Low oil prices cast doubt on Mozambique’s Gas Master Plan

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Monetising Mozambique’s vast Rovuma Basin gas reserves via gas to liquids (GTL) projects, as prioritised under Mozambique’s Gas Master Plan, may no longer be profitable if oil prices stay low.

While other downstream industrialisation processes using gas produced in Mozambique’s Rovuma Basin offshore projects could still be viable with oil at $30 per barrel, the giant GTL projects look increasingly dubious, professor Joseph Hanlon told Zitamar News.

Hanlon, who published a paper with the Centro de Integridade Publica in 2015 arguing that Mozambique should push for gas-led industrialisation once the gas comes on stream, said market conditions for diesel have changed rapidly since his paper, ‘Gas for development or just for money’, was written.

Two GTL projects have been proposed in northern Mozambique. The first is a 38,000 barrels per day facility proposed by Anglo-Dutch oil major Shell in partnership with state oil company, ENH. The second proposal was put forward South Africa’s Sasol and Italy’s Eni, the operator of Offshore Area 4, and ENH.

Zitamar News understands that state petroleum regulator INP did not make reference to the Eni and Sasol-led development during industrialisation discussions last year, implying that project may now be off the table.

Sasol told Zitamar this week that they are “evaluating the results” of a feasibility study they conducted with Eni and ENH into the project, “which will be discussed with the Mozambican government at the appropriate time.”

Diesel demand down

The global oversupply of diesel means prices are expected to stay suppressed for at least another two years.

The Volkswagen scandal – in which diesel-fueled cars were found to be cheating emissions tests – has heightened existing concerns in Europe over the impact of diesel engines on air quality and triggered debates over raising taxes on the duel. Should prices rise, diesel consumption growth in Europe’s transport sector, a key consumer of the fuel, could slow significantly, extending the supply glut.

The companies planning to develop GTL in Mozambique hope that by the time their plants start producing, which is not expected until the 2020s, oil prices will have recovered.

However, given slower economic growth in China, weaker European diesel consumption growth and oversupply in the global diesel market, consultancy Business Monitor International does not expect even a modest increase in prices until at least 2018-2019.

Balance of payments

Both the Sasol and Shell projects would target the domestic and regional markets, rather than exports to Europe. While consumers elsewhere in the world are shifting away from diesel use, demand in sub-Saharan Africa, where fuel emissions standards are lower, is expected to rise steadily up to 2040.

From a balance of payments perspective, Mozambique is prioritising diesel production under its Gas Master Plan because buying the fuel makes the largest dent in the government’s import bill. In 2014 the government spent $1.2 billion importing fuel.

While developing local production has long formed part of the government’s plan for economic growth, the currency crisis at the end of last year has renewed government’s determination to reduce its imports.

However, a lower global diesel price will mean the impact domestic production makes on Mozambique’s import bill be less significant.

source: zitamar news

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