Mozambique to become a global LNG power
A world-class gas reservoir should make Mozambique a global LNG power. But the pace of development may be slower than expected
Sometime in the next 10 years one of the world's poorest countries will begin shipping natural gas to some of the wealthiest, cementing a fast-growing trade route between East Africa and Asia.
Mozambique needs the money that liquefied natural gas (LNG) exports could bring.
Despite rapid GDP growth from a low base in recent years, it remains one of the world's poorest countries, a victim of a wretched post-colonial history, years of civil war and under-investment. About one in 10 adults is infected with AIDS. Malaria is rife. Education remains basic. Public debt is high. Donors meet about 40% of the country's budget.
But Mozambique is sitting on a natural gas bonanza that its government and many international agencies believe could transform all that. The US firm Anadarko Petroleum, which has found much of this offshore resource, and Italy's Eni hope to liquefy the gas and sell it to energy-hungry buyers in Asia.
Their plans, which have already drawn in Asian investors and could soon involve other international oil companies (IOCs), will see billions of dollars poured into Mozambique's economy.
The developers - and the government - want to begin shipping gas before the decade's end, hoping to launch one of the many projects around the world that plan to meet a gap between forecast global LNG demand and supply. The progress, however, is likely to be slower. Mozambique will become a major LNG producer, but not before 2020 and perhaps much later.
There is no mystery about why the government wants to speed the developments. Eni's chief executive Paolo Scaroni thinks a world-scale LNG facility on Mozambique's coast could cost up to $50bn - investment on a scale that would dwarf Mozambique's total GDP of $14.6bn last year.
In a recent assessment, the IMF suggested LNG exports after 2020 would help bring Mozambique's current account deficit into healthy territory, as GDP and exports rise "sharply" during the production phase. ICF International, which last year prepared a draft natural gas master plan for the government, calculated that Mozambique could eventually earn more than $5bn a year from LNG, with thousands of jobs created as secondary domestic gas industries - from gas-to-liquids (GTL) to fertilisers - spilled out of the "anchor" LNG business. In September, mineral resources minister Esperanca Bias went further, saying annual LNG income could be $10bn.
There is no doubt, either, about the quality or quantity of the reserve. Offshore discoveries since acreage was awarded in 2006 in Mozambique's portion of the Rovuma basin, which stretches up its northern coast into Tanzania, have already yielded 120 trillion cubic feet (cf) of gas, says Wood Mackenzie, an energy consultancy.
Further drilling should find another 60 trillion to 90 trillion cf. In reserve terms, that puts Mozambique's gas trove on a par with the Carnarvon basin offshore Western Australia, home to two existing and two planned LNG projects.
A sense of scale
While Anadarko Petroleum, which opened the play with its Windjammer well in 2010, is also looking for oil, it is the sheer scale of the gas resource that has taken the global energy industry by surprise.
The discoveries have been individually prolific, with up to 7 trillion cf being found per well. Unlike many Australian offshore developments, the Rovuma's also lay relatively close to shore.
"The Mozambique fields have been consistently excellent in terms of thickness and reservoir quality," says Martin Kelly, lead analyst for Wood Mackenzie's Sub-Saharan Africa division. "That translates into very good flow rates and it all bodes well for the upstream development and the number of wells required to recover the gas."
That will help to keep down the costs of turning the gas into LNG exports. Most analysis suggests greenfield developments in East Africa would reach Asian markets at a comparable cost to the planned US Gulf and Australian expansion projects (see figure 1). Wood Mackenzie, for example, thinks Mozambique's gas could reach northeast Asia for around $11 per million British thermal units, making it less competitive than most competing Australian plants.
Proposed Western Canadian projects, which some in the industry now see as a bellwether for the next wave of development, would be even more expensive, according to research by David Ledesma, of the Oxford Institute for Energy Studies (OIES). Even including added journey time to avoid pirates and other unforeseen greenfield costs, he calculates, East African LNG will be competitive.
Those fundamentals have been compelling for Asian investors, especially Indian firms. "East Africa is the perfect source for India.It's right on their doorstep," says one senior executive at a US major. Indian firms have led the most recent wave of deal-making in Mozambique's upstream, but China National Petroleum Corporation (CNPC), Thailand's PTTEP, South Korea's Kogas and Japan's Mitsui are also shareholders in either the Anadarko-operated Area 1 or Eni-operated Area 4. Japan's Inpex also recently bought a stake in the Statoil-operated Areas 2 and 5. Total and Petronas (operator) are already exploring in Areas 3 and 6.
Areas 1 and 4 will provide the gas for the LNG facility, which is to be based in Palma, in Cabo Delgado province in the north of Mozambique, so the involvement of major Asian LNG buyers is critical, not least in financing.
