Mozambique Oil & Gas: Big hitters betting on country to be global LNG player

“2018 has been a remarkable year for ExxonMobil in Mozambique,” the company’s country manager Jos Evens said after signing three new exploration and production concession contracts (EPCCs) for areas off the country’s long coast in early October.

The negotiation of those EPCCs has taken the three years since the country’s fifth licensing round results were announced in October 2015. During that time, ExxonMobil—which bid for fifth-round blocks in partnership with Rosneft—has bought a joint operator’s stake in Eni’s Area 4 block. Evens confirmed at the EPCC signing event in Maputo that a final investment decision on an onshore liquefied natural gas project in northern Mozambique, based on Area 4 reserves, would be taken by mid-2019.

A floating LNG platform, commissioned by Eni, is under construction in South Korea, and due to be sailed into position in 2021. It will start liquefying gas from the outlying Coral field in 2022. ExxonMobil is taking the lead on the bigger onshore export project, and submitted its plan of development to the Mozambique government in July 2018. Approval of that plan is perhaps the only significant hurdle in the way of a positive FID for the 15.2m-tonnes-a-year project.

LNG sales progress
ExxonMobil is part of a consortium with big hitters including Eni, China’s CNPC, and Galp of Portugal. It expects to be able to move forward to FID without needing to sell any LNG outside of its own consortium. “We expect sufficient interest from the affiliate buyers to launch the project and support the financing,” spokesperson Julie King told Reuters in July.

Meanwhile, Anadarko is leading the adjacent Area 1 project and preparing an onshore “LNG Park” where both projects’ trains would be built. Anadarko also wants to take FID in the first half of 2019—and is sounding confident that it can. It already has approval for its development plan, but needs to sell to external buyers and must seal enough sale and purchase agreements (SPAs) to justify its decision to project finance bankers.
On a state visit to the US in September, Mozambique’s president Filipe Nyusi said the government was helping Anadarko tie up SPAs in Japan, Indonesia, the UK, China, the Netherlands and other countries. Market sources suggest Anadarko is negotiating around eight SPAs in parallel—and could have enough of them signed by end-2018 to allow for FID in Q1 2019.

In June, the project signed a heads of agreement with Tokyo Gas and the UK’s Centrica for a co-purchasing off-take deal for the supply of 2.6m t/y from start-up until the early 2040s.

Crowded house?
Questions remain over whether there is appetite among off-takers and project financers for two onshore LNG projects at Afungi, producing a total of 28m t/y. But current market dynamics—led by the soaring appetite of China, where LNG demand has roughly doubled over the past two years—mean that both projects might be able to justify FID in 2019.

“The relative lull in FIDs over the past several years, plus recent strong growth in LNG demand in Asia, especially China, has created a feeling that the time is right for many large LNG supply projects,” Kelly Krasity, an analyst with IHS Markit’s LNG team, told Petroleum Economist.

However, she warned that the two projects are “competing in a pretty crowded field at the moment”. Krasity expressed concern that the market was poised for another cycle of overly optimistic project sanctions.

“Right now, there are multiple liquefaction projects in the US, Russia, Qatar and Mauritania/Senegal that are all looking to reach FID in the next year or so, on top of the two projects in Mozambique. The market is highly unlikely to be able to absorb that amount of LNG in the next five or six years, particularly since there is still a lot of LNG capacity under construction in the US, Australia and Russia that will come on line by 2020,” she said.

Northern unrest
Anadarko ran a local opportunities conference in the northern port of Pemba at the start of August, opened by President Nyusi and attended en masse by the Maputo business community with interests in participating in the sector. The event was a success, prompting the firm to run more such events across the country. But the feeling among attendees was broadly one of frustration because they would be unlikely to be in a position to win the juiciest contracts. Anadarko has promised to try to help bring companies up to speed with what’s required, but it seems unlikely that Mozambique would have the capacity to service these projects.
Questions of local content also have a regional component within Mozambique. Workers on the resettlement project in Afungi went on strike at the end of September, accusing Anadarko and sub-contractor CMC of hiring southerners instead of locals.

Such dissatisfaction, coupled with the feeling that someone else is making a fortune, has made Cabo Delgado a fertile recruiting ground for an Islamist insurgency. This started in earnest in October 2017 and shows no sign of disappearing.

Mozambican police chief Bernardino Rafael said on 4 October, the anniversary of the first attack in the town of Mocímboa da Praia, that insurgents had so far killed 90 people and burned down 1,065 houses. He’s almost certainly understating the truth. Maputo-based Zitamar News, which is keeping count of fatal attacks, estimates at least 128 dead over the past 12 months. Reliable press reports suggest that insurgents torched over 1,000 homes in June 2018 alone.

Anadarko, Eni and Exxon are continuing more or less without missing a beat. However, the insecurity in the region has claimed the scalp of one project, with Wentworth Resources saying a combination of “the situation on the ground”, and a revised estimate of its Tembo-1 well’s reserves, have led it to stop investing further in it.

The Mozambican authorities have promised to stamp out the insurgency, but that may be beyond their capabilities. There are strong signals that it’s linked to others in East Africa, including in Tanzania, the Democratic Republic of Congo, Uganda and Somalia.

Licensing talks unblocked
The drawn-out negotiations over the fifth-round areas, which include sought-after blocks in the Angoche and Zambezi basins, where hopes are high of finding oil, have finally been concluded. The government overrode provisions put into Mozambique’s petroleum law by the Mozambican parliament.

The headline change was that international oil companies no longer have to list on the Mozambican stock exchange. IOCs also won concessions from the Bank of Mozambique on the currency regime. At Monday’s signing ceremony, Evens thanked the central bank and the Instituto Nacional de Petróleo (INP)—the sector’s regulator—for their cooperation in finally getting the EPCCs done.

One of Exxon’s and Rosneft’s three areas lies in the Angoche play off central Mozambique, with two more in the Zambezi area. Sasol also signed an EPCC for a new onshore block next to its existing gas projects in the Pande Temane area in the south of the country. An Eni-led consortium signed one for an offshore block next to Exxon and Rosneft’s in Angoche.

Other bidders didn’t stay the distance. Norway’s Equinor pulled out of the Eni-operated offshore block in January, blaming “the outcome we have achieved after more than two years of negotiations, and the current business environment”. London-based junior Delonex also walked away from a large onshore area in the far south of Mozambique.

To try and make the sixth round more successful, INP says this year it will start a consultation process with possible participants to help decide which blocks to offer, and to gauge market interest.

“We’re going to listen separately to potential companies that are interested in being part of it,” INP administrator Augusto Macuvele told Zitamar. “From there we will know what the trend and the market’s appetite are in relation to the areas of the country that we include, to ensure that we are all aligned.”

INP wants to launch the round before the end of 2018—and Evens says Exxon intends to be there. Momentum in Mozambique’s hydrocarbons sector is building.