Mozambique Oil & Gas: “Arrests could hamper country LNG funding” – Petroleum Economist

High profile arrests in early January related to Mozambique’s “hidden debts” scandal, made at the request of US prosecutors, are an unsettling reminder that the country still faces questions over its financial credibility. It is something those trying to fund LNG projects based on the massive gas reserves of the Rovuma basin could do without.

In early January, former finance minister Manuel Chang was arrested in South Africa, three former Credit Suisse Group bankers were arrested in London and one executive of Lebanese shipbuilding group Privinvest was detained in New York. They face charges in the US linked to a long-running fraud investigation of $2bn in loans to Mozambican state-linked companies.

The three loans, to Ematum, Proindicus, and Mozambique Asset Management (Mam), were taken out in 2013 and 2014 and were revealed to the wider world in 2016. The loans were nominally to buy fishing and maritime security packages from Privinvest, but attracted allegations of corruption and kickbacks. They pushed Mozambique into default on its international debts and stalled its economic development.

US prosecutors allege that the defendants duped American investors into buying parts of the debt contracted for corrupt purposes — which Mozambique was unlikely to pay back. They also allege that transactions routed through US banks violated US and Mozambican anti-corruption legislation.

“Pre-resource curse”
Until the arrests, the government had sought to justify the debts. It has insisted that it will pay them back, once it starts receiving the revenues from the LNG projects.

But such claims underline the feeling that Mozambique has fallen prey to the so-called “pre-resource curse”, by spending anticipated resource revenue on questionable and possibly corrupt undertakings on the expectation of revenues from yet-to-be-built extractive projects.

One possible side-effect of the scandal is that Mozambique could have difficulties maintaining progress with the gas projects. Raising tens of billions of dollars in project financing — part of which needs to be raised by national oil company ENH — in a country which is in international default is not easy.

Under the circumstances, getting one gas development — the Eni-led Coral South Floating LNG project — to a financial close in 2017 was a major achievement, even if ENH was carried financially by its partners in that case.

However, ENH does need to fund its share of developments relating to two onshore LNG projects — Area 1, operated by US independent Anadarko, and Area 4, operated by ExxonMobil (midstream) and Eni (upstream). Opinion is divided on how the arrests and the prospect of a high-profile trial in New York might affect their financing.

Ed Hobey-Hamsher, senior Africa analyst at risk consultancy Verisk Maplecroft, thinks the arrests highlight Mozambique’s lack of financial credibility, making it harder for ENH to acquire the necessary financing to secure its 10pc stakes in the offshore fields. This will in turn “increase the likelihood of delays to the FID and to LNG revenues coming online”, he said in a briefing note on the arrests.

Other voices argue that the US legal case could amount to a “clearing of the decks” for Mozambique, and strengthen the hand of financiers trying to convince credit committees that Mozambique is a bankable prospect. Being able to point to a credible, continuing legal process to clear up the mess could go some way to restoring confidence in Mozambique’s financial probity, they argue.

SPAs stack up
But, whatever the ramifications of the hidden debt, neither LNG project is likely to be derailed by it. The main delays to the projects to date have not been due to the farrago, instead related largely to other factors.

In the case of Anadarko’s project, it needs to firm up offtake agreements. ExxonMobil, meanwhile, needs to reach a final agreement with the government. Both milestones are in sight.

Anadarko is understood to be very close to having sale and purchase agreements (SPAs) in place for 9mn t/yr of its 12.88mn-t/yr Area 1 project — the figure it requires to take FID and finalise financing agreements.

The company has had little to announce formally to the market, but, according to a recent report by brokerage Poten & Partners, it has recently added a 2mn-t/yr SPA with Shell, and a 1mn-t/yr SPA with Indonesia’s Pertamina, to deals already signed with Japan’s Jera (1.2mn t/yr), Tokyo Gas and the UK’s Centrica (2.6mn t/yr jointly), and India’s Bharat Petroleum (1mn t/yr).

That would bring the total to just under 8m t/yr, but with discussions in progress with China’s Cnooc for 1.5mn t/yr and Thailand’s PTT for 2.6m t/yr, the project may soon be ready to progress.

Area 4 close to FID?
For Area 4, ExxonMobil announced in early January that its project had secured sufficient LNG offtake commitments from affiliated entities of its consortium partners — Eni, China’s CNPC, Portugal’s Galp and South Korea’s Kogas, as well as ExxonMobil — to “provide a solid foundation for securing project financing”. The agreements “are subject to the conclusion of fully-termed agreements, which will be finalised and initialled in the next weeks, and the approval of the government of Mozambique,” ExxonMobil says.

The statement stopped short of saying that the offtake commitments were enough to proceed to FID. However, unlike Anadarko’s Area 1, the Area 4 project is still awaiting government approval for its plan of development (POD), before a decision can be made. ExxonMobil hopes to get the POD approval by April.

During Q4 2018, the ExxonMobil-led consortium was asked by Mozambique’s petroleum regulator to revisit commitments made in its POD regarding its domestic gas allocation, its plans to use local content on the project, and the unitisation agreement for the reserves in the Mamba-Prosperidade field, which straddles Areas 4 and 1.

Carlos Zacarias, chairman of petroleum sector regulator INP, told Mozambican newspaper O País in December that the POD had failed to meet various requirements. INP has since said that ExxonMobil had submitted a revised POD.

ExxonMobil needs 21-22 tn ft3 of gas for its onshore LNG project, of which 5 tn ft3 would come from the Coral South field (which is already feeding the FLNG project), and 16-17tn ft3 is due to come from the neighbouring Mamba-Prosperidade field, according to the newspaper. However, the existing decree law only allocates it 12tn ft3 from Mamba-Prosperidade initially.

A unitisation agreement announced by Anadarko and Eni in 2015 — before ExxonMobil joined Eni’s project — should have guided how the Area 1 and Area 4 consortiums could extract additional gas volumes from the Mamba-Prosperidade field beyond the initial 12tr ft3 each. However, three years later the Mozambique government has still not signed off on that deal, for reasons which remain unclear.

Domestic supply row
Anadarko also has some challenges to overcome, notably regarding domestic gas allocation.

A recent conference produced a high-profile clash between Anadarko and Shell, which is pushing for the government to secure enough gas in the first phase of the projects to allow it to go ahead with a gas-to-liquids plant. However, Anadarko’s POD has been approved and it knows the government is keen for the project to move ahead.

ExxonMobil also faces similar pressure, and could be more vulnerable to calls to increase gas supply to the domestic market, until its POD is formally approved.

Away from the Rovuma projects, Qatari investment in ExxonMobil’s exploration blocks in the Angoche Basin and Zambeze Delta, will be a welcome show of support for the Mozambican authorities. The three blocks, in which hopes of oil discoveries are high, are now run by a consortium of ExxonMobil (50pc), ENH (20pc), Russia’s Rosneft (20pc) and Qatar Petroleum (10pc).