After selling a fifth of its licence in Area 4 to CNPC, Eni's boss Paolo Scaroni said the deal would help the company finance the development. "This kind of deal shows how careful we are not to have eyes bigger than our stomach," he told the Financial Times.
But securing take-off agreements is the main thrust of the Asian influx into the licence areas. In September, Anadarko's chief executive Al Walker said he expected preliminary sales agreements to be agreed "through the course of this year and next". A Reuters report claimed the company had been in negotiations with 20 buyers.
In the meantime, it is pushing ahead, with 7,000 hectares of land set aside for the development, and preliminary engineering and design contracts already under way.
Some obstacles have also been cleared. Anadarko and Eni agreed in December last year to build the onshore plant jointly, although the two companies would continue to develop their upstream portions of the project, in Areas 1 and 4, separately.
The latest iteration of the plans for the LNG facility would see two 5m t/y trains come on line first, with another two to follow later. Anadarko says the LNG 'park' in Palma could eventually consist of 10 trains, with capacity for 50m t/y, making Mozambique one of the world's largest LNG exporters.
Not so fast
But there are many uncertainties. Last month, reports circulated that Eni was also considering a floating LNG facility - a new form of liquefaction that looks attractive to investors because it needs minimal land work, but less so to host governments that want to see the offshore bounty bring onshore employment and development. (Eni did not respond to Petroleum Economist's requests for comment.)
More critically, although Anadarko hopes to begin shipping the LNG by 2018, the deadline is far too optimistic, say analysts. "Developing the last 35 LNG projects took in the world 18 years from discovery to development," says the executive at the US major. "Discount all the numbers out there: 2018 is very unrealistic."
Wood Mackenzie's Kelly says a more realistic target is 2019 for the first train, with the next three trains to be added by the early part of the next decade.
There is also some scepticism that Eni and Anadarko can bring the project off on their own. Anadarko has never been through the marketing and construction of an LNG project, points out Kelly, and Eni's experience has only been as a non-operating shareholder in other developments.
That suggests an opportunity may arise for a major with experience to step into the project - a prospect said to be attractive to Anadarko and the government, but not to Eni. In any case, having missed earlier opportunities, the terms and risks of Mozambique LNG may no longer be feasible for the majors.
Last year, Shell pulled out of a bidding war with PTTEP to buy UK firm Cove Energy, which held an 8.5% stake in Area 1. Reports soon followed that the Anglo-Dutch firm could be more interested in the bigger prize: Anadarko's operating stake in the licence. ExxonMobil was also said to have talked to Anadarko about a farm-in agreement.
But the momentum seems to have passed. Among some majors, there is now some anxiety about LNG pricing mechanisms. The senior executive at a US major talked recently of "unrealistic" expectations among buyers for global gas price convergence, saying consumers' illusions about the coming impact of US LNG supplies had put a 'logjam' in global developments.
Big projects in other words are stalling because buyers, with erroneous expectations of falling LNG prices, are not giving developers the confidence to push through final investment decisions (FID), he argued.
That logjam, the executive said, could pass once US LNG hits the market and buyers discover that today's basement Henry Hub prices don't turn into the obvious arbitrage opportunities later in the decade - especially if weather or rising US gas demand amid rapid growth in domestic petrochemicals end an era of cheap American gas.
Even without those uncertainties, though, other obstacles stand in the way of swift development of Mozambique's LNG capability.
Political risks are among them. Tensions between President Armando Guebuza's ruling Frelimo party and Renamo, its opposition - they fought the brutal civil war of 1977-92 - have threatened to grow more serious in recent months. Periodic minor violence has erupted between the two groups in the past year, culminating in Renamo's efforts to impose a road blockade separating the north from the south. In October, things worsened. The army attacked the headquarters of Renamo's leader, Afonso Dhlakama. On 22 October, Renamo said the the 1992 peace accord it signed with Frelimo was now over.
No one expects a return to the brutal civil war between the two sides. But negotiations to settle the disputes will take a long time. Neither party is interesting in concession, and Renamo, whose political support has been waning, has said it will boycott local and national elections this year and next. But the friction could still hinder some of the government's plans, especially if it stalls infrastructure development. Much of that is needed.
Palma, location of the proposed LNG park, is close to the offshore fields in Mozambique's north but still a three-day drive from Maputo, the capital. Cabo Delgado is also home to a protected national park, meaning environmentalists' scrutiny of the developments is likely to be high.
Guebuza, a wealthy man considered friendly to investors, will leave office when elections take place in October 2014. He wants the LNG plant to be signed off as a legacy project before he goes. But analysts wonder if the political support for the projects will filter through to the wider public quickly enough to prevent some opposition on the ground.
