Mozambique liquefied natural gas, (LNG) stands to transform the country. Mozambique is looking to gas exports to raise the government’s revenues and reduce a heavy dependency on donor aid which it has relied on since independence from Portugal in 1975. Developing the country’s reserves and scaling up a currently planned LNG facility to its potentially multi-train capacity, could establish Mozambique as one of the largest exporters of LNG, a commodity of increasing global prominence, says Simon Ashby-Rudd, global head, Oil & Gas at Standard Bank.
Some of the world’s biggest offshore natural gas fields lie off Mozambique, which despite extensive coal and gas discoveries remains one of Africa’s least developed markets. Lacking capital to develop multi-billion dollar LNG export terminals, Mozambique has to attract foreign investment for financing. The government hopes to bring in a substantial $30bn in FDI most of which will focus on the natural gas sector to build capacity to produce 20m tonnes per year of liquefied natural gas (LNG), with first exports due to start in 2018/2019.
In support of the search for FDI the government is planning to introduce new energy and mining laws that will set out a clear regulatory and taxation infrastructure; though these were expected to have been finalised last December and the government concedes that various laws are still in the formulation stage.
To date it remains a market for intrepid and experienced players and it will be some time before the country’s LNG output comes on stream in a meaningful quantity. Italy’s Eni and US developer Anadarko Petroleum Corporation are among a discrete list of potential investors who are looking to launch LNG exports from Mozambique beginning in 2018/2019.
Even so, a tough physical environment, challenges around getting the gas to the country’s ports and delays in reaching firm development agreements with the government in the run up to the publication of formal legislation means, say experts, that Mozambique won’t find it easy to secure all the financing it needs to expand its promising energy sector as rival LNG exporters offer a much less risky development environment.
At the beginning of this year the IMF forecast the southern African nation’s economy to expand by 7.5% in 2014 from 7% the previous year, but noted that delays in implementing reforms to tax administration and public financial management could hurt medium-term growth. Additionally, Mozambique’s credit rating remains substantially below investment grade, Standard & Poor’s, Fitch Ratings, and Moody’s class Mozambique’s credit rating as highly speculative.
The reality is that the Mozambique economy presents little structural transformation, relying mostly on mega-projects in the aluminium, extractive industries and the energy sectors.
The capital intensive nature of capital goods projects in the country means that even when they do come on stream they do not generate enough jobs to provide sufficient opportunities for the fast growing young population.
There are also structural imbalances in the economy which urgently need tackling. Fiscal revenues, for instance, cover little more than 65% of the annual budget, while mega-projects benefit from generous fiscal incentives. Weak human capital and the country’s deficient infrastructure seriously cripple economic and social development. Increasing public spending on infrastructure and salary increases contributed to the widening fiscal deficit, while the narrow tax base limits revenue collection growth.
At the same time, external aid continues to contract. The rise in external debt levels to fund the country’s public investment programme, particularly from non-concessional borrowing, increases the demand that public investments generate positive economic returns.
There are also political considerations in play. Mozambique will hold national elections in October to elect a successor to President Armando Guebuza, who has served two terms and cannot stand again. There is still a small scale civil revolt that flares up from time to time. The opposition Renamo party in February ended its boycott of parliament, which was to protest against the results of the October 2014 general elections. The risk of political volatility nonetheless persist; many of Renamo’s grievances about political power remain unsolved, while several aspects of the Frelimo-Renamo peace deal of September are unclear. Armed partisans of the Renamo opposition movement who remain opposed to the president’s Frelimo party cause international investors some concern over the country’s long term stability.
US oil major Anadarko Petroleum is building the first two of up to 10 plants in Mozambique to liquefy gas for export. Its gas finds in Area 1 of the country’s Rovuma Basin will feed the initial 10m tonne per annum (mtpa), $23bn export project.Standard Bank estimates that developing LNG in Palma will facilitate a real GDP increase of 800% by 2035 with the Mozambique government receiving in excess of $200bn in receipts over the life of a 6-train facility. The opportunity scale for stakeholders across all sectors is therefore enormous.
