Mozambique Oil & Gas: China and the Rovuma-Gauteng Gas Road

The participation of the China Petroleum Pipeline Bureau (CPP) in a 2,600 km pipeline to take gas from Mozambique to South Africa brings technical capacity and financial weight to a project that experts have previously warned looks too risky or expensive to fund, Interfax Global Energy reports.

There are still major questions hanging over the deal, not least who will be the anchor offtaker and why Profin Consulting, an anonymous Mozambican company with no experience in oil and gas, has such a major stake in the project.

However, if it is developed the pipeline will offer Mozambique’s government an opportunity to deliver on a key part of its Gas Master Plan – to provide gas-based industrialisation throughout the country and not solely at its northern tip.

CPP, a subsidiary of state-oil company China National Petroleum Corp. (CNPC), will fund and conduct the feasibility study into the proposed $6 billion African Renaissance Pipeline (ARP), which will run from the Rovuma Basin in northern Mozambique to Gauteng Province in South Africa, with potential offshoots to neighbouring countries. It will also arrange and procure debt financing equal to 70% of the cost from Chinese financial institutions, should the project move forward.

“China’s involvement is a win-win-win solution to this project. It’s a win for China because Chinese contractors get the deal, it’s a win for South Africa and Mozambique because they get the gas they need, and it’s a win for Zimbabwe and Zambia, because they are also short of power,” said Aubrey Hruby, a senior fellow at the Atlantic Council’s Africa Center.

Going global

CPP’s investment in Mozambique follows a wider trend of Chinese companies looking for business overseas as their domestic market shrinks in the wake of China’s economic slowdown.

“Investment opportunities are diminishing in China so it is natural for the country’s big firms to go global. We should expect to see them involved in projects around the world that do not necessarily relate back to the Chinese economy,” said David Dollar, a senior fellow with the Brookings Institution’s Foreign Policy and Global Economy and Development programmes.

Much of CPP’s business in recent years has been driven by China’s need to secure new energy supplies.

By the end of 2014 China had 69,000 km of long-distance gas pipelines, and four new major long-distance routes are expected to come onstream over the next few years: the third West-East Pipeline, the fourth Shaanxi-Beijing Pipeline, the Chinese section of the Russia-China Pipeline, and the Xinjiang-Guangdong-Zhejiang coal gas pipeline.

However, once these projects are complete there will be little need for new ones, especially as growth in Chinese gas consumption is expected to undershoot forecasts. The country consumed 193.2 billion cubic metres last year, well below a target of 230 bcm set in 2011. Consumption forecasts for 2020 vary widely, from 360 bcm to 290 bcm.

And with the government planning to unbundle pipeline ownership from the three state energy giants under its new oil and gas reforms, there will be little incentive for these companies to invest further in new infrastructure at home.

However, exported Chinese labour and skills are not always welcomed abroad. In countries such as Mozambique – where boosting employment, skills and local industry is a government priority – there is a concern that, as major Chinese EPC companies move in, local workers and enterprises will lose out.

The problem has been “overblown in the public psyche”, Hruby countered. “Maybe five years ago this was an issue, but most governments have got much more savvy in their negotiations with the Chinese and mandate how many local workers should be used. When I’ve worked with Chinese companies on these types of infrastructure projects a lot of time they will try to source as much locally as possible because it’s cheaper.”

Beyond OBOR

Although China’s ‘One Belt, One Road’ investment plan does not usually extend as far south as Mozambique, Beijing’s engagement with Maputo is in line with its wider Africa strategy, said Charlotte King, an analyst in theEconomist Intelligence Unit’s Middle East and Africa team.

“[China’s strategy] is motivated by two aims: securing markets for Chinese goods and services (particularly engineering contracts in Mozambique’s case) and expanding China’s ‘soft power’ in geopolitics,” King toldNatural Gas Daily.

