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Majors show early interest in Mozambique’s 5th round

ExxonMobil, Total, and Statoil are among the companies that submitted bids to explore for new exploration blocks in Mozambique

The interest confirms that oil companies are still confident interesting discoveries can be made in the southern African country’s waters.

But the terms of the round faced criticisms ranging from opacity to cronyism and the turnout was less than expected – even allowing for the low oil price.

A total of 15 blocks were included in the round which was closed 30 July by the Institute of National Petroleum (INP).

Sixteen companies ranging in size from supermajors to minnows applied for blocks as operators and non-operators. Among the bidders were Italy’s Eni, South Africa’s Sasol, Russia’s Rosneft, Indian Oil Corporation, Shoreline Canoverseas, Delonex Energy, Angola’s state-owned Sonangol, Namoza Natural Resources, Petroinveste Mozambique and Bluegreen Investments.

Blocks on offer included three new areas of the northern Rovuma Basin, where US oil major Anadarko Petroleum and Eni are already developing multi-billion-dollar liquefied natural gas projects. Other areas included the offshore Angoche area in the northern province of Nampula; offshore the Zambezi Delta; onshore around the Pande and Temane concession; and onshore the Palmeira areas.

INP said that the successful bidders would be announced within three months.

The strong turnout, particularly from the majors, surprised analysts given that oil companies have been reining in capital spending in the prolonged spell of low oil prices. Teneo Intelligence’s senior vice president for Africa, Anne Fruhauf, had predicted a more “muted” response to the round given the low oil price environment.

Ecobank’s head of energy research, Dolapo Oni, had also expected interest to be drawn from mainly Asian national oil companies rather than western majors – mistakenly, as it turned out: “I suspect the likes of Shell, Eni and Total may sit out the licensing round and focus more on acquisitions in the Middle East and North Africa,” he said.

A number of concerns had also surfaced before the round’s closure with potential bidders questioning the management of the process, and the lack of clarity on how financial proposals would be assessed.

In the bid evaluation criteria, there was a 19% score given to the “economic model analysis” but the actual details of the so-called model have not been released. More importantly, there was no information on how the “preference” given to bids that include Mozambican partners would be applied. Together, these concerns triggered fears among anti-graft groups that the process lacked transparency and was mismanaged.

Fighting corruption

The Maputo-based Centre for Public Integrity studied the round and questioned whether certain bids would be favoured because of their association with “politically connected” Mozambican companies.

PwC Africa Oil & Gas advisory leader, Chris Bredenhann, said the aim of Mozambican partnership could be seen as an effort to promote local participation in the industry. However history had shown it could also be an opportunity for companies with no oil and gas experience capabilities to “skim profits.” This, he said, had been seen in other African bid rounds, including Nigeria.

The other major concern was that the round had been rescheduled several times while new petroleum laws were being finalized. The bidding round was set to close on 26 December 2014 but the deadline was extended twice – most recently to 30 July 2015 – while new petroleum regulations were being finalised.

When the new petroleum law was passed in August 2014, it contained unexpected changes including a domestic market requirement to sell a quarter of the gas produced to local industry. In addition, it inserted local content requirements that some goods and services may only be provided by Mozambican companies. “Newcomers should look at the exploration and production terms carefully, including the local content and domestic market obligations,” Fruhauf said.

Under the new law, concessionaires are required to file a local content plan in conjunction with development plans to be approved by the government. As part of the plan, which must be updated every three years, preference will be given to Mozambican companies where the services offered by them are comparable to those available on the international market.

While the changes in the law required major revisions to the nation’s oil and gas regulations and the drafting of new model contracts, the INP and the ministry of natural resources chose to launch the bid without these documents. “This caused uncertainty; therefore, bidders were hesitant at best,” said Bredenhann.

The round was also clouded by the fall in oil prices and a widespread belief that oil discoveries are increasing unlikely while the balance was tipped to disadvantage gas in order to monetise the Rovuma basin discoveries. “Adding uncertainty to the mix just makes matters worse,” Bredenhann said.

Certainly, Eni and Anadarko’s gas discoveries have attracted global attention but some industry experts believe there is far less emphasis on petroleum exploration now than a year ago.

“With global prices low, companies are reviewing all of their ventures worldwide. Even in terms of resources in the ground, while Eni and Anadarko have made giant finds, other companies exploring adjacent blocks such as Statoil have been much less lucky,” Fruhauf said.

Statoil with its partner Tullow Oil in September 2013 were forced to leave Areas 2 and 5 in the Rovuma Basin after failing to find hydrocarbons.

