Exxon’s Rovuma LNG project down but not out
Partners in Mozambique project could seek further cost cuts as global revenue slump looks set to endure
The ExxonMobil-led Rovuma LNG project in Mozambique is the latest high-profile energy venture to suffer delay, as the coronavirus pandemic’s impact on the energy sector deepens.
The company announced on 7 April that FID on the £30bn project would not be made in 2020 as planned. It stated it would continue to “actively work with its partners and the government to optimise development plans by improving synergies and exploring opportunities related to the current lower-cost environment”.
Rovuma LNG is envisaged as a 15mn t/yr two-train project, based on reserve estimates exceeding 85tn ft3 from deepwater offshore Area 4.
“In our base case, we see Rovuma kicking off in 2021” Saraswat, Rystad Energy
The delay to FID—following on from another last year—was already on the cards before the pandemic, as ExxonMobil and its partners sought to deal with high costs and financing problems.
The major announced in 2019 it wanted to cut costs for the project before giving it the green light. The decision to postpone became inevitable when the challenge of building and funding one of the world’s most costly energy projects was compounded by the imposition of work and travel restrictions affecting personnel and supplies.
ExxonMobil’s announcement was part of its decision to cut 2020 capital spending by 30pc in response to falling demand and prices. This reasoning deepens concerns over the extent of the delay to the Rovuma project, given 2021 is unlikely to see a return to business as usual.
The Rovuma project has legs even if its estimated breakeven price of c.$7/mn Btu is well above current market prices, according to market observers.
“In our base case, we see Rovuma kicking off in 2021,” says Aditya Saraswat, senior analyst at consultancy Rystad Energy. “But it comes back to what sort of exposure consortium partners are willing to take up.”
Rystad predicted before the coronavirus pandemic that global demand for LNG would catch up with prevailing over-supply by 2023. It has since revised its view to expect the market to start tightening in 2024, which would mean Rovuma, if it receives FID in 2021, would come onstream around 2026 when the market can support higher prices.
£30bn Capital that would be required by delayed FID
Another favourable factor is the project’s location on the same site in northern Mozambique as the Total-operated Mozambique LNG project, for which FID was taken last year. With that project underway, much of the onshore transport and logistics infrastructure for Exxon’s project will be in place when its construction potentially starts. However, Total’s effort has not been free from problems, with Islamic State-linked militant attacks in recent months escalating a volatile security situation.
While ExxonMobil is the operator of the LNG project, Eni is the operator upstream in offshore Area 4. In both projects the two majors are partnered with with China National Petroleum Corporation, Korea’s Kogas, Portugal’s Galp and Mozambique’s state oil firm ENH.
Eni is operator of the 3.4mn t/yr Coral South floating LNG project, also based on Area 4 reserves, which ExxonMobil has assured is continuing as planned. The FLNG facility is being built in South Korea and is due to start up in 2022.
A post-pandemic recovery would still leave ExxonMobil with the issue of cutting costs for Rovuma LNG. Energy firms have already made their operations more efficient, as they struggled to stay afloat during the post-2014 oil price slump.
The downturn also drove down rates paid to oilfield service contractors and suppliers, in a sector that has yet to fully recover. As much less scope remains for greater efficiencies or lower rates, reducing the scale of the project could prove the only way to cut costs.
“There is not much ExxonMobil can do in terms of the bidding process. If it needs to revise down expenditure, it would need to revise down the development scope of the project,” says Saraswat.
A revival in the demand for gas would not necessarily seal the future of Rovuma or any other LNG project—given that the capital to finance them comes mainly from oil production and also that the gas price is still largely determined in oil markets. “This is an LNG project, but its future may yet come back to the oil price environment,” adds Saraswat.