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Doubts linger in the Rovuma

Mozambique offshore gas could transform its economy. But plans to use it domestically or build a lucrative export business have hit a number of problems

With an estimated 180 trillion cubic feet (cf) of natural gas lying in the Rovuma basin offshore its northern coast, Mozambique believes it is on the cusp of economic transformation. Last year, the metical lost half its value against the dollar, consumer inflation soared and analysts predicted rioters would take to the street. But this year, the money is supposed to start pouring in as investors start to develop the gas trove. 

Whether or not that happens though, is debatable. The accusations thrust at the government in recent times include widespread corruption, and more recently atrocities that have led to an estimated 6,000 villagers in the country’s north fleeing to Malawi. That, coupled with various international interests attempting to force development in different directions, is making progress slow.

Turning Rovuma’s reserves – equivalent in size to Nigeria’s – into an industry will be Sub-Saharan Africa’s biggest-ever development, says the IMF. The size of the financial boon is hard to fathom: the IMF expects the investment influx will amount to $110bn, dwarfing Mozambique’s annual GDP of just $16bn. By the middle of the next decade, the country could be the world’s third-largest exporter of liquefied natural gas, yielding GDP growth of 24% a year and propelling Mozambique, the world’s poorest nation when its civil war ended in 1992, to middle-income status.

That, at least, is the potential as the IMF sees it. The predictions are based on massively increased assumptions about the volume of LNG that Anadarko, operator of Rovuma’s Area 1, and Eni, operator of Area 4, are planning to produce. The fund said in January that after discussions with the companies it thinks 13 onshore and four floating LNG trains will be built during the life of the project. Previously, it expected just four trains in total.

The two projects are following different paths. Anadarko, which plans to pipe the gas ashore and liquefy on land, has an integrated upstream and midstream structure for its special-purpose company. Eni will divide upstream extraction from its midstream liquefaction business, which initially it plans to carry out on floating platforms at sea.

But there is some crossover. Anadarko leads development of the onshore LNG park, but Eni remains a partner in the project. Petroleum Economist understands that the Italian company’s onshore plans were a major factor in the IMF adjusting its projections. Once Anadarko has brought its LNG facilities on line, economies of scale will make it worth Eni’s while to invest heavily in further trains there.

Yet the projects are not yet underway. On 28 January, a representative of state oil company ENH, which has stakes in all oil and gas projects in Mozambique, said the companies must make their final-investment decisions this year. Oil’s slump, a glut of global LNG supply, and the weakness of seaborne-gas prices in Asia – the destination for any East African supply – mean no one would be surprised if further delays occur.

No one has yet lost money betting on postponements to Mozambique’s LNG projects – and, in fairness, the same could be said of most LNG proposals worldwide. While Anadarko, Eni, and the government all insist final decisions will come in 2016, industry sources admit in private that the timing could well slip to 2017. Even then, Eni’s floating LNG project could be up and running by 2021 – but for the more significant onshore LNG trains, 2023 seems the best guess for now.

Interests in outlooks

The IMF projections are raising hopes in Mozambique, but analysts are sceptical. Anne Frühauf, of Teneo Intelligence, a leading authority on Mozambique and the Rovuma projects, thinks the fund’s outlook is “very optimistic”. She feels the IMF has underrated the risks of further significant delays.

The motivations for the IMF’s bullish outlook have caused some disquiet. Its LNG projections underpinned a debt-sustainability assessment of the country, which justified a $280m credit facility granted to Mozambique in December 2015. This helped it overcome a foreign-exchange crisis precipitated by the first repayment on an ill-advised $850m Eurobond that was taken out by state-owned fishing company Ematum and used to pay for fishing boats and defence vessels.

Colin Waugh, a long-time resident of Maputo and principal at Circuit Research & Investment, an advisory firm, believes the IMF is now an unreliable analyst of Mozambique’s gas prospects. “Now that the IMF has a bigger financial vested interest, having thrown a further chunk of funds in to Mozambique to help stave off the currency crisis, it is less of an objective observer of the outlook,” he says.

Eager to avoid five years of annual repayments of $200m, plus interest, to Ematum’s creditors, the government is examining the possibility of paying only the interest for the term, and making a balloon payment once the country is rolling in petrodollars in 2021-2. “The government, Ematum, the whole enterprise is really banking on the LNG”, says Frühauf. “But the market conditions are really bleak; the only thing we can hope for is that the gas companies take a long view with their investment decisions.”

Mansur Mohammed, South and East Africa upstream research manager at energy consultancy Wood Mackenzie, says the projections rely on some serious crystal-ball gazing. “To commercialise the entire gas volumes discovered so far and to achieve 12 onshore trains, one would have to assume a long-term view for Mozambique LNG’s supply growth beyond 60 years”, he says. “This ramp up will depend on Anadarko and Eni’s ability to secure additional sales agreements and project financing, future LNG market conditions and competition from other LNG supply areas.”

Mozambique has been consistently advised that it needs to get its LNG projects up and running before a window of opportunity shuts, as other new producers start exporting. But according to Paul Eardley-Taylor, who leads Standard Bank’s oil and gas team in Johannesburg, “the window of opportunity has kind of got better” since his bank produced a seminal report on the Rovuma projects in 2014.

“The original timeframe [to start producing] was 2019-20”, says Eardley-Taylor. “That’s when the world has too much LNG, even before the demand slowdown. Where the buyers have indicated they do need the stuff is 2022-23, when suppliers like Malaysia and Indonesia are expected to taper down.”

