The government began spending before its resource boom kicked in, but some gas developments are beginning to move in a climate of increasing international competition
A resource revolution delayed
Since 2010, the c ycle of discovery and disappointment has been rough on Mozambique. The agreements and finance needed for the multibillion-dollar gas industry to take off have been hard to come by. But in June of this year Claudio Descalzi, chief executive of the Italian oil and gas multination Eni, flew to Maputo to launch the construction of a floating liquefied natural gas plant (FLNG) known as Coral. It is the first project to develop Mozambique’s gigantic gas reserves. The second will be the Mozambique LNG Project (see graph on page 88). The Coral reserves lie in the waters offshore of Cabo Delgado Province, in the north of the country. The deposits discovered so far contain an estimated total of 140trn cubic feet of natural gas, which makes it the most significant discovery in the gas sector in the past decade. Areas 1 and 4 of the Rovuma Basin, where the discoveries were made, belong respectively to US firm Anadarko a nd Eni. At f ul l production, Mozambique could become the world’s third-largest gas producer, just behind Qatar and Australia. But with the recent heydays of the oil and gas industry seeming a distant memory, Mozambique’s road to become a major gas player has been bumpy. With the gas price now 40% lower than it was a few years ago, and an increase in gas production worldwide, a recalibration of expectations for all stakeholders is under way. Certainly, oil companies are betting on the growth of the LNG market and are boosting investments and production across the world. Gas has lower carbon emissions than coal and oil, and it serves as a bridging resource in the transition between fossil fuels and the age of renewable and cleaner energy. However, there is concern that this optimism may drive a glut in the market. Some industry sources estimate that LNG supply will rise by more than 50% over the next five years. Eni is investing billions of dollars to bring the huge Zohr field in Egypt into production by the end of this year. That is another reason for Mozambique to speed up developing its resources. The country is still weathering a debt crisis that added pressure to an economy already under strain from the crash of commodity prices. It badly needs foreign investments in hard currency, like those that would be involved in the development of the LNG facilities. The main national development plan calls for the construction of an onshore LNG facility, shared by Area 1 and Area 4 operators, that will liquefy the gas for export. The cost of the first phase of the onshore LNG project is estimated to be $12bn-$15bn – figures that are bigger than the country’s gross domestic product in 2016. And with weak domestic industrial and oil services capacity, much of the money is likely to be spent on major international firms like US company Baker Hughes, which has been contracted for work on the LNG and FLNG plants.
FOCUS ON CORAL
With delays on the main onshore plant, Eni has prioritised the development of its nearby Coral field, which is thought to hold reserves of 16trn cubic feet. Eni signed an agreement with BP to make it the sole LNG
buyer last year, reportedly settling on a lower price to bring home the deal. Eni was then able to arrange the financing for the new FLNG facility, which is due to start production in 2022. The grand style of the inauguration and press conference on 1 June expressed more a call for confidence than joy at fresh cash arriving. Mozambique’s President Filipe Nyusi admitted that, to realise the project, the country had had to sacrifice future revenue and domestic gas development, as the Coral FLNG project does not have any provisions to boost domestic gas supplies. But Nyusi said he hopes the green light for the FLNG facility will be perceived as a vote of confidence for the country. Given the huge corruption issues surrounding the 2013 Ematum tuna bond – a case where the government borrowed money that it is struggling to pay back and part of which has been misappropriated – it is perhaps understandable that the Coral project is being feted.
Claudio James, director general of Petrogas, a subsidiar y of Mozambican fuel company Petromoc, says: “The final investment decision (FID) for the Coral FLNG project has changed the whole trust and belief about making such projects in Mozambique, especially because of the financial market situation. This is the first FLNG project that has gone through project finance.” He adds: “And the involvement of an off-taker such as BP, 13 commercial banks and three concessional banks shows that Mozambique has the trust of both the financial and oil and gas industries.” The Coral development will not have a major impact on the local economy, however. Tavares Martinho, the executive vicepresident exploration and production at ENH – the Mozambican national oil company and a partner in the gas projects, points out: “The development of the sector does not depend on the FID made for FLNG in Area 4. The most important activities will appear as FID for the onshore LNG [is] made. Most of the work for the FLNG will be done outside of Mozambique.” The government will earn substantial revenue from the Coral project eventually, but only after the oil companies have recovered their costs. This means the hope for the country to see major benefits from its gas lies with the onshore LNG plant that will make the bulk of Mozambican export capacity. In March, Eni s ol d a 2 5 % stake of Area 4 to US supermajor Exxonmobil. The stake makes Exxon the operator of the Mamba field, which shares its gas reservoir with Anadarko’s Golfinho field in Area 1. The gas will be processed in the planned onshore LNG facility using infrastructure that Eni/ Exxon will own in partnership with Anadarko. Once it settles in, Exxon could bring new momentum to a project that has been losing steam and has been plagued by delays. Financing the LNG facility is proving challenging because of the low current price of gas. The project faces competition from several other new developments in other countries. These are closer to coming online and, like Mozambique’s, are aimed at markets in Asia.
At the moment, Anadarko only has an informal agreement for its Rovuma gas, and binding sales contracts seem far away. Without guaranteed revenue and hard numbers to present to the lenders, there is not a solid base for financing. ENH’S Martinho points out that, despite progress made in agreements between the Mozambican government and the oil companies, there is “not much we can see in the coming months on the onshore LNG”. Nevertheless, the government is trying to put in place plans to benefit domestically from the gas. “The local industry is not well prepared, but there are a couple of initiatives that are taking place to guarantee their involvement, like a new national content law, for example” says Petrogas’s James. The Maputo government has been working on the draft national content law, which will set out provisions for the employment of locals in major projects and for the use of local companies as subcontractors. Years ago, donor governments warned that the government needs to speed up the formulation of its national content policy or risk missing an opportunity to prepare the ground before the oil companies get started. The government is also awarding tenders to international players to help kick-start a local gas industry so that Mozambique can benefit from domestic gas without being solely reliant on LNG export. “Currently the government has adjudicated two projects [urea for Yara and gas-to-liquids for Shell], the gas master plan has some guidelines for domestic gas and the government is currently negotiating access to more domestic gas from Mamba and finalising the numbers for the Golfinho field,” says Petrogas’s James. Honoré Banda
Mozambique is having to recalibrate its expectations for a gas-fuelled boom