Mozambican Natural Gas: Approval for Eni, More Uncertainty for the Country
On February 23, the Mozambican government gave formal approval to Eni’s plan of development (POD) for its 3.4-million-mt/y Coral floating LNG (FLNG) train, although the company has yet to give a final investment decision. This marks a crucial step in the southern African nation’s strategy to monetize its substantial gas reserves.
The Mozambican share of the Rovuma Basin, which is also shared with Tanzania, is believed to hold up to 150 trillion cubic feet of natural gas. The deposit was first discovered in 2012 by two exploration consortiums led by Eni and Anadarko Petroleum and delineated in more detail in subsequent drilling campaigns in 2013.
A combination of the slump in global oil prices and local regulatory uncertainty stymied initial hopes that Mozambique would become an LNG producer by 2016. At this point, the earliest any potential production is likely to come online is 2020.
Eni first submitted its POD in the last quarter of 2014. It has taken over a year for the regulator to come to an agreement on all the terms and conditions. One of the most contentious areas was the amount of gas that would be allocated for use within the country. The state initially demanded that the operator set aside 25% of total production and supply it to the shore in gaseous form to promote development of local industry.
Yet the high costs and engineering challenges posed by constructing a pipeline from the offshore production site to the mainland made this option unviable.
Instead, Eni has pledged to implement a more comprehensive local-content strategy, though details of this have not been made public. Additionally, the operator has guaranteed to offer condensate—a by-product of the liquefaction process with applications as an industrial feedstock—at a discount to market prices. The pricing formula by which this discount would be calculated is also yet to be released.
The ball is now in the Italians’ court. While Eni executives are reported to be enthusiastic to get the project underway, the current low oil prices appear to have dampened the spirits of the remaining members of the consortium. The other parties involved are China National Petroleum Corp. (20%), Kogas (10%), Galp Energia (10%) and the Mozambican national oil company ENH (10%).
Now, the challenge is to source financing.
The total cost of the project is estimated at between $8 billion and $9 billion. While modest compared to some of the larger projects that have been constructed in recent years, notably ExxonMobil’s $19-billion PNG LNG operation in Papua New Guinea, there are some factors that may lead commercial lenders to view Coral as a risky investment.
Firstly, on the project side, FLNG is a relatively unproven technology and this will be the first such project in the Indian Ocean. The potential for unforeseen snags in both developmental and operational phases is high
Secondly, investors will be keenly evaluating the level of sovereign risk that they are assuming. Although Mozambique has lived through a long period of peace since the end of the civil war in 1992, flair-ups between the ruling party, FRELIMO, and long-term opponents, RENAMO, are a common phenomenon. In January, RENAMO’s secretary general was shot and seriously injured while leaving a press conference, leading some analysts to assert that the peace is a fragile one.
On the other hand, the success of Mozambique’s mining industry has demonstrated the country’s capacity to bring multi-billion dollar resource projects to fruition. Between 2004 and 2011, Brazilian mining giant Vale invested over $4 billion in setting up its Moatize mine. Unfortunately a weak coal market and logistical-teething problems have limited the operation’s profitability.
The third and most basic factor that bankers will be considering is market fundamentals, which are not looking so bright. A slew of new LNG projects in Asia and Australia have led to oversupply in the East. In parallel, subdued economic growth in the primary markets of China, Japan and South Korea suggests that prices are unlikely to strengthen in the near future.
That being said, financiers are likely to take a long view of the project. Recognizing that the oil and gas industry is cyclical and that prices will eventually rise again, development of Coral is almost inevitable; it is simply a question of when it is going to happen. The quality and scale of the resource dictate that eventually it will be exploited. Meanwhile, Mozambique will continue to be a country on the edge of a resource boom.
This article was written of research being conducted by GBR for its Sub-Saharan Africa Oil and Gas Handbook 2016, which will be published in October. The 2015 edition of the handbook can be accessed here. The GBR team is currently in Mozambique conducting the necessary research and interviews for the mining and oil & gas sectors. To participate in this report, please contact Molly Concannon at email@example.com or +258 82 559 4115.