China has already invested heavily in energy and construction projects in Mozambique, including an estimated $700 million on the Maputo-Katembe bridge and highways project and $300 million on the Maputo ring road.

According to a report published by the International Monetary Fund in August, Mozambique has a wish-list for $2 billion in further lending from China via a mix of concessional and non-concessional loans.

To allow the country to borrow more, China agreed at the end of last year to waive any outstanding interest payments and reduce the interest it charges on future loans from the current minimum of 1.5%, Mozambican President Filipe Nyusi told reporters at the China-Africa Summit in December.

However, this is just a fraction of the funds Beijing plans to commit to Africa as a whole. At the summit in Johannesburg, China committed to increase the rate at which it lends to African projects by a factor of three until 2018, offering $60 billion in concessional and non-concessional loans and grants over the next two years compared with $20 billion from 2013-2015.

“While you have to be sceptical of some of these numbers because it’s hard to trace exactly how much money is actually being spent, the final figure will be big,” said Hruby. “All that we know is that it’s in the tens of billions and it’s probably closer to $10 billion than $1 billion.”

Beyond Mozambique

As well gaining a stronger foothold in gas-rich Mozambique, the ARP offers the opportunity to improve energy supply in neighbouring Zambia and Zimbabwe, where China already has a strong economic presence.

In both countries, as in Mozambique, it is a mutually beneficial relationship. For Zimbabwe in particular, given its isolation from the West, China offers a much-needed source of credit. “[Meanwhile,] for China, Zimbabwe is a market for its services and it can afford a long-term bet that the Zimbabwean economy will take off eventually,” said King.

But strengthening its foothold in these two economies is unlikely to be China’s primary motivation for the $6 billion pipeline. “There are numerous quicker, cheaper and easier ways to do that,” added King, pointing to South Africa – the continent’s second-largest economy – as a more likely target market for China.

Securing a gas supply from Mozambique into South Africa would put Chinese companies in a strong position for South Africa’s planned gas-fired independent power project programme.

The country’s department of energy is anticipated to launch a pre-qualification tender for the first 3.1 GW of capacity later this year, but the department is expected to eventually contract for at least double that volume over the next 10 years, offering huge new opportunities for power developers.

Drowning in gas

Low oil prices and global oversupply of LNG means both of Mozambique’s LNG projects are struggling to take FIDs.

Although Rovuma volumes are unlikely to hit the global market before the early 2020s, CNPC‘s 20% stake in Eni’s Offshore Area 4 could prove handy for securing supplies in 10-15 years, when China’s gas demand is expected to be at least double the current level.

In the meantime, CNPC will be looking for quick returns on the asset, particularly because it needs to prove to the Chinese government that it did not overpay or buy a dud. The $4.2 billion deal, which closed in 2013, is one of CNPC’s most expensive international acquisitions.

As the outlook for global LNG demand looks uncertain, exports from Mozambique to regional markets could become increasingly attractive, but the ARP will still need to find a large anchor customer for its gas.

Seeing as South Africa’s state utility Eskom has thrown its weight behind the rival Gasnosu pipeline project, “it is not entirely clear who in southern Africa this could be”, said King.

Even if Eskom switched loyalties and started up negotiations with the ARP, it is uncertain if the beleaguered company has the balance sheet to support a project of this size. On top of that, even with access to cheap Chinese financing it is not certain pipeline imports from Mozambique will be competitive against LNG.

According to local media reports, the ARP does not intend to use domestic market obligation gas, so it will not be guaranteed cheap supply. Meanwhile, LNG projects in North America are offering to sell cargoes into South Africa for only $6-7/MMBtu, and it is hard to see the $6 billion ARP competing with these prices.

Even if strategically important, China is not now prepared to subsidise a development that does not promise returns.

“With the Chinese economy slowing down, we expect Chinese financiers to be increasingly selective over the projects that they back – if it is not economically viable, the project will not progress,” said King.(Source: Interfax)