Mozambique Oil & Gas: “Debt crisis will not affect LNG finance” – Omar Mitha, ENH CEO

The financing of Mozambique’s flagship 12 mtpa LNG export project will not be affected by the debt crisis engulfing the East African country, the head of its national oil company has said.

ENH, Mozambique’s NOC, is wholly owned by the state, “so theoretically any deterioration in the country’s credit rating would be bad for the company”, Omar Mithá, the company’s chairman, conceded to Interfax Natural Gas Daily on the sidelines of the Mozambique Mining, Energy, Oil and Gas 2016 conference in Maputo last week.

“[However,] the Rovuma Basin undertakings are regarded as megaprojects on their own, with a certain decree law and legal framework. They [are being] constructed on a project finance basis, meaning that the balance sheet of the sponsors is completely isolated from the project itself,” he said.

“Such being the case, the financiers will look at the [risks of the] project on a standalone basis […] not necessarily [at] one company with a minority stake that will dent [the rating of the project],” he added.

Despite Mithá’s reassurance, donor confidence in Mozambique is at an all-time low following revelations in April that the government is holding $1.2 billion in undisclosed state-guaranteed debt, in addition to the controversial, recently restructured $850 million EMATUM bond. The International Monetary Fund and World Bank have suspended development loans to the country while they assess whether the undisclosed borrowing makes Mozambique’s debt burden ‘unsustainable’.

EMATUM is Mozambique’s state tuna fishing company. The state-backed $850 million bond was taken out in 2013 ostensibly to finance a tuna fishing fleet, but was in the end mostly spent on maritime defence.

Other key donors, including the EU and the UK’s Department for International Development (DFID), have halted financial aid while they work out a response to what the DFID described as the country’s “serious breach of trust”.

Conducive climate

Nevertheless, Mozambique has been creating “a climate that is conducive to more foreign investment”, said Mithá. “[Mozambique] has shown its commitment to comply with the treaties that it has signed in different forums. Mozambique, at this juncture, is not prepared to play the ‘bad boy game’, through nationalisation or export creation, or something of the like.”

If ExxonMobil buys into Offshore Areas 1 and 4 and takes over the development of the combined onshore LNG project, this would be a further stamp of confidence for the country’s potential as a secure place for investment and as a future leading LNG producer, Mithá said.

“We would see that as positive because Exxon is very much experienced. They’ve done this in the past […] they’ve got a very strong balance sheet, liquidity as well, and they would act as a magnet […] for foreign direct investment,” Mithá added.

If Exxon buys stakes in the Rovuma Basin blocks it would also provide a much-needed boost to government finances, as Mozambique has introduced a 32% capital gains tax on oil and gas asset sales.

Current Area 1 Operator Anadarko would also benefit from the cash injection. The United States-based independent has seen its share price fall by 44% over the past year and has had to slash capex for 2016 by nearly half to ride out the low oil price wave.

“It’s not bad at all for Anadarko to sell activities to recuperate liquidity, consolidate its balance sheet and then reinvest at the appropriate moment. This is normal and not a sign of weakness,” Mithá told journalists at the conference.

Exxon is negotiating with Eni only to buy a stake in Offshore Area 4. The deal would be structured so that Eni would remain operator of the 3.4 mtpa Coral FLNG project while Exxon would operate the giant Mamba gas field and the planned onshore liquefaction plant. Omar told conference delegates he is confident the $9 billion Coral FLNG project can reach an FID this year.

Anadarko is now negotiating with buyers in Japan, Indonesia and China to convert its heads of agreements for 8 mtpa of offtake into sales and purchase agreements.

However, the project will only need to lock down binding agreements for 9 mtpa – rather than the plant’s full 12 mtpa output – to secure debt financing, Mithá told Interfax Natural Gas Daily. The partners are in discussions with “new emerging markets and other Asian countries” for further long-term sales, but the spot market is also a possible destination for the remaining 3 mtpa, Mithá said.

Given the low oil price environment and the glut in LNG, this could be preferable to locking in long-term prices now. Mithá expects the oil price will have risen to around $60-70 per barrel when Mozambique LNG starts operations in five years’ time.

However, from an operations perspective, “the economics of the project are so good that we could [do] better than breakeven [even at today’s oil price]”, he said.

The only impact the oil price will have is on the financing. “Given the fact that it will be project-financed, it’s highly leveraged, then in that case we would need to trade off in terms of what is the portion of equity, what is the portion of debt,” Mithá said.(Source: Interfax Energy)