Mozambique needs less haste, less speed
Bureaucracy, financing problems and last-minute wrangles are slowing Rovuma Basin projects
Mozambique's government infrastructure is creaking under the strain of managing one of the world's most ambitious hydrocarbons provinces. The severely understaffed oil regulator, Instituto Nacional de Petróleo (INP), has been working flat out to finalise agreements aimed at getting long-delayed offshore Rovuma Basin gas projects underway, while also negotiating the allocation of new exploration blocks and awarding downstream gas monetisation projects.
Meanwhile, the energy ministry has had to adapt to a new leader, following the replacement of the highly respected Pedro Couto as energy minister by Leticia Klemens last October. Klemens was a surprising and inexperienced pick, whose professional path has led him mainly through the banking sector—a sign that the government in Maputo may be keen to speed up deal-making in the sector.
Progress towards developing some of the estimated 180 trillion cubic feet of reserves in the Rovuma Basin has been sluggish of late. Eni, operator of Offshore Area 4, had hoped to reach a final investment decision (FID) on its Coral South Floating Liquefied Natural Gas project before the end of 2016, but is still hammering out final details with INP and the energy ministry. Final approval has been forthcoming from Eni and all consortium members barring China National Petroleum Corporation, which is waiting for a sign off from the Chinese government, Petroleum Economist understands.
Another problem is whether project finance banks will be happy lending to a country which has been struggling to maintain financial transparency and is now officially in default on its sovereign obligations. On 18 January, Mozambique failed to cough up the first interest payment of almost $60m on its debut $0.727bn sovereign Eurobond issue—an inauspicious latest development in the so-called 'hidden debts' scandal, which continues to hamper Mozambique's economic progress.
But progress has been made in some areas. In December, Mozambique's Council of Ministers approved five decrees in one day, including the updated exploration, production and concession contracts (EPCCs) for Areas 1 and 4 of the Rovuma Basin, which now regulate for the production of gas and LNG, rather than just oil, as had been envisaged when the original EPCCs were drawn up.
Another decree allows the Anadarko-led consortium on Area 1 to market its LNG as one unit, rather than the various shareholders in the consortium selling their shares of the output independently. Finally, the government also confirmed that it wants the Anadarko-led consortium to pay the Petroleum Production Tax—set at 6% for gas—in cash rather than in kind, allowing all the gas produced to be sold on the international market.
Some gas will still be reserved for the domestic market. Although Areas 1 and 4 are not regulated by the 2014 Petroleum Law that requires 25% of production to go to the domestic market, the government negotiated to take at least 100m cf per day from Anadarko's first two trains, with the potential for an extra 300m cf/d if domestic industry requires it.
Domestic gas supply depends, of course, on those big Rovuma Basin projects coming to fruition, but INP is already moving ahead with a tender and a decision on three projects that would together create demand for more than the full allocation of 400m cf/d.
The biggest allocation is going to Shell, which plans to use 310m-330m cf/d to feed a 38,000-barrels-a-day gas-to-liquids plant, producing synthetic diesel, naphtha and kerosene, and 50-80 megawatts of captive power. Norwegian fertiliser giant Yara International has also been chosen to build a 1.2m-1.3m-tonnes-a-year fertiliser plant, and 30-50 MW of captive power, using 80m-90m cf/d of domestic market gas.
Those two global-scale companies were joined by the little-known Great Lakes Africa Energy, a London-registered company led by Kenyan businessman Humphrey Kariuki, whose other business is East African oil-import company Dalbit Petroleum.
Great Lakes Africa Energy was awarded 41.8m cf/d of gas to build a 250-MW power plant in Nacala, a port city more than 600km by road to the south of Palma, where Anadarko's gas will make landfall. The company already has one power plant up and running in Zambia—the oil-fuelled 50 MW Ndola Energy facility—but has little track record in the sector beyond that.
Meanwhile, INP has been negotiating EPCCs with those allocated blocks in its fifth licensing round. The biggest winner there was a partnership between Exxon and Rosneft, but Eni has another block in a consortium with Statoil and Sasol, and the South African company won more onshore acreage adjoining its existing projects in the southern province of Inhambane. Even further south, a partnership of Delonex and the Indian Oil Corporation was awarded an onshore block.
INP's principal adviser in these negotiations is Norwegian lawyer Bjørn-Erik Leerberg, of law firm Simonsen Vogt Wiig, who has been advising the Mozambican authorities since 2003 under Norway's "Oil for Development" assistance programme for oil-rich developing countries.
Leerberg is, by reputation, a tough negotiator and a stickler for the rules—prompting some to suggest his advice is more suited to an established hydrocarbons province such as Norway, rather than the fledgling Mozambican arena. James Dallas, a World Bank-backed partner at Dentons, who has advised INP in the past, has recently also made a reappearance at the table, sources say.
Mozambique remains a country full of potential for oil and gas development. But 2017 could be yet another year of frustration and delays.
Geopolitics threaten Exxon's Rovuma investments
ExxonMobil's proposed investment in the Eni-operated Offshore Area 4 in Mozambique has become more problematic since the appointment of its chief executive Rex Tillerson as US Secretary of State by President Donald Trump.
Any deal may have to overcome growing US-Chinese tensions, given state-controlled China National Petroleum Company (CNPC) is the second-largest shareholder in Area 4 and could seek to block investment by Exxon, if US tough talking on China mounts.
The war of words has so far centred on the South China Sea, which contains around 11 bn barrels of oil and 190 trillion cubic feet of gas in proved and probable reserves, according to US Energy Information Administration data. Exxon has interests in waters that are disputed by Vietnam and China, as does Rosneft, Exxon's partner on new exploration blocks offshore Mozambique.
CNPC's investment in Area 4 is now worth a lot less on paper than the $4.2bn it paid in 2013, but that investment may still give China considerable leverage. CNPC's 20% stake in Area 4 is held via a 28.57% stake in Eni East Africa, an Eni-led special purpose vehicle, which holds 70% of the block. Eni wants to sell half of its remaining stake in Eni East Africa to Exxon, to leave Eni and Exxon with 25% each of Area 4. So Exxon is seeking to come into a joint venture between Eni and CNPC.
Chinese intransigence on the Exxon deal could also hold up a final decision to invest in for the Coral Floating LNG project for Area 4, where CNPC had yet to approve its investment when Petroleum Economist went to press. It could also hinder progress in the neighbouring Area 1, as Exxon's plans in the Rovuma Basin appear to be those of a Monopoly player angling to take all the most expensive squares on the board—it would ideally like stakes in both Area 4 and Area 1, not just one of them.
Mozambique has made no secret of its desire for Exxon to come in to the Rovuma Basin blocks, both for the capital gains tax windfall that the government desperately needs, and for the supermajor's expertise in complex LNG projects. But the country now finds itself caught up in a geopolitical tug of war, with Trump's US and Russia on one side, and China on the other. Mozambique can ill afford to sacrifice its relations with any of these players.
Mozambique's leviathan gas developments have yet to make a splash