After a number of delays, next year may see FIDs in Mozambique liquefaction projects, but security challenges are on the rise, writes Ed Reed, at Africa Oil.
The Area 1 project should reach FID next year, but the Area 4 plan may take until 2020.
As enthusiasm for LNG begins to return from the doldrums, plans to develop Mozambique’s offshore resources – via onshore facilities – are coming to the fore. Eni took the final investment decision (FID) for its Coral South floating LNG (FLNG) project in mid-2017.
The offshore plant is relatively modest, at 3.4 million tpy, which helped secure financing. The fact that it is offshore helps it avoid many of the woes vexing onshore plans. The 439-metre long facility is being built by Samsung Heavy Industries (SHI), skipping the logistical and security challenges of Mozambique’s northern Cabo Delgado Province.
While appetite for megaprojects is picking up, and some signs of the market tightening in the mid-2020s are emerging, there will be more challenges to overcome in Mozambique.
Despite the difficulties, companies took a strong stance on the onshore plans last week, during a conference in the US. ExxonMobil said it expected an FID for the Rovuma LNG project to come in 2019, following “binding sales and purchase agreements (SPAs) for Rovuma LNG with some affiliated buyer entities of the Area 4 co-venturers,” the company’s head of gas and power marketing, Peter Clarke, said. A statement from ExxonMobil on June 27 said marketing work was underway and that “significant progress” had been made.
The first phase at Rovuma LNG will develop the Mamba field. Construction and operations onshore will be led by ExxonMobil Mocambique.
Eni Rovuma Basin will lead the upstream development and operations. The partners are also working on financing the plant, as well as with the Mozambique government. In a sign of ExxonMobil’s regional preferences, the company was widely reported to be shopping its deepwater Tanzanian gas resources, with plans in Mozambique’s northern neighbor moving slowly.
“The key strength of Area 4 is the quality of the co-venture partnership,” said Eni’s chief gas and LNG marketing and power officer, Massimo Mantovani. “Following the [FID] on Coral South [floating LNG] FLNG in 2017, we are working together to develop the remaining gas fields which will feed the Rovuma LNG trains, taking full advantage of the expertise of all our co-venture parties.”
Speaking earlier in June to the Financial Times, Galp’s CEO, Carlos Gomes da Silva, said: “Coral puts Mozambique on the map but Mamba will be the anchor.” He went on to say the more important factor for development, rather than start-up time, was controlling costs. Mozambique must be “different to Australia”, da Silva said, with the project competing with supplies from the Middle East, North Africa and the US.
“We’re in a good position but we have to execute it well.”
All told, therefore, Area 4 seems poised for success, although whether the FID will come in 2019 or 2020 is a matter for debate. Project financing may prove a challenge, particularly given the likelihood that it will seek support only shortly after the Area 1 plans are completed.
Anadarko Petroleum’s Mozambique LNG plan – which will be located with Rovuma LNG at the Afungi LNG Park – is better known but its fortunes have oscillated more closely with the wider industry. In line with ExxonMobil’s hopes for 2019, Anadarko said it expected an FID to be made in the first half of the year. One of its partners at Area 1, Mitsui, said in May that the FID would come by the end of March 2019.
Matching da Silva’s comments on costs, Anadarko’s executive vice president, Mitch Ingram, said cost savings of around US$4 billion had been achieved from 2016 estimates. As a result, the first two trains, with 12.88 million tpy of capacity, should cost around US$7.7 billion – less than US$600 per tonne.
This is in line with projections from the International Monetary Fund (IMF) in March, which said processing facilities should cost around US$7 billion, saying US$4.5 billion of this would be debt financed.
These facilities, though, do not represent the full cost of the export plan. The IMF put the total cost at around US$25 billion, of which US$15 billion would come from debt. In line with this projection, Reuters reported in May that Anadarko was seeking US$14-15 billion for the project.
A number of steps remain before reaching FID on Mozambique LNG, including the conversion of non-committal deals, covering 8.5 million tpy, to firm offtake agreements, currently at 6.7 million tpy. In addition to this, the group is working on a financing package.
The Mozambique LNG project can tap a resource base of around 2.12 tcm of gas, with subsea wells capable of producing around 5.7 mcm per day, Anadarko said in its presentation. Area 1 holds the Golfinho/Atum, Prosperidae, Orca, Tubarao and Tubarao Tigre fields, while the plant will be fed initially from the first field.
Anadarko has been ready to go on this project for some time. In 2012 – as the company estimated the recoverable resource to be 850 bcm to 1.7 tcm, with a total gas in place figure of 2.8 tcm – it said it intended to reach FID in 2013, with first LNG sales coming in 2018. It is clear from this that the problem is not one of a lack of gas, rather, it is appetite for a megaproject in a remote location.
Despite the numerous setbacks, it does seem that progress is coming for Anadarko’s Mozambique LNG project, even though its partners do not seem to be lining up for the same sort of offtake agreement that the Rovuma LNG plant has. Anadarko increased spending in Mozambique this year, to US$150 million, largely to cover its share of the development of the LNG park.
Outside the park walls
While the companies involved in these liquefaction projects have the financial, commercial and logistical ability to execute such convoluted works, other factors must also be considered. At the top of the list recently has been the emergence of an Islamist terror movement.
In early June, the US’ embassy in Mozambique warned its citizens to leave Cabo Delgado on the belief that attacks were imminent. Some reports suggested that, as a result of this warning, Anadarko halted work. The UK also updated its guidance on the area, warning against “all but essential travel” to Palma, Mocimboa de Praia and Macomia in Cabo Delgado.
While terror incidents will slow work, these are largely manageable, given the defensible location of the Afungi Park. The park has security fencing around its entirety, with 24-hour guards and security lighting. While the attacks are brutal, the perpetrators seem fairly ill-equipped, so the park itself is unlikely to be troubled.
Another problem for the Mozambique projects is how Empresa Nacional de Hidrocarbonetos (ENH) will cover its share of obligations. As the IMF said, in its report earlier this year, ENH’s equity share of spending will be covered by its partners. The company will, though, be liable for its share of debt raised for the Area 1 work. Given its 15% stake, and plans to raise US$15 billion, this amounts to US$2.25 billion.
It also has a 10% stake in Area 4. The Coral FLNG project cost around US$7 billion and information has not been given for Rovuma LNG. Borrowing for these projects, therefore, will increase public debt by about 20 percentage points at peak, in 2023, according to the IMF.
This comes even as Mozambique is still reeling from a hidden debt scandal. Around US$850 million was found in 2014 to have been borrowed under dubious circumstances, with another US$1.4 billion being discovered in 2016.
It might be expected that such a cloud hanging over the East African state’s finances might deter lenders. However, such a decision on lending might well see some investors being content to balance the risk with likely attractive yields.
Assuming FIDs come in for both projects in 2019, it is likely to take at least four years to achieve first production. This would suggest Mozambique LNG might begin in 2023 and Rovuma LNG in 2024. If history is anything to go by, this will slip – but there is a sense that onshore LNG from Mozambique is coming closer to a reality.