Mozambique Oil & Gas: “The Hidden Debt Issue and The Grand Gas Plans” – by Kevin Godier

Maputo is playing hardball with its international creditors, while pushing ahead with its grand gas plans, writes Kevin Godier.

What: Mozambique will rake in US$350 million from Eni’s sale of a Coral South stake.

Why: The government is seeking maximum benefits from its mineral resources.

What next: Balancing gas sector revenues with debt servicing will shape the future.
Mozambique’s high hopes for its huge natural gas resources to move away from the debt scandal that has sent its economy spiralling out of control have been underlined by a US$350 million capital gains tax bill presented to Italy’s Eni. The bill is the result of Eni’s sale of a stake in Area 4 to ExxonMobil. It should be paid during the next month, Mozambican Minister of Economy and Finance Adriano Maleiane said on local television on August 29.

Maputo is desperate for every possible short-term economic stimulus, in the wake of debt defaults and a currency collapse, while it looks in the long term to LNG projects to build a future as a gas exporter. Maleiane said the government had authorised the asset sale, whereby ExxonMobil agreed in early March to pay Eni US$2.8 billion for a 25% stake in the block, which holds a number of gas fields and will host Africa’s first deepwater floating LNG (FLNG) project.

In a news bulletin on the private television station STV, he said the tax authorities could go ahead and collect the outstanding amount from Eni, the field’s operator. “The state has already done what had to be done. Officials from outside the country must close, and from there they have a deadline of 30 days to bring the funds here to Mozambique,” said Maleiane.

Signs that Mozambique’s LNG plans remain on course, despite its unwanted status as the first major African state in recent times to become unable to meet obligations to international creditors, have been building in recent months. On August 30, Baker Hughes announced its second Coral South contract this year with Eni. The oilfield services company will provide rotating equipment for the power and gas refrigeration process, turbo-compression trains for mix refrigeration services and turbo-generation units.

Transformative projects
Located in Area 4, in the Rovuma Basin, the estimated US$7 billion, 3.4 million tpy Coral South scheme is the first of a series of projects that could transform the impoverished East African country into a major energy supplier to Asia. Mozambique President Filipe Nyusi has made the country’s emergence as a major gas producer a central element of his presidency, holding out the promise of LNG export revenues that could lift it from its status among the world’s 10 poorest countries.

At the beginning of June, Eni launched the implementation phase at Coral South, after raising a US$5 billion multi-sourced lending package that marked Africa’s largest-ever project financing. It expects to begin producing LNG in 2022, ahead of the much larger US$20 billion, 12 million tpy onshore gas liquefaction scheme proposed by US-based Anadarko Petroleum. Both Eni and Anadarko signed agreements with the Mozambique government on August 10 to build two onshore terminals in Cabo Delgado Province.

Mozambique has 2.4 tcm of natural gas reserves, enough to supply Germany, the UK, France and Italy for nearly two decades, according to a 2013 International Monetary Fund (IMF) report. But the country needs revenue inflows in the near term. In 2016, hidden loans worth US$2 billion were discovered, leading the International Monetary Fund (IMF) and Western donors to halt support, catalysing a financial crisis, which was epitomised by a Eurobond default in July 2017.

The authorities in Maputo have been awaiting an IMF debt sustainability assessment for Mozambique, which may allow debt restructuring talks to move away from a current stand-off. In the meantime, the government plans to set up a sovereign investment fund where taxes received from sales of the country’s minerals will be used to finance development projects, state media reported last month.

Hardline
Progress in the LNG segment is particularly important for Mozambique, given the soaring commercial and political risk perceptions attached to the country. It is effectively bankrupt, having guaranteed the entire US$2 billion of questionable loans, but it cannot afford to repay them.

There is an increasing risk that long-awaited discussions between Mozambique’s government and its creditors, expected to begin in the coming months, will come to nothing, given the consistently hard stance adopted so far by Maputo.

In neighbouring Zimbabwe, the adoption of such a position with its creditors – albeit in relation to significantly higher debts – has led to dizzying inflation, near-economic collapse and the estrangement of the Harare administration from the global financial community.

Mozambique’s government has so far refused to cede any ground to bondholders, who have demanded prioritisation over the country’s other creditors, having already undergone a restructuring of their investment in 2016. In April, the government signed into law the equal treatment of all its creditors, including VTB Bank and Credit Suisse, the key banks behind the hidden loans.

The government’s solitary Eurobond issue still yields the highest return on dollar debt in the region and does not mature until 2023, when LNG production from the Anadarko scheme is expected to come online and offer a substantial boost to state coffers. Although the IMF has warned that Maputo needs to take “urgent” action to strengthen its financial position, it has predicted that the economy will grow this year, partially driven by a surge in coal production exports.

The LNG sector will survive, in some form, whatever further fiscal turmoil Mozambique must endure. Signs of strength come from the deal by Eni agreeing to sell the entire output from Coral to BP, for 20 years, while the Anadarko-led consortium continues to make progress on reaching 9.6 million tpy in LNG sales and purchase agreements. The company is targeting this level in order to reach a final investment decision (FID).

Furthermore, Maputo probably has too much to lose by walking away from its debt negotiations, in the light of Zimbabwe’s bare financial cupboard and threadbare economy since Harare began to default on major international loans in 1999. Future revenue flows from LNG offer a means to restructure its debts but how this is accomplished will be a determinant of its economic vector over the next decade. The extent to which Eni’s US$350 million payment plays a role in this process remains to be seen.

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