The scramble to attract buyers and gain approval for new liquefaction capacity is intensifying. Eager for a share in the rapidly growing global market for liquefied natural gas, producing countries from the US to Russia are vying to secure investment.
But nowhere is the will to become a major LNG player more apparent than on the east coast of Sub-Saharan Africa, in debt-stricken Mozambique.
There, two planned LNG megaprojects – one headed up by Anadarko, and the other by ExxonMobil and Eni – are entering the concluding stages of pre-FID (final investment decision) project purgatory.
Both are greenfield projects, located on the Afungi Peninsula, in Mozambique’s northerly Capo Delgado province. The Anadarko project, Mozambique LNG, will obtain its feedgas from Offshore Area 1, a swathe of deepwater gas fields covering some 2.6 million acres of the Rovuma Basin.
The ExxonMobil/Eni project, Rovuma LNG, will rely upon the adjacent Offshore Area 4. The Coral gas field in Area 4 will also supply feedgas to Eni’s Coral South floating liquefied natural gas project (the world’s first ultra-deepwater FLNG), on which an FID was taken in December 2018.
Together, Wood Mackenzie estimates that Areas 1 and 4 contain 120 tcf of technically recoverable resources, placing the untapped resource potential of the Rovuma Basin among the world’s richest. If both projects go ahead, Afungi could eventually export as much as 90 million tonnes of LNG per annum to meet rising global demand.
Want more articles like this? Sign up to the KNect365 Energy newsletter>>
Economic promise
In theory, the tax proceeds generated from the two projects could transform Mozambique’s economy. Once a poster-child for economic progress in Sub-Saharan Africa, since 2016 the country has been saddled with a debt burden it has little hope of repaying.
Mozambique’s debt-to-GDP ratio skyrocketed following the discovery of USD 2 billion in secret loans from foreign lenders, earmarked for investment in dubious state ventures. In 2017, the debt-to-GDP ratio was 112%. By 2022, the IMF forecasts that it could climb to over 130%.
The hope is that LNG exports from Mozambique will set the country’s economy heading back in the right direction. Ambitious comparisons have been drawn with Qatar, where aggressive LNG investment provided the foundation for one of the world’s wealthiest populations.
In 2017, Mozambique’s GDP was USD 12.33 bn. By contrast, the South African financial services group Standard Bank estimates that investment in the country’s natural gas industry could total USD 128 bn by the year 2025, providing that there is no deviation from the established project timelines.
Be that as it may, Mozambique is unlikely to reap the tax benefits of domestic natural gas production until the late 2020’s or early 2030’s. Before then, some fear that the country could have a hard road to travel.
LNG production in Sub-Saharan Africa will find it difficult to escape the spectre of the “resource curse” – the tendency among economically immature, resource-rich nations to stack up public-sector debt in the expectation of future revenues.
If for any reason the windfall is less generous than anticipated – or if a change in commodity prices undermines export-dependent economies – the result can be economic stagnation and popular unrest. Many critics of LNG development have attributed Papua New Guinea’s economic problems to the effects of the resource curse.
There are some indications that Mozambique may be betting its fiscal stability on the success of its nascent natural gas industry. The Centro De Integridade Publica (CIP) recently released a report suggesting that Mozambique is planning to mortgage its future gas revenues to alleviate the burden of its debt repayments.
Despite the risks involved, there are reasons to be optimistic about Mozambique’s LNG windfall. Critics will observe that the Qatar comparison does not quite hold water – Qatar built its natural gas industry on the back of existing oil production, allowing the country to fund its own projects and retain controlling shares.
But the terms secured by Mozambique should place the country on a strong footing. In 2014, Standard Bank and Conningarth Economists performed a macroeconomic study for Anadarko on the impact of the Mozambique LNG project.
The study forecast that six trains of LNG would “add an additional USD 39 billion to the Mozambican economy by 2035 over a baseline growth case.” Two trains have been confirmed so far for each project, but more are expected.
The study also found that, depending on the number of trains constructed, the total undiscounted government take would clock in at between USD 67 and USD 212 billion over the lifetime of the project.
Social risk
Nonetheless, before the LNG windfall kicks in, promises of future benefits may not be enough to quell the public anxiety generated by Mozambique’s debt burden. Writing in the Oxford Energy Forum quarterly last week, risk researcher Anne Frühauf pointed out that in Mozambique, “the social risk context in which upstream companies operate may worsen as inequality sharpens.”
Previous megaprojects, such as the Mozal aluminium smelter – which in 2013 accounted for an incredible 45% of Mozambique’s electricity consumption – have succeeded in delivering growth. But the rewards of this growth were not evenly distributed.
