Energising Mozambique: upstream, midstream and downstream opportunities
By Barnaby Fletcher, Southern Africa Analyst
A year ago Mozambique was floundering. April 2016 brought the bombshell revelation that state-owned companies had racked up close to USD 1.5bn in illegally-obtained debt. Never mind that public debt soared as a result to more than 100% of GDP, Mozambique’s development partners then suspended all their direct budgetary assistance. In the background, the opposition Mozambican National Resistance (RENAMO) insurgency continued its corrosive burn. In the foreground, President Filipe Nyusi appeared unable to take control of government policy. Investors lost faith. Foreign direct investment fell for a third consecutive year, contributing to the country’s slowest economic growth since 2000.
That was then. Mozambique still has huge challenges to overcome, but among the international investors flocking to the capital Maputo there is a palpable sense of optimism. Many of Control Risks’ clients view Mozambique as southern Africa’s most exciting investment destination, for a number of reasons. A ceasefire with RENAMO has held since the end of 2016. President Filipe Nyusi grows increasingly assertive and has assumed a pro-business posture. Early indicators in 2017 show improving economic growth and more prudent fiscal policy.
Each of these on its own is an important indicator. But one thing lies at the core of both Mozambique’s ills and its potential triumphs: natural gas.
Natural gas was even meant to head off the debt scandal. That mountain of hidden debt was accumulated on the assumption that vast increases in revenue from liquefied natural gas (LNG) projects would cover them before they attracted scrutiny. Final investment decisions on the two major LNG projects being developed by Italian international oil company (IOC) Eni and US IOC Anadarko, in fact, were expected to be made in 2013. Then came delays. As expectations were consistently pushed back, debts came due for repayment and investor confidence tanked. Even senior government officials privately voiced concerns that these decisions would be delayed until LNG prices improved, or that global oversupply could see companies prioritise Tanzanian hydrocarbon prospects while neglecting Mozambique.
This is now: developments in 2017 have renewed confidence that natural gas will fuel rapid growth for Mozambique. ExxonMobil’s purchase of a 25% stake in Eni’s offshore interests and planned LNG developments in March was a much-needed display of confidence in the industry. Eni’s formal decision to move ahead with this project on 1 June has sparked a flurry of activity; contracts worth hundreds of millions of US dollars have already been signed for a range of services and equipment supply. Subcontractors are being chosen. Production is expected to start in 2022-2023.
Eni’s Coral South Floating LNG (FLNG) project may be the most advanced, but it is far from the only upstream opportunity in Mozambique. Andarko is expected to make its final investment decision in the first half of 2018, having announced on 31 July that it was waiting until “sales purchase agreements and financing are in place”. Sasol – for a long time the only natural gas producer in Mozambique – announced in February that it had discovered oil and gas in its offshore Blocks 16 and 19, on which it plans to start production within three years.
Alongside the estimated 100 trillion cubic feet (Tcf) of natural gas already discovered, Mozambique still has substantial exploration potential; some studies estimate that less than half of the country’s total hydrocarbon resources have been discovered. French IOC Total has started to move forward with exploration after it replaced Malaysia’s Petronas as the operator of Areas 3 and 6 in June last year. Contracts for the blocks awarded in the fifth licencing round held in 2015 are still being negotiated – sources say that a number of issues remain disputed, including the proportion of revenue companies must hold in Mozambican meticais (MZN) – but are likely to be finalised soon. Russian state-owned oil and gas company Rosneft, which holds minority shares in two concessions, is said to be planning to open an office shortly. Meanwhile, a sixth licencing round is optimistically planned for later this year, but will more likely take place in 2018.
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The opportunities are not limited to the upstream and LNG developments. In 2014, the Council of Ministers approved a Natural Gas Master Plan, which still guides government policy in the sector. This lays out ambitious plans to create a domestic downstream industry, using its gas production to feed petrochemical plants, fertiliser production and electricity generation. It set a domestic market quota of 20% of all gas produced and processed, which was increased to 25% in the Petroleum Law approved later that year; a proportion that, even just on confirmed projects, will amount to many multiples of Mozambique’s current domestic consumption. Per capita liquid fuels consumption in Mozambique remains well below the sub-Saharan African average.
