Mozambique Gas Summit: “Gas industry skirmishes diminish, but Asia looms as the battleground”

Yes, it’s that time again: after a spring lull and a winter of bitter repercussions from the country’s financial scandals, in the gas industry at least, its time to get back to work. So with microphones switched on, and notepads at the ready – everybody’s off to another Mozambique Gas Summit.

In contrast with the dreary near-standstill gas industry deliberations of recent years, however, this time there’s a distinct buzz in the air, a sense that something might actually be happening in the sector at last.

In contrast with the dreary near-standstill gas industry deliberations of recent years, however, this time there’s a distinct buzz in the air, a sense that something might actually be happening in the sector at last.

Hosted by Mozambique’s state-sector Empresa Nacional de Hidrocarbonetos (ENH) in conjunction with the London-based CWC event management group, delegates will doubtless be eager to know the latest news from ENI East Africa, newly capitalized by Exxon’s $2.8 bn. purchase of a 35.7 per cent stake in the company from ENI, operating in Rovuma basin’s Area 4.

The recent Exxon purchase could potentially result in a windfall to state coffers of $354.4 million, according to Leticia da Silva Klemens, Minister of Mineral Resources and Energy. Elsewhere, any further advances in the Area 1 onshore contract negotiations confirming a final decision on Palma and Anadarko-led operations on the Afungi Peninsula will doubtless also animate Gas Summit discussions. Last but not least, ENI’s South Coral Floating gas production – likely to be Mozambique’s first actual offshore gas to hit the market, around 2022, is also moving ahead with equipment contracts signed in June with GE.

Everybody’s off to the Summit? Well almost everybody, but Minister Klemens herself will not be among the celebrities on the podium this year however, as she has more pressing matters to attend to in Asia – marketing Mozambique’s future gas production to Japan and China. Minister Klemens’ trip is a follow up to the presidential delegation which was in Japan this March and at which she and President Nyusi met with the Tokyo Power Group, who buys some 14m tons of natural gas worldwide per annum. Japan’s existing interest in Mozambique’s gas is currently spearheaded by Mitsui and Co, who have a 20 per cent stake in the Rovuma basin’s Area 1 production.

Despite the wide array of producers and exporters of LNG globally, consumption of the end product is dominated by North Asia and will continue to be so for the foreseeable future. According to the Barcelona-based International Gas Union, last year Asia accounted for over 72 per cent of total world trade in natural gas, with China in the lead followed by Japan and South Korea. Currently, the world’s largest suppliers of liquefied natural gas are Qatar, Australia and Malaysia.

Asian trade has been evolving however, with a marked slide in delivered LNG prices over the past four years. With declining Japanese imports due to the restart of post-Fukushima nuclear production and stagnant purchases from South Korea the market has been buoyed by increases in Chinese imports, up 6.9 per cent, as well as new Indian buying (4.5 per cent year-on-year). China, as driver of global demand growth is however currently not a long-term contract buyer of LNG like Japan, and normally only enters into the LNG spot market, while focusing on pipeline-sourced natural gas from Turkmenistan, Myanmar and Kazakhstan for the bulk of its import needs.

Until very recently LNG in Asia was traded under long-term, fixed destination contracts with prices linked to crude oil and with little room for flexibility. For years demand from Japan and South Korea was buoyant, supplies were relatively scarce and LNG project sponsors could obtain long-term sale arrangements to underpin their investments. Buyers were typically locked into e.g. ten-year contracts at prices around three times higher than those paid for equivalent product in the US.

Asian buyers revolt against inflated LNG costs

The situation has recently been in flux however with the confluence of several factors: a drop in LNG demand in Asia in 2015-16 leading to buyers becoming more demanding with regard to post-signature contractual flexibility; the trend to using alternatives to crude oil price indexing, the recent rapid development of Asian LNG futures trading; Japan’s resumption of nuclear power generation following the post-Fukushima shutdown; and new producers in the Middle East, South Asia and Africa, often with competitive production costs but with limited access to capital for infrastructure, now strongly motivated to find new markets.

These factors have exerted downward pressure on delivered Asian LNG prices, contributing to a situation where prices in Europe and Asia have once again been moving in parallel, reminiscent of the pre-2012 period.

Two further factors have impacted global pricing patterns over the past five years, neither of which are directly related to supply and demand trends per se: Firstly, the tradability of LNG internationally has risen, not only with the entry of the US into the global market but also with changes in contractual norms, as well as rapidly growing Asian gas futures markets, allowing flexibility in sales arrangements with North Asian buyers.

Secondly, the entry of lower cost, emerging producers targeting Asian customers as well as the trend for major producers including the US and Australia toward a rapid expansion of their export capacities, also aimed at Asia, is also likely to keep future inter-regional price spreads far below their 2011-2014 levels.

All this may come as depressing news for a country like Mozambique also hoping to sell its product into what looks like a hotly competitive Asian market with prices under pressure. But there are silver linings to the cloud cover hanging over our industry: firstly, Mozambique still enjoys relatively low projected production costs compared to competing international producers; secondly, we lie closer to Asia – meaning cheaper LNG freight costs – than many new or returning producers such as the United States, North Africa, Nigeria and Angola; and thirdly, the (now) expected start of Mozambique’s shipments will not be until 2022-23, a time when there are relatively few projects coming on stream, in contrast to the next 3-4 years when several large competitors (e.g. Qatar and Australia) have significant new product coming on stream.

Paradoxically, all this time that has gone by in delay and discussion may not have entirely been time wasted – when Mozambique finally gets its gas to market the buyers may once more be back in force with their cheque books at the ready.

By Colin Waugh

• Colin Waugh is a financial economist and commodity market investor based in Maputo