GAS SALES AGREEMENTS FOR ROVUMA LNG: How Price is Determined and What it Means for Government Revenue

Sales agreements for Rovuma LNG are being negotiated at a time when gas prices are more volatile than ever. Past projections for government revenue have been based on price forecasts for Asian LNG that are no longer credible due to shale gas production in the United States and plummeting international oil prices. Lower prices mean less government revenue and might put the future expansion of Rovuma LNG at risk, says the Mozambique Center for Public Integrity (CIP).

Assessments of potential revenues to the Government of Mozambique from Rovuma LNG focus overwhelmingly on the volume of gas to be produced and the tax rates that were agreed in the 2006 contracts. Little attention is given to the single most important determinant of government revenue – the price at which the LNG will be sold.

If prices are lower than expected, early revenues will be greatly reduced and will grow much more slowly than current projections assume. The future price of LNG is largely outside the control of Mozambique; it will be determined by international market prices. But government revenue will also be determined by the long-term gas sales agreements currently being negotiated by Anadarko and ENI, and by the way in which the vague valuation clauses in the 2006 contracts are interpreted.

Mozambique already has painful experience from the effects of a bad deal on the sale price for natural gas, where Pande Temane gas is sold inMozambique for 1/5th of its value in South Africa. The pricing formula agreed in 2002 guarantees that Mozambique will never receive a fair share of the financial benefits.

Case studies below on Equatorial Guinea and Yemen reveal that other developing countries have lost massive revenue on LNG due to unfavorable pricing agreements. Due to the shale gas revolution in the United States and the result crash in oil prices, there is greater price uncertainty in the international LNG market now than at any time in recent decades. Although first exports of gas are still at least five years away, these long-term sales agreements are being negotiated now as the basis on which the companies will borrow tens of billions of dollars to build LNG facilities in Mozambique. The plausible sale price for Mozambique LNG is much lower, therefore, than has been assumed in the revenue forecast efforts by the IMF and Standard Bank. In order to protect future revenues, the Government should:

• Develop an independent position ontrends in the international LNG market in order to protect Mozambican interests and actively participate in the negotiation of these long-term sales agreements;

• Divide potential sales markets between Anadarko and ENI (as was done by Qatar) in order to ensure that competition between the two companies does not drive down price;

• Ensure that the gas sales agreements follow international best practice and include both price review clauses (at least every five years) and destination clauses that guarantee a fair profit split if gas is shipped to an alternative market (see case study on Equatorial Guinea); and,

• Resolve gaps in the 2006 Rovuma contracts on how LNG should be valued by agreeing to a “netback” price based on final sale value less shipping and regasification costs.

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