmos and any potential new investor will be watching the upcoming election with close attention. Even if it proves peaceful, as hoped, if the opposition wins, investors will have a new set of policy makers and attitudes, which may change the country’s approach to investment in its up-and-coming gas sector.