Mozambique weighs up next steps for gas projects
The country's state-run firm ENH is optimistic about gas' future
Mozambique's Rovuma Basin gas has been a long time coming—and the country is still waiting. Nevertheless, the last 12 months have seen a level of activity and progress that suggests the authorities are serious about doing what they can, within the constraints of Mozambique's political realities, to get the projects up and running.
Omar Mitha, chairman of Mozambique's national hydrocarbons company ENH, is under no illusions, however, that production from Mozambique's large gas reserves will be entering a competitive marketplace, both in terms of attracting gas buyers and keeping developers interested.
At the end of January, it emerged that Norway's Statoil was quitting extended negotiations for engineering, procurement, construction and commissioning contracts on blocks awarded in October 2015 in the country's fifth licensing round. It is rumoured that another fifth-round winner, Delonex, is considering pulling out too, while Total terminated its upstream operation in 2017, after failing to find a partner to share the burden of exploring an offshore area it had inherited from Petronas.
ExxonMobil entered the Rovuma Basin projects in 2017—spending $2.7bn to take a joint operator's stake in Area 4, alongside Italy's Eni. Area 4 alone could hold as much as 85 trillion cubic feet of gas in place, according to the developers.
Exxon is now leading development of the block's onshore liquefied natural gas project, while Eni keeps control of its offshore floating LNG project, on which a positive final investment decision was taken in June last year.
Exxon's acquisition delighted the Mozambican authorities, who saw it as a vote of confidence in the country—and welcomed Exxon's capacity to develop the large-scale project that is planned in the country's remote far north. The capital gains tax on the deal will have been welcomed by Mozambique's cash-strapped exchequer as well.
Rumours persist of a potential takeover of Anadarko's Area 1 by an oil major—and Mitha did nothing to dispel them in a recent interview with Petroleum Economist at ENH's headquarters in Maputo.
"We've seen companies coming into Mozambique—ExxonMobil, the Chinese, the Japanese. Why did they do that? Because they've seen there's a good prospect as a country; [and] it's a project that could help them for energy security as well," he said. "So, it would come as no surprise, for me, for anyone to entertain that possibility that a major would farm into those areas—or, as luck would have it, why not have a bigger company, a giant company, taking over the entire field."
The rumour that Exxon could take over Area 1, combining it with its share in Area 4 to give it complete control over the onshore LNG project at Afungi near the Tanzanian border, has been particularly persistent. Mitha said he didn't know whether that was true, but said he could see both pros and cons to the idea. Clearly there would be efficiency gains with a single operator, but he said he feared it could slow the pace of development.
Exxon's acquisition delighted the Mozambican authorities, who saw it as a vote of confidence in the country
"The con is: would you be able to develop the two projects simultaneously, under current market conditions? That's a question, because they would be mutually exclusive if they belonged to just one operator. But if they are run on an independent basis, each one can develop independently, and the country will benefit much more, as we'll have two trains from Area 4 Mamba onshore, and then two trains from Anadarko's Golfinho-Atum onshore project. That would benefit the country. But if the owner is the same, they would think twice."
Exxon is not the only rumoured suitor. Shell, which wants to build a gas-to-liquids plant in Afungi to help Mozambique monetise part of the domestic gas allocation, used to protest that it was too busy dealing with the acquisition of BG Group to consider a bid for Anadarko's assets. But that excuse now seems to have run its course. The latest rumour on the streets of Maputo is that BP—which is buying all the output of Eni's Coral South floating LNG project to add to its portfolio—could even join Shell in a bid for Area 1.
The elephant in the room is Qatar, rarely mentioned in the Mozambican context, but still the dominant world player in LNG. Could it have a role in Mozambique?
Based in Maputo, ENH believes interest in Mozambique's gas reserves is growing
"The only thing I can tell you is that we're open for business," Mitha said. However, he added that it might "be a good thing, instead of competing with Qatar, to co-operate with them". What form might that cooperation take? "For example, they could buy something in the Rovuma," Mitha said.
He was happy to speculate on the pros and cons here too. "Remember that the market is tight, and Qatar has got 30% of the market share. They could be shareholders, and not help Mozambique," he said.
