Mozambique Oil & Gas: Anadarko’s Massive LNG Export Project In East Africa

Rovuma basin Anadarko vessel

Anadarko Petroleum Corporation (APC) hit it big back in 2010 when the upstream player struck gold in Mozambique. In the Romuva Basin off the coast of the East African nation, Anadarko discovered what is now estimated to be 75 trillion cubic feet of recoverable natural gas resources. These resources are situated in what is known as Offshore Block 1, or Area 1, which you can see down below. Let’s dig in.

A screenshot of a cell phone Description generated with very high confidence

Source: MZLNG Website

East Africa to enter the LNG export market

Back in late-2007, Anadarko signed an agreement with Mozambique to start exploring Block 1, with drilling operations beginning two years after that at the Windjammer prospect. 2D and 3D seismic mapping surveys were utilized to uncover oil & gas prospects worth investigating further through deepwater exploration and appraisal programs.

It was at the Windjammer prospect back in 2010 that Anadarko began to realize the immense resource potential this basin had. The Belford Dolphin drillship, owned by Norwegian-based Fred. Olsen Energy (OTCPK:FOEAY), drilled the Windjammer exploration well through 4,800 feet of water to a total depth of 14,000 feet.

Over the course of the next three years, Anadarko announced a series of impressive discoveries which were later validated by independent review in 2015. The Golfinho exploration well, which was announced a success in May 2012, located the first gas field the consortium plans to develop. Another important well to keep in mind was the Orca-1, which discovered an estimated 7 to 20 trillion cubic feet of additional recoverable gas resources in early 2013. The Orca-1 exploratory well hit 190 net feet of natural gas pay. The Golfinho-Atum and Orca gas fields are the two to watch going forward, as those underpin Anadarko’s ambitions in the nation.

To commercialize these enormous gas discoveries, the consortium (led by Anadarko) decided to pursue a major liquefied natural gas export project known as MZLNG (Mozambique LNG). Anadarko owns 26.5% of the venture and its partners are Mitsui & Co. (OTCPK:MITSY) (a Japanese conglomerate), a wholly owned subsidiary of ONGC (India’s national oil company), ENH (Mozambique’s national oil company), Bharat PetroResources (a private Indian firm), PTTEP (primarily owned by Indonesia’s PTT Public Plc, a state-owned firm), and Oil India Limited (primarily owned by the Indian government).

As you can see, a lot of big state-run firms in the mix. India and Japan are both major LNG importers, and these types of direct foreign investments are used to secure long-term gas supplies for consumption back at home (explicitly for India, implicitly for Japan).

Keep in mind discovering 75 trillion cubic feet of gas is similar to locating 12 billion barrels of recoverable oil. However, the difference lies in the kind of realizations those hydrocarbons receive and the level of capital expenditures needed to commercialize those resources. Generally speaking, a large oil discovery of similar engineering complexity compared to a similar-sized gas discovery will have a better expected return.

Overview of MZLNG

Phase 1, which was approved by the government of Mozambique in early March, envisions building two onshore LNG trains on the nation’s coast adjacent to these major discoveries. This export facility will cover 17,000 acres, setting the stage for future growth opportunities. Anadarko envisions those two trains having 12.88 million metric tons of LNG production capacity per year. Farther out, the consortium has the very lofty goal of eventually increasing MZLNG’s production capacity up to 50 MPTA by constructing new LNG trains. Debottlenecking endeavors are also noteworthy as those incremental investments to modestly boost production capacity tend to yield very strong incremental returns on capital.

On a side note, there will probably be some level of natural gas liquids and condensate produced along with these “dry” gas (methane) volumes. Those volumes offer some modest upside, especially when oil prices are favorable as global NGLs prices are heavily influenced by Brent.

To support Mozambique’s domestic industries and consumers, each train will supply 50 MMcf/d of gas to the nation. Expect future LNG trains to also allocate a portion of their processing capacity to supplying domestic markets.

Roughly 70% of Mozambique’s 28 million strong population lives in rural areas with limited or often no access to electricity or gas heating. Building out domestic gas infrastructure would not only be a major benefit to Mozambique and its economic trajectory, but that would also give the consortium a bigger market to supply gas to. Longer term, there is also a ton of upside to be had by investing in an expansive regional gas network that connects Mozambique’s gas supplies to industrial (and in the future, residential) buyers in places South Africa, Zambia, Zimbabwe, and elsewhere.

Upstream overview

Natural gas will be sourced from the Golfinho/Atum gas field in the Northern part of Block 1. Anadarko’s drill stem tests in the Golfinho/Atum gas field brought wells online that produced a constrained 90 MMcf/d-100 MMcf/d of natural gas, indicating that this gas complex’s reservoir was of high quality.

Constrained wells are wells drilled to test the pressure and permeability of a geological formation to gauge what kind of well productivity the operator should expect. Fully optimized (removing the bottlenecks that hold back well productivity) production wells targeting this field should be able to produce between 100 MMcf/d and 200 MMcf/d of natural gas each, according to the consortium. That is on par with wells tapping offshore gas fields near Trinidad & Tobago, a major LNG exporter in the Caribbean, which are some of the (if not the) most productive gas wells in the world.

Marketing update

Long-term contracts are needed to ensure there will be buyers willing to pay a fair price for the majority of the LNG export facility’s output to ensure the consortium will be able to recoup its massive investment. By fair, I mean the venture is realizing LNG prices based on Brent or some other oil benchmark, instead of being at the mercy of spot prices. While spot prices are favorable as of this writing, that won’t always be the case.

Anadarko has agreed upon key terms with major buyers covering 5.1 MPTA of LNG. The consortium doesn’t want to give the MZLNG project its blessing until 8.5 MPTA of the facility’s capacity is secured through long-term contracts, and the goal is to reach that level by the end of this year. After a final investment decision is reached, it won’t be until 2023 at the earliest that LNG exports will commence.

When it comes to financing, it appears the consortium is playing it safe and waiting for confirmation that there is enough demand to justify another LNG export project. One major positive is that it appears the supposed global LNG glut is over, at least for now, as LNG spot prices have risen materially in the UK (proxy for European LNG prices) and Japan (proxy for Asian LNG prices). With spot LNG prices back in the US$7 to US$12 per MMBtu range, LNG projects are starting to look more attractive again.

Final thoughts

Anadarko Petroleum Corporation’s Mozambique LNG venture will mark its entrance into the liquefied natural gas space. While we won’t know the true size of this endeavor, and more importantly the cost, until a final investment decision is reached, this is probably going to run in the tens of billions of dollars. The reason; to capitalize on strong expected demand growth for liquefied natural gas over the next 20 years from nations with relatively limited gas supplies but a lot of energy demand (China and India are at the top of that list). Done properly, Anadarko Petroleum Corporation has secured itself an economical source of growth through the 2030s as additional LNG trains are brought online.

Summary

Going over the Anadarko Petroleum-led Mozambique LNG export project.

Block 1 houses an estimated 75 Tcf of recoverable gas resources, equal to 12 billion barrels of recoverable oil.

Done properly, Anadarko Petroleum Corporation has secured itself an economical source of growth through the 2030s.

The consortium developing the MZLNG project is getting close to reaching a final investment decision.

 

Author’s note: Some of the companies mentioned above don’t trade on a major US stock exchange, which come with their own set of risks and rewards. Always do your own due diligence before investing. Thanks for reading.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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