According to Fuhauf, there is also the danger that regulators, overexcited by the gas discoveries, will become too demanding with respect to investors, while failing to take into account lower oil prices. Oil prices have lost more than $10/b over the past month, with benchmark Brent nearing a six month low at the end of July.

Both Anadarko and Eni are forging ahead with their large-scale LNG projects in the Rovuma basin. Although the exploration is far from completed, gas reserves are currently estimated at 120 trillion ft3, positioning Mozambique as a potential challenger to Qatar, the world’s top LNG exporter and the emerging Australia.

Eni aims to make a final investment decision by the end of 2015 on the LNG export project which includes a 2.5m t/year floating LNG unit in the Rovuma Basin. Anadarko in May selected a consortium of developers including Chicago Bridge & Iron to work on the onshore LNG project that includes two LNG units of 6mn t/y. The decision is significant step towards reaching a final investment decision which the company expects in early 2016. Other partners in the joint venture include Japan-based Chiyodo and Saipem.

While much of the decision hinges on final negotiations with the government of Mozambique, both companies appear to be progressing with the projects, Bredenhann said.

Challenges of price

There are, however, challenges for Mozambican LNG production. If new suppliers in Australia, the US and Russia develop their resources faster than Mozambique, gas prices might fall further and the country’s LNG resources might lose their competitive edge.

Another potential challenge is the lack of infrastructure in Rovuma basin where the LNG facilities are planned. Securing capital to build the projects will also be a challenge. The development of onshore fields and the construction of the supporting infrastructure such as pipelines and storage units all cost a lot of money.

'Newcomers should look at the exploration and production terms carefully, including the local content and domestic market obligations'

There are also the delays in the firming up of the regulatory framework. In December 2014, Mozambique’s council of ministers passed a decree law covering the LNG developments but the companies are still unclear about its final content.

“For Anadarko and Eni, one of the biggest milestones on the road towards their final investment decision was the 2014 passage of the LNG decree law. However, there remains many i’s to be dotted and t’s to be crossed, including regulation guiding the implementation of the decree law,” Fruhauf said.

The political economy is also a source of concern. “With a new government in charge and a new minister presiding over an enlarged ministry, government decisions may even be more delayed than normally,” she said.

Mozambique in October 2014 elected Filipe Nyusi of the governing Frelimo party as the next president. Shortly after, Nyusi appointed Pedro Couto, the former deputy finance minister to lead the newly merged ministry of energy and minerals. There are concerns that merging these ministries might be challenging with Couto in charge of not just the LNG project but other key areas such as coal, mining and the electricity sectors.

But Fruhauf said Nyusi’s government “desperately” needs the LNG projects to proceed because the country’s economic outlook needs them to get off the ground and fast-rising public debt depends on natural gas revenues from the 2020s.

It is estimated that LNG projects will attract about $50bn in investment, more than three times the country’s $16bn gross domestic income.

Political risk

While the country is keen to escape the shadow of its troubled past, the nation still has a political crisis on its hands. Despite a new peace agreement in September between Felimo and the opposition party, Renamo, several armed clashes have occurred this year in the northern Tete province where at least 45 people were killed in June.

Top opposition figure Afonso Dhlakama has threatened to declare himself president of the north and the centre of the country where he polled higher than Nyusi in the elections. Dhlakama took control of the Renamo party in 1979, during the early years of Mozambique’s civil war.

In a country report by Chatham House in June, the research director at the Africa Program, Alex Vines, said Renamo did not have the capacity to return the country to conflict, but it has proven its ability to disrupt and worry international investors. A serious inclusive cross-party process could help reduce the political tension and address some of the inequalities that have led to political tensions, Vines said in a report published 25 June.

Mozambique has a long history of oil and natural gas exploration. Although the first exploration was carried out in 1904, no substantial production has resulted so far. The only gas production is from the 2.6 trillion cf onshore Pande and Temane fields, operated by Sasol. The gas is piped via an 865-km pipeline to South Africa.

Sasol, the world’s top gas-to-liquids producer, is now waiting for government approval to increase its gas reserves and most likely develop the country’s first crude oil.

A field development plan for the development of the Inshassoro block and the drilling of additional wells at the Temane field was submitted to the INP for approval in February this year. Sasol hopes the plan will be approved “as soon as possible.”

Bredenhann believes the round was lunched too early with “too many biddable elements” making it difficult for bidders to have confidence in the transparency of the process. “We would recommend that future rounds include fewer biddable elements and a third-party oversight committee be appointed to adjudicate the bids,” he said.

Nevertheless, excitement remains around the game-changing gas finds that could transform the war-torn country into a leading player in the LNG upstream and the industry is waiting to see how the new government tackles the substantial challenges. Mozambique is a frontier play for oil and gas exploration that, handled well, could make everyone concerned better off.

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