Mozambique’s downstream plans may be overly ambitious, but the government’s desire to build a domestic gas market will create openings for private-sector investors. Already in January it awarded three gas development contracts to Shell Mozambique (to produce diesel and 50-80 MW of electricity), Yara International (to produce fertiliser and 30-50 MW of electricity) and GL Energy Africa (to produce 250 MW of electricity). The government is keen to build – or at least facilitate the building of – gas-to-liquid facilities, fertiliser and methanol production, and numerous energy projects. And even if the domestic market is some way off supporting such planned production, the wider region offers a tempting market. All of Mozambique’s neighbouring countries are net importers of fertiliser; all bar South Africa and Zambia import all their downstream petroleum products; and electricity constraints have been a persistent challenge throughout southern Africa for years.
To feed and facilitate this future domestic industry, as well as to export to more established consumers, infrastructure is required. The far north Cabo Delgado province, where both Eni and Anadarko are developing their projects, needs everything. Ports at Pemba and Palma are earmarked for substantial upgrades as they become the logistic and exporting hubs of the gas sector. However, progress has been far from smooth and not all plans are yet in place; only in June did the Council of Ministers approve plans for two new terminals at Pemba, one an LNG terminal and the other to facilitate the construction of LNG plants.
Meanwhile, the Natural Gas Master Plan contains visions of a pipeline network covering the country. In March 2016, a cooperation agreement was signed with a consortium led by the China Petroleum Pipeline Bureau (CPP) for the construction of a USD 6bn 2,600-km natural gas pipeline running from Cabo Delgado down to the southern capital of Maputo. It would then join with the 865-km pipeline that already exists between South African Sasol’s onshore Pande-Temane fields and South Africa, recently upgraded by operator the Mozambique Pipeline Investments Company (ROMPCO). Plans remain at a very early stage. Zimbabwe is committed to upgrading its Feruka-Harare multiproduct pipeline to import downstream petroleum products from Mozambique, which has been struggling to cope with massively increased volumes since it was built in 1966.
Foreign investors as ambitious as the government will find Maputo a welcoming place. Indeed, the progress seen so far in 2017 after years of delays is attributable in part to the appointment of Leticia Klemens as energy minister in October 2016. The appointment of Klemens, a staunch advocate of foreign investment, was accompanied by rumours that her predecessor, Pedro Couto, had fallen out of favour precisely for erecting barriers to foreign participation in the sector. His stance on issues such as local content provisions was believed to have delayed final investment decisions from Eni and Anadarko. Klemens may not be the experienced technocrat that Couto was, but industry sources say she is competent and keen to push things forward.
This enthusiasm carries its own risks: investors must choose the right opportunities. Amid the dozens of projects and hundreds of contracts being touted by both the government and private-sector initiatives, there are duds. Sometimes these are apparent cases of unscrupulous business practices. Projects advanced by some local companies, especially when politically connected, are prone to overstating the certainty of their government guarantees or off-take agreements, as Control Risks has found when carrying out due diligence for potential foreign investors.
Elsewhere, it is simply a case of government ambition outrunning state capacity. A common criticism of Mozambique, and one that has specifically been made against the Ministry of Mineral Resources and Energy, is the lack of communication. Mozambique still lacks a holistic strategy unifying its extractive industries and infrastructure plans; the Natural Gas Master Plan rushes over the subject of port development; even major projects are developed on a relatively ad hoc basis. Different government bodies with oversight of the sector remain poor communication channels and often appear uncoordinated. The Pemba Logistics Base – a port and logistics development intended to serve the gas developments in Cabo Delgado – serves as an example of the challenges this can cause. A USD 400m first phase of construction began in 2014, but work was suspended in early March. Industry sources suggested that nobody had secured guarantees from Eni or Anadarko that they would use the base.
For all the growth that Mozambique is likely to experience as a result of its hydrocarbon wealth, it remains a developing economy. It has had some experience in managing large foreign investment projects with the coal fields of Tete province, but even those will be dwarfed by the likely scale of investment in the gas sector. The International Monetary Fund (IMF) projected that total investment from Eni and Anadarko could exceed USD 100bn. The government will struggle to manage this level of investment and foreign investors will invariably face challenges, many of which will be addressed in further articles in this series. But if the right projects are chosen, the opportunities are huge.