Yet those global fundamentals could mask a threat much closer to Mozambique. By 2023, its neighbour on the other side of the River Rovuma could be a competitor. Tanzania hopes its own Rovuma basin projects, led by BG Group (or Shell), Statoil and ExxonMobil, could take their own final-investment decision in 2018. This would be a “huge concern” for Mozambique, says Frühauf, “as it raises risks on the viability” of the Area 1 and Area 4 projects.

“Mozambique LNG will be attractive to established LNG buyers looking to diversify their portfolios to include new supply areas”, Wood Mackenzie’s Mohammed says. But there is a question mark over whether Mozambique would be differentiated from Tanzania in the minds of buyers, if both projects come on line at the same time.

Structural hurdles

Other more local risks are rising too. Eni’s proposed project has faced some political opposition because of its dislocation from the Mozambican economy – its floating, offshore development would not provide much in the way of either jobs or gas for Mozambicans. To Eni’s advantage, approval of the development would avoid the kind of thorny issues over land rights and resettlement that Anadarko is now grappling with.

In an earnings report issued on 1 February, Anadarko confirmed that government approval for its LNG park, which it wants to build on the Afungi peninsula in Cabo Delgaro province, remains a risk to the project. The company is facing a potential legal challenge from civil society groups unhappy at the way Anadarko conducted the consultation process. An article published in December by Zitamar News, a Mozambique-focused business publication, quoted Fátima Mimbire, of the influential Centro de Integridade Publica (CIP) think tank, saying that her organisation and others “already have lawyers ready” to challenge the development. “Since the government, as state manager and defender of communities’ rights, is not doing its job, our next step as a platform is to run a litigation process,” Mimbire said.

Another civil society activist, however, who attended the last round of consultations in and around Afungi, says all sides are losing patience with the process, and are keen to see progress. “The government and Anadarko and Eni are making sure that this is the last consultation,” says Tomás Queface of public accountability NGO Olho do Cidadão. “People here are also tired. They want all this to finish.”

One major step forward for both projects came last year when Anadarko and Eni signed a unitisation agreement for the fields straddling their areas. Anadarko also signed a memorandum of understanding with the government stipulating how much gas the company would supply to Mozambique’s domestic market.

Mozambique map

Since this issue arose, however, global oil and gas fundamentals have shifted against resource owners and in favour of investors. It makes Maputo’s position more difficult. “My concern is that the initial priority will be fiscal, and they’ll let the domestic gas slide”, says Teneo’s Frühauf. That is, to secure the investment the government will sweeten the terms by lessening its demand for supplies to the local market, where prices are much cheaper than those the companies hope to receive for exported LNG.

Although Mozambique’s gas consumption is small, the government hopes gas can drive a new industrialisation strategy including power generation and various downstream processes. To that end, Mozambique’s petroleum law requires all gas producers to hand over 25% of their production to the local market. However, the law does not cover Areas 1 and 4, where agreements pre-date the new petroleum law. In practice, the domestic-gas requirement for each of those projects is up for negotiation – with the government believed to be trying to drive a hard bargain.

Pushing feasibility

Not everyone agrees. Joseph Hanlon, a development economist with a long association with Mozambique, argues that the low oil price could lead Mozambique to keep more of the gas – even in LNG form. “Mozambique taking more of the LNG becomes more viable if Eni and Anadarko are having trouble selling the LNG,” he says. “They [the companies] might say to Mozambique, ‘OK, we’ll give you it as LNG at a lower price’.”

Last year, Hanlon published a paper on Mozambique’s potential for gas-led development, arguing that the government should push for more than 25% to go towards the country’s industrialisation effort. Hanlon now accepts that the economics have changed somewhat. The low oil price, coupled with greater awareness over the environmental dangers of diesel, now make gas-to-liquids projects proposed by Shell, and a joint venture of Sasol and Eni, economically unviable.

For other downstream gas developments, however, his enthusiasm is undimmed – in particular fertiliser, for which Mozambique has a great need. The process to make fertilizer requires breaking up methane molecules to produce synthesis gas, or syngas, which can be used as a building block for a number of other products. ”Once you’re starting to produce syngas, you can take off some syngas to do other things,” Hanlon says. “At that point you start to look at chemicals. I think methanol would probably be worth doing.”

The downside of downstream developments is cash flow. While such projects make long-term economic sense, they delay the income stream, admits Hanlon – and with the global market price as low as it is, domestic consumers will require a rock-bottom price. “The problem for Mozambique is that they’re going to have to agree more or less to give away the gas, at current prices. So they’re going to give up on royalties”, he says.

That is a problem for a government which is desperate for cash. In the short term – well before the first LNG vessel sets sail – its best hope for an injection of foreign exchange is for an acquisition in the Rovuma basin projects, yielding a capital-gains tax windfall for the treasury.

ExxonMobil has long been rumoured to be a potential buyer of Anadarko, whose slumping market value of just $20bn may whet the supermajor’s appetite. Alternatively, Eni is keen to sell up to half of its 50% stake in Area 4, feeling it has excessive exposure to the project.

But the bigger exposure to the projects belongs to Mozambique itself: either if the developments fail to get moving or if the country falls victim to the resource curse when they do. Rafael Sarandeses, managing partner of merchant banking firm ThirdWay Africa, says the country should be finding alternative routes forward. “At this point there is a broader story to be crafted around Mozambique’s investment potential”, he says. He picks infrastructure, tourism, agriculture, financial services and technology as sectors that the country should focus on instead.

If and when it happens, gas should be a huge bonus for Mozambique. But, says Sarandeses, the starting point for these alternative sectors is low enough to ensure a decent rate of growth over time. “We still believe there is a nation-building effort happening beyond the gas, and this is the story that the world needs to hear about Mozambique.”

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