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Mozambique moving toward LNG Exports

Monday, June 8, 2015

In Mozambique, a race is underway. The nation is an emerging LNG exporter, and operators in the region are aggressively moving to build out infrastructure.

Creating a sense of urgency in Mozambique are similar LNG buildouts in North America and Australia which threaten to fill buy order contracts first.

Over the next five years, and in spite of lower oil prices, Mozambique will undoubtedly continue to become a more and more significant player on the global O&G scene. In this article, we review recent developments and discuss the future of this exciting growth market.

Energy LNG Exports
Energy Mozambique LNG exports. (Source: OilPro)

Mozambique Background: Discovery & Regulation

Anadarko and Eni made significant discoveries offshore Mozambique in Offshore Area 1 and Offshore Area 4, respectively, in the Rovuma Basin in 2010/2011. Energy analysts believe there is as much as 120 tcf to be had. The consortiums are planning two LNG facilities (trains) each, certainly with onshore facilities, but possibly with a floating LNG plant as well. Both operators are in the final stages of engineering, procurement and construction contracts.

The Rovuma Basin Decree Law, passed in December 2014, is expected to attract investors to the area and fuel onshore and offshore construction to bring these fields online. The Decree Law outlines the expected upstream royalty rates, details the process for unitization, sets out policy on foreign worker parameters and eases local currency demands on the developers. It does not specify the fiscal terms that will ultimately determine the profitability of the projects, but it does protect the investors for 30 years with the option to renegotiate the fiscal elements every 10 years. It cannot, however, be treated in isolation. Where there is ambiguity, contractors should refer to previous legislation. Further legislation in an Oil & Gas Law is reportedly due through parliament in the near future, which should hopefully clarify these issues moving forward.

In the meantime, Mozambique’s future as a significant energy exporter relies on foreign direct investments to develop liquefied natural gas facilities. However, the shrinking economies of the major importers due to the recent oil price decline have impacted investment recruiting, according to Brunel’s Mozambique Country Manager Tresham Matthews. He hashas unparalleled insight in the current conditions in Mozambique, and he agreed to speak with OilPro to provide background for this post.

Bringing LNG to Market

Mozambique is driven to develop LNG quickly to fill export contracts before the early 2020s when LNG projects in Asia, Australia and North America will potentially flood the global markets with supply. Anadarko has a tentative start date of 2018 and 2019 for Eni. That’s only 3 or 4 years from now. Matthews thinks direct income from sales is likely to be at least 5 years from now.

The first phase of onshore development, the Pemba Logistics Base in northern Mozambique, officially called the Integrated Hydrocarbon Logistics Centre, is due for completion in 3Q 2016. Phase 1, which launched in August 2014, includes a 300-metre pier, facilities to produce and assemble undersea equipment, access roads and storage areas for equipment and mechanical workshops and two LNG storage units, each with a capacity of 180,000 cu m. The first phase has an estimated cost of over $150 million.

Pemba-Airport
Pemba Airport

About 376 km south from Palma is Pemba, which has served as a drilling logistics hub for Eni and Anadarko as well as logistics firms hoping to serve those building Mozambique’s mega LNG project at Afungi peninsula in Palma. Since Anadarko concluded its exploration phase in 1Q 2015, and terminated its contract for the Belford Dolphin drillship nine months early, hundreds of people have been laid off as major contractors have scaled back its workforce while Eni and Anadarko select EPC contractors.

Like Brunel, many companies set up shop in these coastal cities so to not miss an opportunity. The lull in the activity has weeded out the less serious investors.

“Although there has been huge investment in Cabo Delgado during the project phases until now, a recent aerial trip I conducted highlighted just how remote it is. The building of a brand new port and plants in Palma would certainly only interest serious investors,” Matthews says.

Palma-aerial-view
Aerial view of Palma

LNG will be shipped between Palma and Pemba and exported worldwide from Pemba as well as Afungi, which has limited access by road or air. Building a port at Afungi will be slow.

The lack of industry related infrastructure is a real challenge.

Don Scott’s description of the region in his report, the Drive to Afungi, explains that Pemba and Palma are in different stages of development, but both are in need of industry investment. Pemba is industrialized with construction everywhere you look. There is adequate housing, good food and satisfactorily stocked markets. Whereas Palma is undeveloped and requires visitors to pack in and out what they need to survive. Thanks to Eni, a newly constructed highway has reduced the drive between the two to 6 hours as opposed to the previous 9+ hours.

Mocimboa-da-Praia-Airport
Anadarko uses the Mocimboa da Praia Airport for its staging and logs camp

Local Content

Mozambique’s LNG trains will be the game-changer in the region. According to the country’s petroleum law passed in August 2014, 25% of production is required to cycle back into Mozambique’s market to promote industrial development. In addition, local content will ensure sustainability. However, foreign companies that wish to conduct business in Mozambique must show a strong commitment to training and developing local labor skills, Matthews warns.

As in other developing countries that have experienced the finding of a substantial amount of a sought after commodity some form of nationalization program is likely to be introduced eventually. This will provide a legacy and high level of future self-sustainment, Matthews says. So training, continuation training/personal development, mentoring and then ownership of the roles should be everyone’s aim. Implementing a timescale for this transition is admittedly extremely difficult due to the many factors involved

The Bottom Line

The Mozambique government is planning for long-term stability of its LNG market. Though the Fifth Bidding Round has been delayed until July 30, 2015, ultimately the government hopes its winning bidders will expand on the country’s offshore success, which should provide Mozambique with all the ingredients to invest in its own infrastructure and ability to grow into potentially other markets.

The immediate need is for Eni and Anadarko to make final investment decisions for both Area 1 and 4 soon to ensure the projects are successful. Look for EPC JV contracts to be awarded before the end of the year. This will help establish a more robust pathway for the pre-production phases and encourage further investment and boost confidence.