INTERVIEW: UK's Sound Energy eyes Morocco gas expansion, speedy tax resolution

The UK's Sound Energy is ready to expand its activities in Morocco, but remains troubled by a tax dispute that has led the company to put some of its plans on hold.

In an interview with S&P Global Platts in the week started Oct. 17, Sound CEO Graham Lyon said the company, which is sitting on the biggest-ever gas discovery in the North African country, was ready to move forward with further development work at its Tendrara field in eastern Morocco, including signing a key sales deal with the state utility ONEE.

However, the unexpected tax claim against the company first announced in September 2020 has led Sound to keep its bigger development plans under review while moving forward with a smaller micro-LNG project.

In February 2020, Sound said it would pursue construction of a micro-LNG production facility for the early monetization of its gas resources at Tendrara.

Lyon said the company would look closely in moving forward with a final investment decision on the bigger development project "while the tax dispute is hanging over us and this is the way we're going to be treated."

Sound is partnered at Tendrara by Morocco's state-owned ONHYM, which has backed Sound's decision to fight the multimillion dollar tax claim.

"ONHYM has been very supportive and recognize that we're in the right," Lyon said, adding that its appeal would be heard starting next month.

Lyon said he hoped the case would be resolved quickly, but warned that it could "drag on," meaning Sound would not be in a position to make significant progress on the further development of Tendrara.

Gas sales agreement

Sound signed in late 2019 a memorandum of understanding to supply 300 million cu m of gas to ONEE from Tendrara -- enough to meet around one third of its gas needs.

Despite the ongoing tax dispute, Lyon said he was "minded" to sign the final gas sales agreement with ONEE anyway. "Without that trigger, we can't start the financing," he said, adding that the front-end engineering on the development was done.

But the tax dispute is still an obstacle to the full Tendrara development, he said, adding that Sound was preparing to invest $250 million in the project, including new wells, a gas processing plant and a 120-km spur pipeline to tie into the trunk GME line.

Lyon said there were also significant upstream opportunities that could be exploited in eastern Morocco. "We've got a lot of exploration potential, maybe 30 different sites where we could consider drilling. If only 10% are successful, we'd be able to satisfy Morocco's domestic gas demand," Lyon said.

"And as soon as we have satisfied Morocco's domestic needs, we can sell into Europe."

"But I'm minded not to undertake anything but our commitments while we have the tax issue hanging over us and we can't get the infrastructure in place."

Lyon added that Morocco was extremely underexplored compared with neighboring Algeria.

"We are sitting on reservoirs with similar geology [to Algeria], having done a fraction of the exploration the Algerians have done," he said.

"I'm sure we'll find good success. But why would we explore when there's no infrastructure?"

Algeria threat

New gas finds in Morocco could also be used to supply Spain via the GME pipeline, which has historically been filled with Algerian gas.

However, the transit deal is set to expire at the end of October and it seems likely that exports via the link will be halted from next month if a last-minute deal is not reached.

Lyon said he would not be surprised if a deal was reached, even after a "day or two" of supplies being halted.

Morocco itself stands to lose out given that it meets almost all of its gas demand through imports from Algeria, supplied as part-payment for the transit service.

"The threat of the Algerians turning their gas off has focused the minds of the Moroccans a little more on trying to develop some of their domestic resource rather than importing energy," Lyon said.

Morocco this month formed a new government that is keen to see a focus on domestic production of gas, which it sees as a key transition fuel. "We fit nicely into that space," Lyon said.

In the meantime, Sound is moving forward with its micro-LNG project and has signed a gas sales agreement with local fuel supplier Afriquia Gaz, which also holds a small stake in Sound.

"We are very advanced on taking the 'notice to proceed' and signing a contract for the manufacture of the LNG plant," Lyon said.

"We will probably have -- via Afriquia Gaz -- six or seven industrial users of our LNG. Because it is cheaper than imported LPG, we've already had people queueing up, knocking at our door saying, 'can we have some LNG?'"

"We're happy to consider another couple of plants."

Morocco is also looking to import LNG into a new floating import terminal, having launched a tender for the provision of a floating storage and regasification unit in March.

However, Lyon said imported LNG would be more expensive than domestic gas production. "The simplest and most cost-effective gas is domestic gas."