For the project sponsors, minimising social risk will require demonstrating that exports of liquified natural gas can benefit the economy as a whole.
One thing which may help is that exploration within the Rovuma Basin will also provide a boost to Mozambique’s domestic energy consumption. “As well as opening a new major LNG supply basin for the world, the projects will develop a domestic gas industry in Mozambique that will facilitate national growth and regional industrialisation,” Standard Bank’s Director of Oil & Gas for Southern Africa, Paul-Eardley Taylor, told KNect365 Energy.
Standard Bank anticipates that the majority of Mozambique’s domestic gas consumption will come in the form of gas-to-liquids and fertilisers, with power production and small-scale LNG applications playing a supplementary role.
As domestic gas prices will be set by the costs of offshore production, and not by global supply/demand dynamics, exploration within the Rovuma Basin should provide Mozambique with a fossil resource that is both reliable and affordable.
How soon this resource materialises – and in what quantities – will depend greatly upon the speed with which LNG development in Afungi progresses. The macroeconomic study undertaken for Anadarko is unambiguous on this point.
“The chance of deriving maximum benefits from the revenue streams and domestic gas availability is directly related to the ability to construct the maximum amount of trains as soon as possible,” the authors write.
The cost factor
There is another good reason why moving forward with further trains will be a priority for the project sponsors. Affordability will be critical to securing a share in the emerging markets of Asia. The more trains that are built, the greater the economies of scale, and the lower the prices that can be offered to LNG offtakers.
In July last year, ExxonMobil revealed that the two trains planned for Rovuma LNG would be upgraded to “megatrains”, each able to produce 7.6 mtpa, as opposed to the 5 mtpa planned by Eni. The two upgraded trains will be the first of their kind outside Qatar, and should significantly reduce costs per unit of LNG produced.
Bringing down production costs is a priority because greenfield projects are competitively disadvantaged against cheaper brownfield projects in the US and elsewhere.
North West Australia’s Gorgon LNG, the Chevron sponsored megaproject revealed to have suffered cost overruns of USD 20 bn, set a worrying precedent for greenfield projects in the same mould. Much like the two planned projects in Afungi, Gorgon is in a relatively remote location and relies on offshore exploration to obtain its feedgas.
There the parallels end, however. “In the Australian case… the trade unions are tremendously powerful, and they take you in a particular direction with costs,” Eardley-Taylor says. Cost overruns were further aggravated by Gorgon’s expensive (and ultimately delayed) carbon capture and sequestration initiative.
The challenge in Mozambique has little to do with technology or labour, Eardley-Taylor believes. More important by far will be the project sponsors’ ability to manage the complicated bureaucracy and logistics involved. If they have “organised their plans correctly, the stuff will turn up at the beach at the right time. It’s a bit like the D-Day landings,” Eardley-Taylor offers.
There are also some promising indications that LNG plant costs globally reached their peak at around the time that Gorgon was built. A recent paper from the Oxford Institute for Energy Studies, which analysed project costs over the past four years, concluded that that they are trending firmly downwards.
Among the reasons for this trend identified by the paper are increasing competition between contractors and equipment suppliers, and a preference for industry standardisation over more bespoke approaches to plant construction.
Next steps
The expectation is that both Mozambique LNG and Rovuma LNG will take FID this year. Anadarko has an advantage in that the development plan for Mozambique LNG was approved in 2018, and the project outline has not altered over the past four years.
ExxonMobil’s decision to upgrade to megatrains set the timeline back slightly. But the project sponsors have been working hard to make up lost ground. Official estimates are the Mozambique LNG will take FID in Q2 this year, with Rovuma LNG taking FID the following quarter.
According a Poten & Partners report released in December, Anadarko needed only to finalise a 15 year supply agreement with CNOOC to secure financing. The SPA was agreed on February 3rd. The report lists offtakers on other long-term agreements close to being announced as Tokyo Gas/Centrica, Shell, EDF, Pertamina and Bharat Petroleum.
ExxonMobil, on the other hand, will not rely on the traditional model of using long-term SPAs to gain financial backing. Instead they will take a larger share of Rovuma LNG’s funding onto their own shoulders. Affiliates of ExxonMobil and Eni will also act as partial offtakers, helping the project to move more swiftly through to FID.
The momentum behind both projects means that the likelihood of either set of confirmed trains failing to take FID is extremely low.
As far as future trains go, however, all is still to play for. Whether or not global gas demand, particularly in China, continues to grow at a rate sufficient to merit further investment will be the key determiner.
If it does, Mozambique may yet take its seat among the upper echelons of LNG exporters worldwide.
Join us at Flame - Europe's leading midstream gas & LNG conference.
