Mozambique Gas: The race for markets

Steady progress is now being made on the second great new strand to the national economy: the gas industry.

Two big consortia led by Eni of Italy and US firm Anadarko respectively have agreed to jointly develop an onshore liquefied natural gas (LNG) plant that will allow the gas to be exported around the world. They have now identified their preferred site for the project: Afungi in Cabo Delgado’s Palma District.

About $20bn will be needed for the first four trains: a huge sum but even bigger when the project is being undertaken by oil companies that are not among the very largest in the world. It will be interesting to see whether Shell or one of the US majors seeks to buy a stake in the venture. The overall plan for 50m tonnes a year production capacity by 2030 would cost up to $50bn, although there could be savings because of the benefits of scale.

Anadarko is the operator of Rovuma Offshore Area 1, which holds an estimated 65 trillion cubic feet of gas. In March, the company announced that it had already sold two thirds of its share of production from the project, apparently to Asian importers, and the remaining third is also likely to be sold to customers on the opposite side of the Indian Ocean. The final investment decision on the scheme is expected by the end of this year.

Aside from the joint onshore venture, Eni hopes to order two floating LNG (FLNG) plants to be deployed on other newly identified fields in Mozambique. Floating LNG facilities are basically huge ships which receive natural gas via pipeline from a number of wells and have the capacity to turn it into LNG on board before offloading on to LNG carriers for distribution to overseas markets.

It is a very new technology and Ophir Energy is the only company to have previously sanctioned the use of FLNG production in Africa, on Equatorial Guinea’s Block R. However, there are questions over the use of FLNG vessels off the coast of Mozambique, as the area is affected by tropical storms.

The final investment decisions on both fields are expected to be taken by the end of next year, with first production scheduled for five years later, although Eni has appealed for expressions of interest for the first FLNG plant’s front end engineering and design (FEED) contract. Production capacity of 2.5m tonnes a year is anticipated for each vessel.

The biggest Eni find to date is the Mamba Field, with an estimated 50 trillion cubic feet, while Area 4 holds another 35 trillion cubic feet. These are huge volumes, as just 5 trillion cubic feet is generally considered sufficient to justify the construction of a single LNG production train. An Eni spokesperson commented: “The exploration campaign executed in Mozambique in the Area 4 offshore the Rovuma basin proved the Mamba gas complex to be the largest discovery in the company’s exploration history.”

It is important that the investors stick to their construction schedules, as a raft of other LNG projects are scheduled to come on stream at roughly the same time, so it could become a buyer’s market. Australia and Russia are increasing their existing LNG production capacities, while the US and Canada are transforming themselves from importers into exporters as a result of unconventional gas projects.

Time is of the essence
Mozambique is particularly well placed to supply India but US, Canadian and Australian facilities would be far closer to the world’s biggest LNG importer, Japan.

India’s Oil & Natural Gas Corporation (ONGC) bought a 10% stake in the Anadarko-led project in partnership with Oil India for $2.5bn and then another 10% stake in its own right for another $2.6bn. China National Petroleum Corporation paid $4.2bn for a 20% share in the Eni consortium, while South Korea’s Kogas already held a stake in the venture.

However, investors may struggle to secure the necessary finance. Paul Eardley-Taylor, head of oil and gas for Southern Africa, Standard Bank, said: “Mozambique’s credit rating is substantially below investment grade, and it may face trouble finding the necessary cash in an environment in which several countries are vying for investment to begin gas exports. Canada, the US and Australia, which are all introducing LNG export facilities or planning to build them, have much better ratings and they will find it easier than Mozambique to attract the necessary capital.”

This seems overly pessimistic. The government is finalising new energy legislation to determine taxation and regulatory rules for the LNG project and future oil and gas ventures. This should enable it to maximise the financial benefit of its emerging gas industry and assist investors in securing the finance to fund construction.