Your ticket to an energy bonanza in East Africa

Southeast Asia is increasingly turning to Africa to fulfil its energy needs, says Lars Henriksson. Here, he explains why, and reveals the best way to profit.

Have you ever heard of the Rovuma Basin? It stretches for more than a 100 miles south from Tanzania along the coast of Mozambique. And it has been the scene of frenzied activity for the last few months.

It's been like this ever since a consortium led by Anadarko Petroleum found up to 60 trillion cubic feet of recoverable gas here earlier this year. That's more than six times the UK's existing reserves a find that Anadarko described as "the most significant gas discovery of the last 20 years".

I think that's a fitting description. Because this prolific field could play a big part in a story that interests us the rise of Southeast Asia.

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The economies in Southeast Asia are thriving. I am writing to you today from the 'Vertigo' bar, on the 59th floor of the Banyan Tree Hotel in central Bangkok. This city has changed so much in recent years.

Just after the financial crisis in 1998, I had the chance to live in almost war ravaged Bangkok. Streets were half empty as many peopled decided toleave their cars at hometo save money on petrol. And I remember the large billboards fading and flapping in the wind with people paying them no attention.

Today, cranes line the horizon. The buildings that were left unfinished after the 1997 crisis have been completed. And the economy is expected to grow by 5% this year.

But Thailand faces a major threat to its prosperity a serious shortfall in energy that could cause big problems for the economy. And that's where the Rovuma Basin comes in.

Booming Thailand needs resource-rich friends

The Thais need fuel, and lots of it. While Thailand has some ageing oil & gas fields, they are only able to supply about 50% of the country's growing energy needs. The reserve life for the national oil giant, PTTEP, is only aroundten years.

I believe if Myanmar, Laos and Malaysia decided to stop supplying the country, it would come to a stand still. This is why Thailand is so enthusiastic about building a new port in Myanmar and deepening its exploration activities off the Myanmar coast. And why they need to build strong ties with resource-rich economies and quick.

We've seen the same story play out over the last decade with China. The Chinese have invested heavily in African infrastructure spending billions on roads, railways and hospitals across the continent all in a bid to secure access to Africa's vast resources. Thailand is now looking to do the same.

Thailand has its eye on Africa's eastern countries such as Mozambique, Kenya, Tanzania and Somalia, which could very soon emerge as the new global gas players. They're resource rich but cash poor, which makes them ideal for Thailand to partner with.

One Thai energy explorer is leading the way: PTT Exploration (Bangkok: PTTEP). Earlier this year it won a bid to acquire Aim-listed Cove Energy whose core asset is an 8.5% stake in Mozambique's Rovuma Area 1 for £1.2bn, fighting off Shell in the process. In the end, this deal was the largest ever foreign venture for a Thai energy company, outshining Banpu's 2010 acquisition of Australia's Centennial Coal Co, which was valued at $1.85bn.

I expect to see a lot more deals like this over the next few years. It is no coincidence that excluding Anarkado's 38.5% stake all investors in Rovuma Area 1 are Asian: Mitsui (Japan) 20%, Bharat Petroleum (India) 10%, Videocon (India) 10% and PTTEP (Thailand) 8.5%.

PTTEP is raising $3bn to finance the purchase and boost its balance ahead of the final investment decision next year. The state controlled parent company, PTT, said it's willing to participate in PTTEP's natural gas projects. And the sales contract for the gas is likely to be concluded in 2013. That is likely to increase the profile of the project and lead to upgrades of reserves and more explorations. Commercial operations are set to start by 2018/19.

An energy bonanza in Africa

Emerging markets are desperate to find energy investment opportunities. But that is becoming trickier as resource nationalism appears to be on the rise. For instance, last week the Canadian government rejected a $5.2bn takeover offer by Malaysia's state-controlled Petronas for Canadian natural-gas producer Progress Energy Resources Corp. And China's CNOOC is still waiting for Ottawa to approve its $15.1bn bid for a Canadian energy company.

Africa, on the other hand, is welcoming investors. It has ample resources and needs cash. It's not surprising so many are bullish on its energy prospects. Mozambique and other East African countries could take the lead and eventually deliver 100 million tons of gas a year from existing discoveries, according to Macquarie Research. To put that in perspective, that would see Mozambique producing 30% more than Qatar's liquefied natural gas (LNG) export volumes. And Qatar is the world's largest LNG producer.

Earlier this year, enormous gas fields were found off the coast of Tanzania. Norwegian company Statoil recently made a gas find estimated to hold almost one billion barrels of oil equivalent (boe).

In Kenya, British oil firm Tullow announced in March that it had made a big oil strike in the north, which it compared to Britain's bonanza in the North Sea.Other wells will be drilled across Kenya, which also holds out hope for offshore exploration blocs.

How to play this story

I think the easiest way to play this story is PTTEP. Most of the analysts I talk to like to play down the Africa venture and think it will fail. I beg to differ. Neighbouring Malaysia and its national oil company, Petronas, holds reserves of 6.6 billion barrels of oil equivalent in overseas assets, equivalent to almost 25% of its total. It has an exploration and production presence in over 22 countries in Africa, Central Asia, Southeast Asia, the Middle East and Latin America. And what Malaysia does, Thailand can do too.

I just think that Thai analysts need to acknowledge that Thai companies are entering a new phase, which means muscular global ambitions. PTTEP's current share price trades at adiscount to the Thai market, which is set to change with more updates from Africa and Myanmar.

And there's abigger story here too. If you take a look at a world map, you can see that theshortest distance between East Africa and Asia is a straight line. This is something that was well known in the past. Prior to the emergence of Western colonial powers during the 17th and 18th centuries, the Indian Ocean was a spaghetti of trade links between East Africa, the Arab peninsula, India and Southeast Asia. One interesting legacy from that period is that Indonesian and Malaysian descendants dominate (40%) the population of Madagascar, which is located just off the East African coast.

The deal signals Thailand's hopes of wooing African nations and securing a reliable fuel supply to support its expansion. It will help establish trade between two regions with incredible prospects. It means they can prosper without dependence on the West and it offers Asia's emerging markets stability. In short, the Thais hope to reincarnate an ancient trade link to help build their future.

This article is taken from The New World, MoneyWeek's FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.

Lars is our resident emerging markets expert, with 17 years of 'on the ground' experience hunting down profit opportunities in Asia.

Lars spent ten years living in Malaysia and Thailand, seeking out strategic opportunities, before moving to London to manage the Oracle Asia Absolute Fund.

In short, Lars has real knowledge of where the opportunities in Asia are. Sign up to his free newsletter, The New World, here.