Maputo takes the plunge, Dar looks on
Mozambique and Tanzania both have gas reserves likely to support extensive LNG exports, but only one of them is truly committed to exploiting them—at least for now
East Africa's first liquefied natural gas export project—Coral South in Mozambique—has been given the green light, but doubts about how much it will benefit the region's economies remain a major concern for national leaders.
A positive final investment decision (FID) on the floating liquefied natural gas project came in early June from the Mozambique government and the Eni-led consortium developing Area 4 in the Rovuma Basin. But even the optimism of President Filipe Nyusi, announcing the deal in an upmarket Maputo hotel, seemed guarded. He referred to the "sacrifices" made by the country to get the project over the line.
Until a couple of years ago, Mozambique was taking a hard line on FLNG, in much the same way as Tanzania, its gas-rich neighbour to the north, still does today. Floating LNG brought too few benefits to the local economy—for a start, few jobs, directly or indirectly. So LNG developments should happen onshore, ran the argument.
But continued delays to the Mozambique projects softened opposition, which finally fell away when scandals threw the country's economy into a tailspin. These involved three secret state-owned companies, which took out $2bn in state-guaranteed debt to try—and fail—to build a domestic offshore security industry. The government needed investment and hard currency, but was also seeking a good news story for the public.
$8bn - Coral South's price tag
After the scandal, the government realised it needed to get the projects off the ground and so Coral South became reality. The project draws on an estimated 16 trillion cubic feet of gas in place, but the entire output over more than 20 years will be sold to BP. None will supply the domestic market. So much for the Mozambique government's Gas Master Plan.
The hope is that this FID is only the first of several that will come on the Mozambican side of the Rovuma Basin, which the country shares with Tanzania, and that onshore projects, promised by Eni and Anadarko, will be able to provide gas supply to both domestic and export markets.
Eni chief executive Claudio Descalzi said at the Coral South signing ceremony that the $8bn project was "only the appetiser". ExxonMobil has bought joint operatorship of Area 4 and will lead the onshore project alongside Anadarko in Area 1, and the firms will collaborate to develop the huge reserves straddling the border, which amount to the biggest single field yet found in the Rovuma.
More offshore blocks further south and onshore are waiting to be explored by a roster of international companies including Exxon itself, once engineering contracts have been agreed. There are signs, with the recent announcement of an adjustment to the 2014 petroleum tax law, that the government is prepared to cede significant ground in that area too.
Mozambique is proving itself as an investment destination for this type of mega-project, with a fiscal and legal framework that the companies are comfortable with. It seems like it will only be a matter of time before onshore LNG happens.
Different priorities in Dar
That can't be said for Tanzania.
"A lot of people in Tanzania are talking about the LNG project as a foregone conclusion, but it's still very possible that it doesn't go ahead," says an expat oil and gas economist based in Dar es Salaam, who preferred to remain anonymous, citing an atmosphere of mistrust of foreign workers in Tanzania. "I think that's a bigger possibility under [President John] Magufuli than under [predecessor] Kikwete, as he's more anti-foreign labour," he adds.
The mistrust is plain in in the mining sector, where the country's biggest gold miner, UK-based Acacia Mining, was accused in May of drastically underreporting the value of its Tanzanian exports, which led Magufuli to sack energy and minerals minister Sospeter Muhongo. At the start of June, another government-backed investigation into the company found that it was operating in the country illegally. Acacia hotly disputes both charges, and several independent analysts back the company.
The case is contributing to an investment climate which is "pretty problematic at the moment, so even if global markets were more promising there'd still be big question marks over [the LNG projects]", another natural resources specialist based in Dar es Salaam says.
'Only the appetiser'—Eni chief on Coral South
It is in this atmosphere that the would-be sponsors of an LNG project—principally Shell, Ophir Energy, Statoil, and Exxon—are negotiating the Host Government Agreement (HGA) with Tanzania. That discussion is "in its preliminary stages—the government says it started in September, but it hasn't really got underway yet", the second source says.
"The next couple of years will be crucial," he adds. "Even if the global context does improve, the country-specific risk and the regulatory framework, which is a lot more demanding than in other countries, means investors will start looking elsewhere."
Among the matters to be ironed out is how much gas the project must provide to the domestic market. The rules in existing legislation are open to interpretation, because, after the investors have covered their costs, they must fully supply the domestic market's needs before they can start exporting.
The Natural Resources Governance Institute assumed a domestic requirement 10% of production based on the precedent set by the Statoil PSA, but it remains a "known unknown" for the investors.
"In Tanzania, the government has historically been focused on ensuring domestic gas supply to meet electricity and industrial demand," says Mansur Mohammed, a sub-Saharan Africa analyst at consultancy Wood Mackenzie. "That Tanzania has been prioritising domestic gas supply to meet electricity and industrial demand [means] an extra layer of discussion with the companies wanting to sanction the LNG projects."
If the HGA is agreed in the next two years, the companies say FID can be expected in 2022—the same year as Eni plans to produce first LNG at Coral South in Mozambique. At that point, Tanzanians could be wondering what might already have been, although the government will be able point to the fact that Coral South FLNG won a complete exemption from supplying Mozambique's domestic market.
Whatever the problematic genesis of the Coral project, it does make Mozambique a pioneer of the still relatively unproven floating liquefaction technology. Coral South is among the world's first purpose-built FLNG platforms and the first to be project financed. President Nyusi noted with pride that the project had come through the due diligence processes of 15 banks and five export-credit agencies, as well as the offtaker, BP. The partners will finance the upstream portion of the project.
The technology is increasingly in vogue in Africa. "We are seeing a rise in the number of smaller more nimble projects moving forward," Wood Mackenzie's Mohammed says. "You look at Equatorial Guinea block R-Ophir and its partners are developing a deep-water FLNG project, small scale, across a number of fields."
Ophir's project is much smaller, requiring reserves of 2.5 trillion to 3 trillion cf of gas to make it viable. "It certainly challenges the concept of bigger is better, with some of these smaller and more nimble projects that don't necessarily require large volumes to be found, and don't necessarily require large and long offtake agreements to be in place," says Mohammed.
The gasfields in Tanzania are not as prolific as Coral, so a floating project the size of that planned in Mozambique would need several fields. In theory, Shell—which is pioneering FLNG in Australia with Prelude—could have enough gas across its Tanzanian fields to do a Coral-scale project, Mohammed says.
Even if Tanzania plumps for FLNG—unlikely, say most in-country sources—it will now always be playing catch-up with Mozambique. With larger reserves and a more advanced project, Mozambique now seems set to become the region's LNG centre.
Mozambique already has projects in place to use domestic gas from the future onshore LNG projects, having awarded Shell the right to start developing gas-to-liquids and Norway's Yara a fertiliser project. Recently, Mmamoloko Kubayi, South Africa's new energy minister, said a pipeline from the Rovuma Basin into South Africa was a key part of her country's medium-term energy policy. If that happens, which seems doubtful, Mozambique could supply gas to Zimbabwe and Zambia along the way.
Tanzania, meanwhile, could still miss out altogether. "Prices may improve and therefore there might be increased investment in the next 10-15 years. [But] you look at the potential effect of climate change policy on fossil fuels and the window for attracting investment is narrowing. If Tanzania doesn't get investment in the next 15 years, those reserves won't be developed," the natural resources expert in Dar es Salaam says.
The Tanzanian government may not be overly bothered about the pace of LNG development, taking the view that it will happen on its own terms or not at all. But Mozambique, heavily in debt, has little choice but to give the investors exactly what they need.