“There is [also] significant scope to provide gas to the local market to foster gas-based industrial development,” says Ashby-Rudd. “This option has attracted interest from a number of players across power, fertiliser/petrochemicals and gas-to-liquids (GTL). As Mozambique develops into a global energy player, so too can it potentially become a regional energy hub providing petroleum products, chemicals and power to neighbouring countries. Regional LNG import options are developing at a rapid pace and Mozambique will also be well-positioned to serve these.”
South Africa recently announced the procurement of approximately 3 000 MW of gas-fired power. South African has no material gas-producing assets capable of supporting such plants and could soon require LNG imports. “A 2015 Final Investment Decision (FID) of Mozambique LNG would be a game-changing development for Mozambique and be key to unlocking future investment in the country and begin the geopolitical repositioning of Mozambique,” he says.
However, there is some uncertainty surrounding the timeframe for Anadarko’s 10 mtpa LNG project in northern Mozambique continues to loom large. Gas developer Anadarko is more positive saying that it may make FID on its 10 mtpa Mozambique LNG project this year and produce first LNG in 2019, John Peffer, the company’s Mozambique country manager, told delegates at the Deepwater East & Southern Africa Congress in Maputo in mid-April. Some industry watchers suggest late 2016 or even 2017 is more likely. Even so, according to Peffer, “It is doable, but that timing is elastic and it depends on how quickly we can get these final approvals,” he told delegates.
Anadarko is now in the final stages of selecting a contractor for the onshore portion of the project. “We’re down to two joint ventures and we’re evaluating and working towards making a selection in the near term,” said Peffer. The US independent has three consortiums bidding for the offshore contract and is waiting for final FEED submissions.
The company is working with the government to finalise a number of agreements, including the final plan of development for the Golfinho gas field and the resettlement action plan for the Afungi project site. The company also still needs to convert the heads of agreement it has signed with Asian buyers for 8mt of LNG offtake from the project into binding sales and purchase agreements, and secure debt financing for the project – which is expected to cost in excess of $20bn.
However, the prospect of sustained low oil prices, nuclear power plant restarts in Japan, cheap shale gas exports from the United States and cheap pipeline gas imports to China from Russia suggests Asian buyers can take time before signing firm offtake commitments. Press reports in the autumn of last year suggested that Mozambique was quietly finalising 20 year offtake agreements with a variety of Asian buyers; though these have not been officially confirmed. Preliminary deals have been reported to have been reached to sell its LNG to China National Offshore Oil Corp, Japan, Indonesia’s state-run Pertamina, the United Arab Emirates, Thailand’s PTT and companies in India.
According to Ashby-Rudd, “While moving gas from the Rovuma Basin to southern Mozambique is subject to its own economics and wider strategic consideration, there remains potential for gas-based development around Maputo through, for example compressed natural gas, (CNG), in the short-term or a dedicated pipeline in the longer term. Such developments could facilitate industrial development around Maputo, as well as meet South Africa’s energy shortfall and generate additional revenue streams. These would of course be subject to other power/petrochemical/GTL developments further north and continued progress on the rolling out of further LNG trains over the next decade”.
He also notes that gas-based industrialisation leveraging multiple LNG train developments has underpinned the economic growth of Qatar, Oman, and Trinidad and Tobago. “While there is large potential for this to be replicated in Mozambique, outstanding items still remain in realising such an opportunity,” he says.
This includes finalising the development of the LNG facility near Palma and extending this to further trains which underpin the scalability of domestic gas volumes; concluding domestic gas sales agreements (including volumes and pricing structures) and fiscal terms surrounding the resultant projects, noting that multiple field developments are needed; finalising the gas allocation mechanism to individual projects; and addressing project-specific requirements and permitting (e.g. IPP bid-round procedures; GTL facilities are underpinned by different dynamics relative to petrochemicals and each will require special considerations).
In terms of the domestic market, gas supply will come from the Prosperidade and Mamba fields which are expected to be developed for trains 3 onwards, says Ashby-Rudd. “Therefore, completing the first trains and the associated infrastructure upon which more trains will be developed should be a priority and is seen as a first step for truly unlocking the potential domestic gas holds for Mozambique, in line with the Gas Master Plan,” he states.
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