But, he added, Qatar's poor relations with its neighbours, with sanctions threatened, could prompt the gulf state to invest in production in other countries. "With all these sanctions, they need to diversify and think of other sources. They have the money to, and they have the [sales] contracts. So, I think they could help," Mitha said.
For now, development of the Anadarko-led onshore LNG project is being held up by the lack of firm sales and purchase agreements.
"Australia, Qatar, the US, and Russia, are big competitors for Mozambique, and we're all fighting for the premium markets of Southeast Asia—Japan, Korea, Taiwan, and China," Mitha said.
The number one sales target for Mozambique's LNG is Japan—where Mitha says progress is being made. "Japan is the biggest importer, by far, of LNG in the world, so we are doing our best to ensure that we have a contract with the Japanese," he said. "The only thing I can tell you is that we're very much advanced in negotiations with them."
Mitha said Mozambique had entered Heads of Agreement for Area 1 with two companies, but he said the names remained confidential. "But I can tell you that gradually we are making inroads into that market. And that's very good news," he said.
There is an offtake agreement with the PTT, the Thai shareholder in the project, though at the time of writing that still needed official clearance from the Thai government. But Mitha said he thought China would be a tough nut to crack.
85 trillion cf—Estimated gas in place at Area 4
"To be honest, we are fighting with the Chinese," he says. "The Chinese, according to some data, are over-supplied. They are connected by pipeline with Russia, they are connected with Myanmar, and also they have got deals with Australia and Qatar. So, they are, to some extent, oversupplied."
President Donald Trump's zero-sum approach to international trade could also hurt Mozambique's chances of selling into East Asia. "The recent visit of the US president [to China] could be opening doors for US LNG which is competing with Mozambique, because they've got huge plans to increase their ability to export," he said. "You know what Trump told the Koreans. He said, we need to rebalance our trade deficit. We are importing a lot from you, but you have also to buy a lot from us. That means: you need power, we have LNG."
South African pipeline?
Another possible outlet for the Rovuma gas is neighbouring South Africa, which provided a market for Mozambique's pioneering gas project in the south of the country, run by Sasol, which built a pipeline to their Secunda facility in South Africa in the early 2000s.
The Rovuma Basin is some 1,500km further north than Sasol's Mozambican fields, so building a pipeline would involve a far more complicated investment decision but developments on both sides of the border might make it more viable.
Political change currently underway in South Africa looks positive for the pipeline's chances. Jacob Zuma resigned as South Africa's president on 14 February and now faces criminal charges.
Beforehand, his pet project to develop a nuclear power project had already seemed to be withering following the election of Cyril Ramaphosa—no fan of the nuclear scheme—as leader of the governing African National Congress party. That could open the door for gas to play a much bigger role in South Africa's energy mix going forward.
$2.7bn—Exxon's Rovuma basin spend
In Mozambique, a shock change in Minister of Mineral Resources and Energy might be related to the pipeline issue. Leticia Klemens, who was appointed in October 2016, is said by one well-placed source to have been "vehemently opposed" to the pipeline, which may explain why she was replaced by Max Tonela in December 2017.
Nevertheless, Mitha said such a pipeline would be unlikely to provide the bankable offtake that the projects need to proceed.
"Apart from the quantum that will be dedicated to the domestic markets, the pipeline developers said that they will be willing to negotiate with the operators and get the gas on a commercial basis. [But] the operators, to be able to do that, have to ensure they have an anchor offtaker that is at least investment grade, to underpin the project funding. That is the criterion now—to have investment grade at least. Creditworthiness is extremely important, because it's the revenue that will ensure that there is cashflow to service the debt and pay everything else."
The pipeline project, which could also supply neighbouring countries including Zambia and Zimbabwe, would also help Mozambique achieve its aim of speeding up industrialisation of the country as a whole, rather than having all the benefits of the gas concentrated in its far northeastern corner. But Mitha was cautious over the likely pace of change.
"Maybe in future developments, when the exploration cost has been completely amortised and new developments have come on stream, economies of scale are building up, we can reduce or relax [the offtaker requirements]," he said.