Tanzania Gas Sales Agreement Will Re-Rate AMINEX & SOLO

It’s hotting up in Tanzania for AMINEX and Solo Oil. The recent placing by AMINEX where they have raised £1.67m, provides some indication that investors believe the company will be successful in securing favorable terms for the Kiliwani North Gas Sales Agreement. Both AMINEX and SOLO will become cash generating companies this year when the gas sales agreement for Kiliwani can be secured. The pre-requisite infrastructure is in place.

It is in everyone’s interests for this agreement to be signed quickly. Tanzania needs the gas, its economy is booming, GDP growth is expected to be circa 7% in 2015. Only last week the World Bank Group, approved a $100 finance package to help Tanzania increase transparency and accountability in governance and improve public financial management, this is important intervention.

AMINEX will be looking to finalise the Kiliwani gas sales agreement that follows international oil and gas industry standards, sounds obvious, but these agreements can be complex and require the support and guarantees of external international financing agencies.

The last gas sales agreement I can recall being struck in Tanzania that is representative of the type of contract AMINEX will need was the Mnazi Bay GSA secured in September 2014 by Wentworth (OSE: WRL) & (AIM: WRL).

The Mnazi Bay GSA covers a 17 year term with net back price of gas agreed at US$3.00/MMBtu for the discovered gas and is non Brent linked. The Tanzania

government is responsible for transportation and processing costs. Importantly it is an 85% take or pay deal, however, as of yet I understand the financial guarantees have not yet been signed.

This is always a sticking point with these type of gas sales agreements for some Africa countries where the end customer is essentially the domestic market.

Yes the main utility customer of the gas such as Pan African/TPDC which is piloting bottling distributing natural gas in Tanzania will be credit worthy, however, they will need to secure reserve bank support, ie from the Bank of Tanzania, who in turn will need to secure international financial support, so the guarantees within these gas sales agreements are syndicated. But remember, the World Bank and a host of other international financial agencies are very active in Tanzania, which is why last weeks news of World Bank support for Tanzania is timely.

We have seen some evidence of the complexities involving gas sales agreements, particularly in Namibia with the Kudu gas project. The question was always Nampower, the parastatal power utility, and its ability to guarantee to take the Kudu gas production at a price that could support the economics to finance the gas to power project. Encouragingly the Kudu Gas GSA was signed in 2014 and has paved the way for Kudu to begin producing in 2017.

Credit risk is the reason why this is interesting. In Namibia for example Nampower sell their electricity to regional electricity distribution companies, (REDS) who in turn are responsible for collecting the revenue from their local domestic and business customers. Credit control and cash collection can be challenging, and often Nampower can suffer as a result. In Tanzania, TANESCO is the electricity utility and operates a vertically integrated a system that removes some of the risks Namibia has where Nampower is exposed to the ability of its REDS to collect cash.

The REDS in Namibia tend to be lenient and are not fond of cutting off electricity and Nampower is exposed to this more tactile system of cash collection. Customers of TANESCO, I think will not be treated so kindly, and I think the international funding partners understand that and so I think at least the credit risk in Tanzania is lower than other African countries. Given Shell’s recent purchase of British Gas Group who now join a raft of international oil and gas companies operating in Tanzania, the pressure to finalise a structure for gas sales agreements is clear.

On the demand side, Tanzania currently has five gas fired power stations, Ubungo I, Ubungo II, Tegeta, Mtwara and Songas. Coming on stream are Kinyerezi II Thermal Power Station (240MW) 2015, Mnazi Bay Gas Plant (300MW) 2016 and Kinyerezi III Gas Plant (300MW) 2016.  The demand for electricity in Tanzania is clear and so is the domestic demand for gas. These developments are helping lower credit risk.

The recent decision by the World Bank to support Tanzania in terms of the strengthening its financial management is saying to me that the syndication of international financial risk to support GSA’s is underway.

I would expect AMINEX to secure its GSA for Kiliwani quite soon and this would mean a significant re-rating of its stock and that of Solo Oil, who can excerise an additional 6.5% stake in Kiliwani on the GSA being signed.

Currently we are in perfect investment horizon for both of these stocks.