Cost-recovery clauses in the exploration and production concession contracts that govern the upstream investment mean that it will be a decade or more before the profits from LNG development begin to spread in the country.
In the meantime, that will leave scope for more interference from Mozambique's elite, suggests Control Risks, a security consultancy. "Levels of interference will increase as (LNG) production approaches," it says. "Endemic corruption and limited oil and gas infrastructure" would remain "significant challenges" in the short to medium term.
"Clientelism and nepotism provide (Guebeza's) Frelimo party with a way of garnering support and ensuring loyalty. The Frelimo-dominated government is likely to view tax revenue derived from companies operating in the oil and gas sector as a means of reducing donor dependency and ignoring pressure to implement anti-corruption measures."
Despite Mozambique's recent reputation in the energy industry as a relatively benign country in which to operate, Revenue Watch, which assesses new resource-developing countries' fiscal transparency, gives it a "failing" score on its resource governance index, ranking it 46th out of 58 of the countries it monitors.
Endemic corruption and limited oil and gas infrastructure would remain significant challenges in the short to medium term
There are some other issues to be ironed out, too. The framework of tax law and practice is "not well developed", says Deloitte, a firm of accountants, with "limited guidance on the tax treatment of farm-in agreements".
Among other hazy parts of the tax code affecting investments is new uncertainty over capital-gains tax (CGT). When PTTEP bought Cove, for example, the CGT amounted to 12.8% of the transaction. Since then, the government has said CGT will come in at 32%.
That would have landed Eni with a $1.35bn charge on its sale to CNPC of a 20% stake in Area 4. After negotiations with government, the Italian firm settled for a bill of $400m, along with an agreement to build a power-generation plant in Cabo Delgado.
But the threat of the higher rate, which the government says will apply from the beginning of 2014, still hangs over future transactions. It also leaves Anadarko with little time to finalise the $2.64bn sale of a 10% stake in its block to India's ONGC, among other deals that could be affected by the retroactive tax change. And, points out the OIES's Ledesma, on top of the uncertainty, CGT is outside of the remit of the Extractive Industries Transparency Initiative, of which Mozambique is a new member.
The new rate "might not bode well for transparency in the country and has led to some industry participants being uneasy about other regulatory hurdles that may lie ahead".
Above all, Mozambique must make more strategic decisions about how it is to develop its gas sector as a whole - while ensuring that the proceeds of the development, including its vast requirement for infrastructure (everything from air-landing strips in Palma to deep-water port facilities to roads) are spread broadly.
ICF's gas master plan envisages a raft of secondary industries cropping up, based on LNG as the anchor for ancillary gas-based, value-added businesses.
As it assesses the plan, the government must decide whether to proceed with LNG as a stand-alone industry or use it to spur those other industrial developments. To do so, the government will probably have to take royalties-in-kind, not just in cash. Its decision on that matter will go some way to telling outsiders how widely Mozambique's elite wishes to share the proceeds of the gas.
Kogas and other investors, including Eni, are already committed to building some domestic gas infrastructure. Given the country's minimal demand of less than 500m cubic metres a year, this will not affect the availability of gas for export.
But, says Ledesma, the likely price for gas supplied into the domestic market - which the government says will be a requirement from offshore developers - will be much lower than the beachhead price in Palma, implying some kind of government subsidy "as part of its social and domestic energy market policies".
There will likely be other demands on the energy, too. South Africa already imports some overland gas through a pipeline between Sasol's Pande and Temane fields, in Inhambane province, to Secunda, in Mpumalanga.
An advisory paper from the South African Institute of International Affairs last year implored the country's firms to expand this trade, seeing Mozambique's gas as a crucial new feedstock for South African GTL and power generation.
Sasol has already discussed with the Mozambique government the possibility of building a GTL plant.
Sifting through all of these demands on Mozambique's gas, straightening out the commercial terms governing future LNG production and ensuring the dividend is used appropriately will take some time.
The government must decide, too, whether to commit to a sovereign wealth fund to handle future export revenue - a policy often recommended for new hydrocarbons developers, but not necessarily the most efficient way to spread wealth quickly.
But with competing LNG projects in North America and the Mediterranean on the horizon there is some urgency.
Anadarko had hoped to reach FID on the Palma development later in 2013.
Wood Mackenzie's Kelly thinks a decision "towards the end of next year would be achievable". But, as in Tanzania, Mozambique's government is learning as it goes.
Less speed, more haste may end up being the best policy. The country will soon be a major global energy exporter and the riches will flow. But making sure the industry develops fairly and transparently while yielding widespread economic growth must come first.
Either way, the true promise of the country's gas is unlikely to be felt either in Asia or Mozambique until after 2020.